Monday, February 2, 2009

Weekly Hurriyet column: Winter Heat

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

The short month of February is carrying a heavy bag, with a significant part of the action coming early in the month.

Of inflation and Treasuries

With the Central Bank’s front-loaded monetary easing, inflation has returned to the spotlight. The lower-than-expected December turnout as well as the Bank’s disinflationary assessment in the latest Inflation Report seem to have created a positive mood with respect to inflation, with the CNBC expectations survey for January coming at 0.13%. However, my own assessment, which takes into account jumps in inflation sentiment as well, points to an outturn of around 0.3%. Istanbul Chamber of Commerce’s inflation figures will offer rough guidance, as a monthly fall in Istanbul prices of at least 0.6% would be consistent with market expectations. In any case, a modest deviation in either direction is unlikely to move markets much.

While the ongoing positive inflation sentiment is bond-friendly, one of the factors likely to limit a bond rally even in the case of an inflation realization well below expectations is the Treasury’s domestic borrowing program. With nearly TRY 23bn due, February is the month with the heaviest redemptions, and with more than two thirds of that due on Wednesday, the Treasury auctions in the first two days of the week will be watched closely. Just cross your fingers that there won’t be any nasty surprises on the inflation and international fronts.

Closing the 2008 books

The second week of February will bring in the last statistics of 2008: December industrial production, current account and terms of trade. All three will show us how much the economy has slowed down last year before the growth figures for the last quarter are released next month. With the external indicators, I will also be looking for external financing woes and the extent the uncertain environment is leading to postponed investment decisions & durables consumption as well as the size of the damage in Turkey’s external markets and its export competitiveness.

Banking on rate cuts

Another major event of the month will be the release of the bank balance sheets for the last quarter of 2008. While aggregate statistics show the banking system’s response to the slowdown in terms of declining credit and liquidity management, the balance sheets will allow us to see individual differences. In this respect, I will be looking for signs of a flight to quality, which was one of the defining characteristics of the 2001 crisis. While there is not much evidence of this phenomenon so far, I would advise buckling up for some nasty surprises on that front.

Impossible Missions Force

A wait-and-see event this month will be the neverending story with the Fund. While the media has reported the negotiations being deadlocked on extra fiscal measures, but I beg to disagree with the source of disagreement. The reference to the medium-term structural fiscal reform agenda in the short IMF statement last Monday hints that the discords may be more fundamental and forward-looking.

From a practical point of view, however, markets don’t care on such academic questions. In the short-run, an IMF agreement with enough credit to cover Turkey’s external financing gap has already been priced in. Moreover, at this stage, I do not think that it will matter a lot if the agreement is postponed until after the local elections, as long as the PM does not disclose that he is done with the IMF, like he is done with Davos.

With such a heavy agenda, it will be an important feat to leave February behind without any significant road accidents.

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