EconNews Roundup

The shopping malls index: Formed by the Association of Shopping Malls.

BRSA Chief Bilgin says banking profits may rise in the second quarter. That's what banking on rate cuts is all about.

Speaking of rate cuts, the Central Banks continues to be dovish on its latest meeting summary as well as today's inflation report. With the Bank predicting inflation in the 4.8%-7.2% range now (midpoint 6%), my expectation of 7%-7.5% sits right at the upper band of the Bank's prediction. If were to choose between my and theirs estimates, I would go for theirs, but I still can not figure how come inflation will not crawl upwards after falling fast in the next few months. Moreover, it is still a long way off, but the 5.3% and 4.9% predictions for 2010 and 2011 get me confused as well- especially since demand conditions would not be as favorable to inflation then.

The sixth and seventh crisis packages are on the way. According to Vice PM Ekren, these have two focal points. One is the much-talked-about credit guarantee fund. The other is, in Ekren's words,

to strengthen firms’ sustainability. We have begun to put in to motion a new incentive system to provide better support for the real economy. We will start up a company restructuring period, which would reshape the real sector’s scale, financial distress and strategic vision.

Years and years devoted to the study of Economics and I have no clue whatsoever these mean. Maybe, that's why he is the minister in charge of economic coordination and I am just a lowly columnist...

EconNews Roundup

IMF gathers its Turkish posse: I guess my blogs and weekly columns reeking of skepticism on an easy IMF deal do not look that crazy anymore. As I mentioned before, Erdal Saglam, the original source of the article, has ears longer than Suna's (ignore if you don't speak Turkish), so I would take this very seriously. There is but one thing I have sort of miscalculated: The rise of the mumbles of discontent. I am not keeping an official tab, but there were just today a two columns devoted to the uncertainties surrounding the IMF deal.

Tourism revenues down 11.2% yoy: See my comments on price versus income effects last week. One particular mistake in today's article: There is no way the swine flu has figured in these numbers, as they refer to the first quarter, whereas the flu is much more recent. An interesting question, however, is how the flu would affect Turkish tourism, especially as we are steps away from the summer months when most of the country's tourism revenues materializes. There are two effects to consider: If the flu becomes a global threat, everyone will travel less for leisure, the sort of income effect. But if Turkey does not get hit, there is some chance that it could steal away some tourists from flu destinations, the sort of substitution effect. Of course, this all depends on how the flu will spread globally and also to what extent Turkey will get it, but my gut feeling is that the income effect will outstrip the substitution effect easily, so I do not buy the comments that the swine flu could be a boon for Turkey.

Some Economics Gossip

This morning, my sister was complaining that my weekly columns had got very boring of late, suggesting that I should write econ gossip. She is a lawyer, so talk about boring, but anyway, I am glad to oblige:

A cabinet reshuffle has been on the agenda for some time and is expected to materialize this week. In terms of the econ top brass, it was assumed last week that FinMin Kemal Unakitan would be replaced by Vice PM and econ coordinator Ekren, whose post would be taken up by ForAffMin Babacan (ex EconMin).

I have been asking around for their expectations for the past two days, and while my sample of a couple of dozen economists, traders, bankers and the like would hardly be called statistically significant, almost all the respondents now expect EconMin Simsek to get sacked.

This is another instance I am wishing we had prediction markets in Turkey...

EconNews Roundup

IMF chief DSK believes that Turkey and the Fund are close to an agreement- see my column for this week on more on this issue. Simsek has increased my confusion by stating that Turkey had submitted its program to the Fund and waiting to hear from them.

On a different note, I was surprised to learn that cabbies have been dealing with NPLs as well. This makes me wonder if minibuses and ferries have increased revenues as more people choose public transportation. Is there a switch from Migros and Tansas to BIM? Makes one yearn for more data.

Weekly Hurriyet Column: Green shoots a la turca

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive.

