Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. In the second paragraph, I was essentially trying to say that even the CBT's optimistic scenario may not be enough to justify such aggressive easing by an inflation targeter. But Atilla Yesilada, at his column at Bilge Yatirimci, offers an alternative explanation in his usual slightly wonkish tone: Maybe, the CBT is not an inflation targeter anymore...BTW, I highly recommend Atilla's columns at either Bilge Yatirimci or Global Source/Istanbul Analytics- one of the few columns I try to read regularly.
It seems I was too hasty when I declared that the Central Bank had engineered the perfect surprise rate cut last month. Last week’s cut was not only more than twice expectations, but has also brought Turkish real rates in line with peers such as investment grade Brazil.
The Bank has stated explicitly that it expects oil prices will stay low and exchange rate pass-through will be limited. However, these factors may not be enough to justify so strong an easing- unless the Bank believes the recession will be so deep that even the sticky service inflation will fall rapidly- the implicit scenario that is giving me the shivers for some time.
Countering the crisis
“Fortunately”, the government has finally announced that it will disclose its “package” at the end of the month. In the meantime, it has asked for suggestions, and the Izmir Chamber of Commerce put together a diverse group from the academia, the business world and NGOs for a brainstorming session on Saturday to form its recommendations. The session and an accompanying panel discussion on Friday organized by the Izmir Economics University have urged me, at the expense of oversimplifying, to condense the crisis propositions into two broad categories.
First, it is clear that the financing channel has been seriously disrupted, and various credit guarantee fund formulations aim to ease firms’ access to finance, differing on where the funds will come from, who they will be intended for and who will bear the risk. My own view is for a setup that will provide the least budget burden, is geared towards SMEs (as they are more credit constrained, and targeting SMEs is likely to have a bigger employment impact), ensures the money will flow to the real sector rather than to Treasury bills and mitigates moral hazard by sharing the risk between the banks and the government.
The next set of policies revolves around using Keynesian tools to counter the crisis. Here, the suggestions as are colorful as they come, ranging from tax breaks and tax delays to outright cash handouts, such as Finance Minister Unakitan’s recent cash for employment announcement. I am ambivalent on the use of fiscal policy, not only because its impact is highly uncertain, but also for fear of a binge that would bring the nightmare before 2001 back. Policies that will enhance long-run growth and productivity such as infrastructure investment and human capital seem like the safest bet, even though that’s not the way to go if the government is trying to get not the best, but the quickest bang for the buck.
If you build it, will they come?
Commendable as they are, the proposals outlined above adopt the producer’s perspective. A question as key as “how will they produce” is “how will they buy”, especially since global demand is so weak. It was after all the crisis in confidence and sharp consumer pullback that pushed Turkey into a premature slowdown. But unless the consumer feels her job secure, she will not consume, so unless the crisis in the consumer is solved, all the other measures are likely to hit a wall at some point. The optimist could hope that the crisis package will bring back consumer confidence, but I prefer to err on the side of caution.
The government has eroded confidence by claiming the crisis would pass tangent (it turned out to be the diameter) and doing nothing. Luckily, while it seems to have totally misinterpreted JFK’s famous quote, the academia, NGOs and the business world have done more than their share, with the Izmir efforts being the latest example. Now, we will see whether the government will be able to follow.
It seems I was too hasty when I declared that the Central Bank had engineered the perfect surprise rate cut last month. Last week’s cut was not only more than twice expectations, but has also brought Turkish real rates in line with peers such as investment grade Brazil.
The Bank has stated explicitly that it expects oil prices will stay low and exchange rate pass-through will be limited. However, these factors may not be enough to justify so strong an easing- unless the Bank believes the recession will be so deep that even the sticky service inflation will fall rapidly- the implicit scenario that is giving me the shivers for some time.
Countering the crisis
“Fortunately”, the government has finally announced that it will disclose its “package” at the end of the month. In the meantime, it has asked for suggestions, and the Izmir Chamber of Commerce put together a diverse group from the academia, the business world and NGOs for a brainstorming session on Saturday to form its recommendations. The session and an accompanying panel discussion on Friday organized by the Izmir Economics University have urged me, at the expense of oversimplifying, to condense the crisis propositions into two broad categories.
First, it is clear that the financing channel has been seriously disrupted, and various credit guarantee fund formulations aim to ease firms’ access to finance, differing on where the funds will come from, who they will be intended for and who will bear the risk. My own view is for a setup that will provide the least budget burden, is geared towards SMEs (as they are more credit constrained, and targeting SMEs is likely to have a bigger employment impact), ensures the money will flow to the real sector rather than to Treasury bills and mitigates moral hazard by sharing the risk between the banks and the government.
The next set of policies revolves around using Keynesian tools to counter the crisis. Here, the suggestions as are colorful as they come, ranging from tax breaks and tax delays to outright cash handouts, such as Finance Minister Unakitan’s recent cash for employment announcement. I am ambivalent on the use of fiscal policy, not only because its impact is highly uncertain, but also for fear of a binge that would bring the nightmare before 2001 back. Policies that will enhance long-run growth and productivity such as infrastructure investment and human capital seem like the safest bet, even though that’s not the way to go if the government is trying to get not the best, but the quickest bang for the buck.
If you build it, will they come?
Commendable as they are, the proposals outlined above adopt the producer’s perspective. A question as key as “how will they produce” is “how will they buy”, especially since global demand is so weak. It was after all the crisis in confidence and sharp consumer pullback that pushed Turkey into a premature slowdown. But unless the consumer feels her job secure, she will not consume, so unless the crisis in the consumer is solved, all the other measures are likely to hit a wall at some point. The optimist could hope that the crisis package will bring back consumer confidence, but I prefer to err on the side of caution.
The government has eroded confidence by claiming the crisis would pass tangent (it turned out to be the diameter) and doing nothing. Luckily, while it seems to have totally misinterpreted JFK’s famous quote, the academia, NGOs and the business world have done more than their share, with the Izmir efforts being the latest example. Now, we will see whether the government will be able to follow.
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