Monday, January 12, 2009

Weekly HDN column: Hopeless but not serious, or...

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. BTW, I am too lazy to try to prove it econometrically (and I doubt I would be able to anyway given data limitations), but the record-low December capacity utilization (much more than the drop in sales, although I would want to wait for the CNBC figures to ascertain that) seems to provide some support to the inventory depletion story of inflation I outlined in the last paragraph.

It is said the Irish President once asked Winston Churchill how the British war effort was faring, to which Churchill replied: "Serious but not hopeless." When Churchill threw the same question back, the President answered: "Hopeless but not serious”.

While the early-year global rally, which came to a premature end, will not be the last rally of the year, it is increasingly becoming obvious that the health of the world economy is turning from grim to serious, but is still not hopeless, thanks to the huge stimulus packages most countries are throwing in. In fact, the only major country that has stayed relatively unresponsive to the dismal economic landscape is Turkey, which makes me wonder whether Turkish policymakers have adopted the Irish state of mind.

If you feel like you would like to question my skepticism, you have every right to: After all, the December inflation justified the Central Bank’s easing. The IMF is in Turkey, and an agreement is likely to be reached soon, filling the external financing gap. Moreover, didn’t government spending and investment contribute significantly to the third quarter growth figures? All these statements are right and would normally be commendable in ordinary circumstances. But the fact is that we are not living in ordinary times, and such times require extraordinary solutions: Solutions of the type we have not seen yet.

For one thing, no efforts in mitigating the emerging financing constraints in the private sector have been announced so far, other than rumors of a credit package geared towards exporters. The high debt rollover ratio is likely to darken this bleak picture further, as public borrowing crowds out the private kind. Some early signs of this crowding out were seen in the Eurobond auction of the past week, where the two-third local subscription was curiously interpreted as a sign of liquidity of the banking system. While channeling some of the IMF funds to the Treasury could mitigate the crowding out effect, I am crossing my fingers that the high-borrowing month of February will pass without a calamity of the German kind. Otherwise, the Central Bank could find the effectiveness of the monetary transmission mechanism fading real fast.

Another concern is the nature and scope of fiscal policy. While the IMF agreement will probably not be as fiscally-restraining as before, I would like to know where the money will go to. To get the best bang for the buck, policies stimulating private investment should be preferred, but with the goal of protecting the Turkish golden ratio of debt to gross domestic product. A spiraling of debt could lead to worsening expectations and higher interest rates, not the exact place you would want to find yourself in the midst of a global recession. Maybe the government is waiting for the IMF agreement, but I find it hard to believe that policymakers have been so tight-lipped on how they will stimulate the economy.

If Turkish policymakers have an Irish frame of mind, they at least, unlike the Irish, are not impervious to psychoanalysis. How else could you explain the illusion that exchange rate pass-through has disappeared, a conclusion reached on just a couple of months of data? Maybe it is just me, but every time I look at the December inflation figures, I see signs of pass-though covered up by the strong inventory depletions in textiles and autos as well as the drop in energy prices.

I do not want to be a harbinger of doom, but Turkish policymaking is looking more and more to be hopelessly unserious.

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