One problem I have with these columns is that since I only write a week, I try to squeeze in a lot of stuff at the end of the day. Therefore, some additional points are in order:

• This morning, I've reading that Summers is now saying no recovery should be expected before six months. Really a swing of mood...
• I started talking about the European PMIs with "oddly enough" because some of the largest IMF downward revisions are in Europe, and the consensus view is that Europe will be/has been hit by the global crisis more than the US, partly because the policy response in continental Europe is generally seen as insufficient.
• With regards to Turkey and the IMF, I am getting more confused everyday. First, DSK says he expects a deal soon. Then, Simsek says the deal may be delayed. And now I just read Simsek saying the deal will be soon. And then I read Erdal Saglam, who is more or less, the closest thing to a gossip econ writer and I get even more confused, as his sources tell him of significant discord between the Fund and the government. And these are developments of the last few days:):):)
• The sharp jump in real sector confidence definitely deserves more discussion than the few sentences I devoted. Looking at the components of the index reveals that the largest increases are in three-month expectations. While the tax decreases have definitely factored in, I feel there is also some sunk-cost selling going on here.
  

Spring has arrived, and along with it “green shoots”. I am not talking about horticulture, but the new buzzword for signs of recovery from the crisis. While I have my own green shoots as well, I think it is way too early to start rejoicing.

Take Fed Chairman Bernanke’s remarks on signs of stability in the housing market. Rising house prices for the last two months (a first since 2006) might not be reflecting much more than the temporary slowdown in foreclosures, as banks are waiting the details of the government’s take on the problem. Similarly, while the sense of freefall could end soon, as Obama economic advisor Summers has recently notes, the decline itself shows no signs of stopping; it is only its rate that is decelerating. Inventory depletion and deleveraging, my other two conditions for revival (the first being housing stability), still look far away.

However, markets were not acting on such fineprint last week. Rather, fears of nationalization and worries about the bank stress tests to be disclosed next week were exacerbated by IMF’s new estimate of financial losses at USD 4100 billion. In fact, the Fund was the nasty party crasher, as it also released significant downward revisions to its growth forecasts.

While the world has been preoccupied with the Fund’s growth downgrades in its World Economic Outlook (WEO) report, I saw my own green shoots in its analysis of when the recovery would start. This section of the WEO suggests that the worst of the global recession may be behind us, while at the same time hinting that the recovery will be slow and painful.

I could see even more green shoots in the least likely of places, the latest European purchasing managers’ indices. While the largest monthly rise in the index’s history provided much-needed relief after the gloomy Fund forecasts, I would not make too much out of this noisy headline number. However, a closer look reveals widespread inventory depletion in manufacturing, the sort I have been looking for in the US. Oddly enough, Europe may be about to start the ascent to recovery as well.

Despite below-average temperatures, Turkey is living its version of green shoots. Notwithstanding inconsistencies in the government’s fiscal figures and the apparent differences between the Fund and the government on the economic outlook, markets have embraced a large spending-spree IMF program, although I have started to hear a single mumble of discontent here and there. Expect the mumbles to morph into widespread grumbles if there is no improvement in two to three weeks.

Similarly, the recent uptick in confidence is providing a false sense of recovery. For one thing, both consumer and real sector indices are moving up from extremely low levels, so the most we could hope for is the beginning of a slow recovery. Such indices tend also to be affected by the exchange rate and the stock market, both of which have been supportive of late. The government’s temporary tax decreases have factored in as well. Unfortunately, none of these reflects a change in fundamentals, and unlike European data, I find almost no positive details in the Turkish numbers.

I see a parallel sense of desperation on the consumer credit front. The recent upward trend in consumer loans and credit cards could as well be reflecting a last-resort move from cash-strained consumers. If I am right, it will not be long before the hike in non-performing loans in commercial credit spreads to the consumer segment.

There may be an element of weather in my wary outlook, but I am not seeing frost all over: Just only where others see green shoots. Similarly, I notice sprouting where others see rime. I am looking real hard, but I do not detect a single bud in Turkey.

Blog Developments

Hurriyet Daily News & Economic Review, where I have been writing weekly columns since November, has decided to expand its web site. One of the additions will be to migrate this blog to their website. Well, not really, as I will continue to write at this blog, but the entries will also automatically appear on their website- sort of the way it works in Facebook. The link will be something like:
hurriyetdailynews.com/emre_deliveli
blogs.hurriyetdailynews.com/emredeliveli.

At this point, I am trying to decide on whether or not to keep the name as it is: emredeliveli. Not very creative like Econbrowser or NewsnEconomics, but at least to the point and shamelessly self-promoting. Anyway, I also did manage to come up with some alternative names: emreshummings
emrescorner
econconfessions*
econdeli*
econguru
emrestreet
carsiecon*
econgourmet
emreecon
emrecon*
emresmarket*
emresbazaar*
(the starred are the ones I like a bit more).

At this point, I am leaning towards emresmarket or emresbazaar, as they have double meanings, paying homage to Carsi. But any input/suggestions would be really appreciated.

EconNews Roundup

Hurriyet summarizes Banking Regulation and Supervision Agency's latest Financial Markets Report with a to-the-point headline: Crisis amplifies risks for lenders. One of the major risks is the increasing NPLs. As you can deduce from the article, the NPLs have so far been mainly in the commercial loan segment. As unemployment soars and people start delving into their credit cards (which is supported by data BTW), I'd expect consumer loans and credit cards to catch up as well. Note that these will continue to work their way into both the quantity and price of credit, and I expect the credit channel of monetary policy to remain stagnant for a while.

Some Weird Pricing (continued)

In a blog more than a month ago, I had noted of some weird pricing at KFC and my failure at explaining it. As a last resort, I have consulted the ultimate Economics detective, who has solved many such puzzles in his columns at the Financial Times. Here's his take:

I have two explanations, neither is that convincing:
1) The owner is innumerate
2) The owner has designed a "confusion pricing" plan designed to extract more revenue from careless customers. This is surprisingly common (see "The Undercover Economist", chapter two) but his scheme is being undermined by his own staff, who automatically figure out the cheapest price for you. Just a thought.

I do agree with Tim that either answer is very convincing, but if I had to choose one, I guess I would probably go with the second. I'll also ask a couple of behavioral economist friends from grad school on what they think as well; will post another entry if anything interesting comes up.

EconNews Roundup

I agree that the IMF deal might be messy, but for fiscal rather than growth reasons, as the Hurriyet article reports.

Lira to outperform forint: A nice demonstration of the relativity theorem.

Government's solution to unemployment: Temporary public sector employment. In the spirit of constructive feedback, I would like to offer a concrete proposal. Divide all the unemployed into half. The first half could dig holes, with the rest filling them up. Joking aside, I have to look at Referans for the details, but as it stands, I don't see why the government would go for so much inefficiency, whereas they could simply provide firms incentives for not firing. Go figure...

As much entertaining the previous are, the gold medal goes to a very good summary of recent BETAM labor market research that shows that contrary to Econ. Minister Simsek's claims last month, women are not contributing proportionally more to unemployment; it is rather men losing their jobs.

Spring cleaning

I just finished off a huge spring cleaning in the blog:

First, I put in all weekly Hurriyet columns since February, writing short comments before each column as appropriate. This also gave me a chance to take stock on what I had been writing for the past three months. And to be honest, there is everything: From the very precise, to the really imprecise (you should nevertheless have a look at that for the shameless self-defence), from the funny to the grim, from the self-confident to the perplexed, from the timely to the ill-timed, all is there.

Second, there were a bunch of unfinished entries over the course of the last couple of months; blogs I had started but had never got to post. I know this totally beats the purpose of a blog entry, but I nevertheless wanted to finish them for my own archiving purposes for the very least. Anyway, you'll find a couple of interesting encounters, a mystery and a puzzle to spice things up even some fiction.

Now, the only thing missing is my popular links section, which I hope to start by Saturday. Hopefully, I will not need such a large clean-up ever again...

EconNews Roundup

First, Mr. Simsek goes to Washington. One of the things that kept me scratching my head after the IMF Turkey forecasts were released (but forgot to put into my blog entry yesterday) was what the Fund's forecasts would mean for the stand-by. News headlines saying that more expenditure cuts were on the way began to appear soon enough. At this point, it is anyone's guess, but I think the government's primary budget figures would have to revised, for the reasons I outlined in my Monday Hurriyet column.

Second, the dismal tourist arrival figures continue. Of course, the 7.5% yoy March fall is not as drastic as in Greece, but the growing pace of the decline hints that the weak lira will not shield Turkish tourism that much this year. On a more general point, I think economic columnists and market economists alike are giving too much emphasis to price effects and too little to income effects when they discuss Turkish trade. On layman's terms, will it matter if your goods are cheaper if there is noone left to buy your goods? Coming back to tourism, Germany and Russia, two countries that look really dismal in yesterday's IMF forecasts, are also two of Turkey's biggest tourism markets. Given that these countries are headed for a heavy slowdown in the second and third quarters, the summer months, when most of Turkey's tourism revenues arrive, may not be rosy at all.

Last but not the least, we have a businessman who lashes out against the IMF. This is all nice talk, but unfortunately does not reflect the reality at all. The is a huge literature on the impact of IMF programs does not validify the bold claims. In fact, I had summarized the literature in a simple table as part of a paper I coauthored on the IMF some years ago:

BTW, the paper has is a sort of an IMF-101, in case you are interested. And according to my coauthor, the IMF had liked it- I am not sure this is a success or failure, but anyway...

EconNews Roundup

I decided to continue with something I had tried out last week; my take on a couple of Economic News of the day: I hope to do this daily, as it is also a fun way to keep a sort of economic diary:

One possible crisis indicator I had mentioned last week was gold exports. Yet another is increase credit card usage, especially for cash withdrawals. If people are indeed resorting to credit cards for a last resort, that would mean increasing NPLs on that front as well.

IMF Turkey Forecasts

The Fund just released its Turkey forecasts: On the growth side, the 5.1% contraction in 2009 and 1.5% growth of are not really far off from my own projections of -5% this year and 2-3% the next, which I have been sharing in my weekly Hurriyet columns since end-November (see Monday's piece for a detailed discussion). Given that I no longer remain the maverick I was when I first made these bold forecasts, I do not see why one daily calls these projections shocking: Many respectable economists see growth around these parameters at the moment.

The Fund sees inflation at 6.9% this year and 6.8% the next, which is only a little bit more optimistic than my own scenario of 7-7.5% inflation at year-end. But note that I, as many other economists, expect inflation to fall rapidly in the next few months because of base effects, hitting near or even below 6% in the summer. However, while most economists expect inflation to stay there, I foresee a gradual climb back to 7% territory, and I guess so does the IMF. So the issue is one of the alphabet, whether inflation will be an L, as in the consensus and CBT view, or a V, as in my minority view.

There Fund also released its current account forecasts, which at 1.2% and 1.6% of GDP this year and the next, are more or less in line with the consensus view. In any case, we are way past the days when current account used to be the single most important statistic in Turkey, so for current account, I'd say "who gives a heck?".

As much as we Turks want to world to revolve around us, the Fund also released forecasts of other countries, which you can read in prestigious papers like WSJ and FT tomorrow, so I won't delve into those. But here's a quick discussion if you can't wait until tomorrow, and a one-sentence summary would be "all growth forecasts are revised down". One interesting peculiarity is the Fund's German growth expectation of 5.6%, which confirms my really scientific analysis of the German economy I had offered a trio working on a Turkey report a few weeks ago: "Germany is f---ed". Now, unless Turkish exporters are extremely deft at switching markets, a sharp rebound in exports should not be expected not only this year, with Europe and especially Germany in the sorry state they are in, but also the next- this was the point I was trying to make in my latest Hurriyet column when I said I found a huge contribution to growth from net exports next year somewhat unrealistic.

All in all, since these were released late in the day, I will have wait a couple of days until I see what market economists and columnists think of these figures.

Weekly Hurriyet Column: Il buono, il brutto, il cattivo

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive.


The government disclosed the Pre-Accession Economic Program (PEP) last week, providing a much-needed update to its outdated economic projections. Economist reaction was worthy of the profession, varying between those who found the new figures very realistic to completely unrealistic. But the truth is not so black and white; like a good Spaghetti Western, there was the good, the bad and the ugly in the new numbers.

To start with the good, I am glad that despite the acronym, the government forewent pep talk on the growth side. Being one of the first to go for a significant contraction (5%) for 2009, I am pleased at the government’s admission of the inconvenient truth by projecting growth at -3.6% this year. But, contrary to conventional wisdom, which is going for negative growth next year as well, the government’s 2010 projection of 3.3% is in line with my own forecast of 2-3%.

Before being accused of unfounded optimism, I have to note that Turkey would have to significantly underperform peers if it were to shrink while the global economy recovers next year, which is more or less the consensus baseline scenario. Similarly, expecting negative growth is in sharp contrast with the prospect of a large IMF program, as much of the impact on growth would be felt next year. I have to say that I do have my doubts on some of the details of the PEP growth figures, such as a sharp rebound in private investment and a large contribution of net exports. But when the numbers add up, the government’s numbers for next year are not out of whack at all.

If the growth projections classify as good, unemployment would certainly fit into the bad category. The government’s forecast of 13.5% at year-end is not only totally fictional; it is also in sharp contrast with its own growth predictions. Last week’s employment statistics, which showed unemployment at 15.5% in the December-February period, have revealed that firms have started laying off workers with great abandon in the first two months of the year. Even under optimistic scenarios, the vast army of the unemployed, currently at 3.5 million, is on its way to surpassing the population of the capital. Even more worryingly, due to the inherent asymmetries in hiring decisions and Turkey’s own structural problems in the labor sector, the rehiring process will be painfully slow.

If the unemployment outlook is bad, the fiscal picture is downright ugly. While the projected IMF-defined primary (net of interest payments) deficit of 0.6% is more optimistic than my own projection of 1.5-2%, the real issue lies elsewhere. In fact, I would not be that worried if the government did indeed run a larger deficit this year, especially if the extra money went to good use. However, the surpluses for the next two years, 0.5% and 0.6% respectively, are not viable from a debt sustainability point of view, as rough calculations show that a surplus of 2.5% would be needed to keep debt in a sustainable path. Moreover, the supposed fiscal adjustment from this year to the next is actually a marketing gimmick; the extra tax revenues from the growth differential between the two years would be enough to ensure the difference. So, take my word for it: Those at the IMF Turkey desk were probably scratching their heads when they saw these fiscal figures, as they are definitely not Fund-stamped.

I am aware that this is rather unpleasant fiscal arithmetic, but reality does indeed bite. So, when expectations have converged on the IMF stand-by agreement as an already-in-the-bag 45 billion deal, it might be a good idea to get a rabies shot. The stand-by will no doubt be signed sooner or later, but markets will start grumbling if the agreement is still dragging along come mid-May, especially after the heavy Treasury redemptions on May 6.

Newest Fiction from Nazim

but not Hikmet, this one is Ekren. Nazim Ekren, Deputy PM in charge of economic coordination, told NTV that IMF money could be used to help out the private sector and to counter unemployment. For one thing, this would be totally counter to the general practices of the Fund, even a much more lenient Fund awash with ample money and willing to throw it away. Moreover, with the primary deficit on its path to 1.5%-2% territory, the government's projection of 0.5% means that it is actually curbing not increasing expenditures. Even if the Fund was more lenient this year, the 2010 and 2011 figures do not make sense from a debt sustainability view. So believe it or not, if you take Ekren's words and government's fiscal projections together, they somehow do not fit in together. Or am I missing something?

Even more entertaining were the Minister's remarks that the only structural reform left was to make Istanbul a financial hub. I and the economist friends I was discussing the latest news with first thought that the Minister is knows his stuff: He should have thought that making Istanbul a financial hub would include all the necessary reforms that would be required. But alas, that wasn't in his mind at all. Forget about labor sector reforms, education reforms and the like: All the problems will go away once Istanbul is a financial hub.

Puzzles on the latest current account figures

In the latest (February) current account release, net errors & omissions continues to dominate and puzzle. However, we now have yet another riddle: The huge gold exports, which first came to notice when the February trade statistics were released at the end of March.

Hurriyet Daily News & Economic Review reported on this before the official February trade figures were released, based on a precious metals research outfit GFMS report. They revisited the issue right after the current account figures were released. As the two articles state, there are two competing explanations: One, people are selling gold to take advantage of higher prices. Two, the crisis is forcing people too depart with their gold.

Although I do not have hard core evidence to back it up, I am more inclined towards the second explanation, as February was not the only time when gold prices were high in the past couple of years. I plan a visit to the covered bazaar in a couple if weeks, when I will have some chance to talk to jewelers for what you'd call a "nabiz yoklamasi" (fieldwork)...

EconNews Roundup

Just as I was talking about inconsistencies in Turkish economics thinking, here are some smart words from today's Econ news:

First, Economics Minister Simsek, who has often been criticized by your truly, really made sense this time around by stating that Turkey cannot spend its way out of the crisis. Now, he has to convince the PM, who BTW threatened to sack six ministers and seems to be in a foul mood. Good luck! BTW, another phrase in the same WSJ phone interview is really one of the best one-sentence summaries (no pun intended this time, I swear) of Macro a la Turca: "We cannot just increase our budget deficit; that would increase external financing needs".

Second, head of the Banks Association did a fine job (sorry only in Turkish) in dismantling the "greedy bankers" explanation of high deposit-loan margins, to which I had referred to in my latest column as well.

Quick take on revised forecasts of the Turkish economy

Nazim Ekren is going over the government's revised economic forecasts as I write this blog. Here are some headlines, as reported in the newsgroup Research Turkey:

- Turkish economy will contract 3.6% in 2009
- Growth rates for following years 3.3% in 2010, 4.5% for 2011 respectively
- Current account deficit prediction for 2009 11 bln $
- Unemployment rate will increase to 13.5% in 2009

Just a quickie on growth: I was one of the first to go for a significant negative growth (-5%) for 2009. It is good to see that the government has now officially adopted the consensus growth forecast for 2009. On the other hand, I see the market expectations of negative growth in 2010 a bit overpessimistic (I never thought I could accuse anyone with that, usually being more dismal than the average guy- after all, this is the dismal science we are talking about). I think there is a herding/psychological element involved there. Anyway, I see growth at 2-3% next year, so despite the huge difference with market expectations, I see the government's 2010 growth goal not too unrealistic.

BTW, the market's negative 2010 growth expectation is also in sharp contrast with expectations of a large IMF program, as the IMF money will affect growth not much this year, but the next. Needless to say (then, why am I am saying it?), it is also in contrast with expectations of a global recovery in 2010. In fact, I am thinking about devoting next week's column to such inconsistencies in the Turkish economic thinking, as there are plenty- sort of a Hitchhiker's Guide to the Turkish Economy:). Anyway, you should definitely make up your mind on which story you are buying- I am no trader, but I know that wherever there are inconsistencies, there are money-making opportunities.

As an side point, the top brass of the Economy went over many issues, including debt, fiscal policy, IMF and the like. So, if you are interested in the Turkish economy and do not speak the language, definitely have a look at Hurriyet Daily News & Economic Review tomorrow.

Weekly Hurriyet Column: Crisis, what crisis?

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive.


Households are faring well, and so are the banks. As for the non-financial sector, there isn’t much to be afraid of.

Before devout followers of my columns accuse me of a triple jump worthy of a world class figure skater, I have to say that the words above are not mine- rather they are my liberal translation of part of a speech made by Economics Minister Simsek last week. Honestly, if all the main parts of the economic engine are well-oiled, as the minister claims, then I believe I have been wasting my time (and yours) writing about a crisis that doesn’t exist. A closer look is in order.

To start with the non-financial sector, I find it almost Woody Allenesque that the Minister’s comments appeared on the same day industrial production reached new lows. While March capacity utilization has hinted that industrial production could have hit bottom in the first quarter, other leading indicators such as real sector confidence indices and both manufacture & imports of capital goods suggest that the recovery is likely to be slow and painful, as firms have been cutting back on investment plans. The fact that non-financials owe more than 150 billion dollars of foreign currency debt, about two thirds of which is to Turkish banks, is further confounding the picture.

In fact, the real sector’s woes are, in turn, increasingly showing up in the assets side of the banks’ balance sheets as rising non-performing loans (NPLs) and tightening credit. It is true that there is a demand and supply side to every good, and credit is no exception. But it would be a bit far-fetched to dismiss all of the decrease in loans as a demand pullback- as would be explaining the large margin between deposit and loan rates with the appealing “greedy bankers” explanation. Moreover, in the current uncertain environment, banks are likely to ration credit as well, as economists Stiglitz & Weiss explained almost three decades ago- one of the works that brought the former the Nobel Prize in 2001. The idea is not that novel for today’s Turkish banks, as the upward trend in the concentration of loans as well as anecdotal evidence certainly point to rationing in the credit market.

Unfortunately, credit is not the only thorn in the so-called rosy banking picture. For one thing, banks have literally been banking on rate cuts in the last two quarters. While, contrary to conventional wisdom, they did not profit extensively from the bond market bottom-fishing in the last quarter of 2008, banks have nevertheless both taking part in and benefiting from the rally in bonds on the back of the Central Bank’s aggressive monetary easing. Even under an optimistic scenario, most of the gains have already been realized. In addition, even though it depends on important exogenous factors such as the IMF agreement and CBT actions, liquidity is likely to be tighter going forward.

Turning to households, it is true that Turkish consumers are not nearly as indebted as their Eastern European counterparts. However, “mean” figures that ignore the distribution of debt can understate the true nature of household strains. A cursory look at the Bank Association’s latest consumer & housing loans report, using data from the third quarter of 2008, reveals that low-income households are disproportionately more indebted relative to their income. Simple back-of-the-envelope calculations taking into account disposable income point to rising defaults among low-income borrowers. Given the relatively more blue-collar nature of the job losses, the rising unemployment rate will definitely be a catalyst. Needless to say, this would deal yet another blow to banks.

Given all this, I am really glad that households, firms and banks are all bracing the crisis well. What if they weren’t?

Bad operators driving out good ones

A friend who works in a travel agency just emailed me of a new development in the tourism sector. If you do not speak Turkish, in brief: Two leading tour operators have agreed to voluntarily implement a no-hidden-fees policy in their ads, meaning that insurance, airport tax and such will be included in their advertised prices.

While this would definitely be a welfare improvement for consumers, such practices almost always end up with the bad practice driving out the good one, a distinct cousin of Gresham's Law. In layman's terms, unless all operators adopt no hidden charges (my understanding of the news is that while the policy is supported by the Association of Turkish Travel Agencies, it is not mandatory at this stage), the ones adopting the practice will be at an unfair advantage. My friend at Pronto, one of the two leading operators behind the changes, argues that people are not stupid and that when people notice the extra charges, they will choose the no-hidden-charges operators. I agree that you can not fool everyone all the time, but you can definitely fool someone taking a vacation once a year...

Another Interesting Meeting

I had mentioned earlier that the Hurriyet columns+ this blog enable me to interact with readers from variety of backgrounds, with different interests. I met on Monday with Global Business, which is preparing the Fortune Turkey report, to appear in the October issue of Fortune. Here is an excerpt from the info. sheet they had emailed me along with their meeting request:

The International Monetary Fund and World Bank annual meetings that are to be held in Istanbul in October this year will cast a spotlight on Turkey and will showcase its world-famous hospitality. As the city’s municipality prepares to host some 30,000 opinion leaders, there has never been a better moment to draw the attention to the many facets this beautiful country has to offer.

Hence, following two successful reports on Turkey in 2007 and 2008, Global Business is now compiling its 3rd in a series of special sections on Turkey to be published in FORTUNE magazine, the world’s premier business publication. The feature will focus on the most dynamic sectors of the Turkish economy, highlighting the driving forces and key personalities that have kept Turkey aloof of the credit crunch and have pushed its economy ahead of that of its European counterparts.

In light of global economic uncertainty that has left many of the largest economies in despair, Turkey has demonstrated its strength by having remained largely resilient to its negative effects. Naturally, Turkey has not remained immune; however, its unique financial system with a strong capital structure prevented the financial crisis from leaping over into its own system. Now more than ever, business leaders are looking for new investment opportunities and Turkey has a lot to offer.

Aside from its solid banking structure, Turkey’s political framework has also made it one of the most investor friendly nations worldwide. It offers equal treatment for domestic and foreign capital companies and sports a very young, dynamic and highly skilled labour force. Moreover, Turkey has favourable demographics with 65% of the country’s total population of 70 million being under the age of 34. Its sheer market size therefore provides an ideal location not only for production but also as destination for export.

In addition, unlike any other country, it finds itself in a unique geographical position providing a bridge between Europe, the Middle East and the Asian-Pacific. An advantage many investors have already identified, having injected a total of USD 22 billion of foreign direct investment in 2007 alone. Resultantly, Turkey’s economy ranks 6th largest in Europe and reaches for 15th place globally, as the financial crisis shakes the world order.

Global Business works exclusively with Fortune magazine, renowned for its editorial excellence and high profile readership, 70% of which are CEOs and heads of state. Always aiming to reserve the best timing for our country portraits, this report will be published to coincide and distributed with the recently announced 2009 IMF/World Bank Annual Meeting in Istanbul of October this year. Besides the high profile audience of this event, the report will be featured in the EMEA Edition of FORTUNE, reaching an audience of over 550,000 readers in more than 110 countries including Europe, the Middle East, Africa, and Latin America (including the Caribbean).

We believe that this is the ideal time for Turkey to show its value to the world.

Since the report is an advertising effort paid by TUSIAD, the top brass businessmen's association and the Turkish government, the three guys (actually, two gals and a guy) I met were more interested in the positive aspects of the Turkish economy- which was a good change for me, as I am usually a pessimist worthy of the dismal science.

The conversation also forced me to concentrate on longer-term issues I had not thought about a long time, such as Investment Climate and Higher Education, two issues I had worked on in extensive detail as a think-tank researcher in Ankara before becoming a bank economist.

I think that both Global Business and Tim are doing very interesting work on the Turkish economy. I hope to cover their findings as their work progresses.

Weekly Hurriyet Column: Quantum of Solace

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. For once, I really liked the title, until I found out this morning that it had already been used on Friday by Atilla Yesilada. Anyway, as a great economist, who also happens to work with Atilla, once said, "Great men think similar titles", so kudos to Atilla for coming up with such a great:) title. BTW, his analysis, which is more or less along the lines of mine, is in Turkish and as part of a fee-based service, so I could not provide a hyperlink. But if you are interested in the minority view and speak Turkish, email him and he might send you the piece himself (his email is on his web page).


Solace may be the best word to describe markets last week. Signs that the US economy might be have hit bottom, a boost from the G-20 meeting and more lenient US accounting rules for toxic assets all contributed to the relief that decreased risk aversion and lifted markets. But at the end of the day, these are just quanta, tiny pieces of data that do not change the big picture at all.

Take the US economy. I maintain my view, stated in this column at the beginning of February, that the US will not start recovering before inventories are worked down, household savings rise or house prices stabilize and banks get rid of their toxic assets. Last week’s housing data were mixed at best. As for the toxic assets, I can not help but wonder how the banks would be willing to sell those (the essence of the Geithner plan) unless they are coerced by the stick of mark-to-market accounting.

In a similar fashion, I do not believe that much came out of the G-20 meeting. The summit fell short of a global stimulus package towards correcting global imbalances or concrete action against protectionism, Moreover, as I had feared, the gathering was diluted by measures towards tightening financial regulation; definitely important matters, but totally irrelevant to the problem of containing the global recession. But, as I had stated in a special piece for this paper last Tuesday, the smaller the expectations, the greater the bliss, so the 1.1 trillion package and the five-trillion stimulus (US dollars) were more than enough to lift markets.

In fact, a closer look shatters this rosy picture: For one thing, the stimulus is nothing but the IMF estimate of the rise in G-20 government deficit from 2007 to 2010. Moreover, at most a third of the package is new commitments, the rest being simply shinier wrapping. Finally, the bill is not as emerging-market friendly as you’d think. For example, only about a third of the 250 billion dollars of special drawing rights (SDRs, IMF money that can be used as foreign exchange reserves) will be available for middle-income or poorer countries. Still, even the word of half a trillion dollars of new provisional IMF money, along with the announcement that the Fund was easing loan payments for borrowers, provided yet another boost for emerging markets. While Turkey’s external debt payments were reduced by 2.1 billion dollars (18% of total) this year, it was the news that Turkey and the IMF had reached an agreement that buoyed markets.

In fact, Turkey could not have asked for better conditions: A good global environment, yet a better one for emerging markets and the best for this particular emerging market. In this setting, domestic data were unsurprisingly overlooked. But these quanta were nevertheless hiding bad omens. For example, economists concentrated on the 2008 GDP figures and March inflation, which they took as non-negative. But more important than these were the trade statistics: Official February turnout and preliminary March exports. Both pointed to a near-double digit yearly contraction in growth in the first quarter, which will probably confirmed by Wednesday’s February industrial production data. As for the IMF deal, call me a skeptic, but with the primary balance set to fall into deficit territory, I will have to see the ink on the agreement before I become convinced.

In the global tunnel, there is definitely some light. But for one thing, we do not know how far that light is- or whether it is the sunshine or the lights of an approaching train. As for Turkish assets, I know I am in the minority, but I kind of feel like Jack Nicholson walking into his shrink’s office and lamenting upon seeing the other patients: What if this is as good as it gets?