Really depressed on a Thursday afternoon...

I've been catching up with the latest news, and I just noticed that Econ. Minister Babacan briefed the economics columnists of the major dailies, a nice event to which yours truly wasn't invited:(

I am of course disappointed not to be taken for an econ. columnist by his excellency:) The CBT had disappointed many in my profession before by inviting only Econ. PhD columnists to a gathering with Governor Yilmaz, leading Referans columnist and market economist Haluk Burumcekci, whose opinions and analysis I hold in high esteem, to get sort of pissed off...

When I was excluded by former minister Simsek early April, I thought that he, being a true Fenerbahce fan, had closed the door to columnists who are Besiktas fans:) But given that I satisfy the CBT's education requirements, I am not sure what to make of Babacan's continuation of his predecessor's ignorance of me. I mean, is there something wrong with me, as my sister is suggesting, or is it that Hurriyet Daily News is not taken for a newspaper- David and Taylan take notice:):):)

BTW, I am again dealing with illness in the family-just had time to jot these on my Bberry. Will try to get a couple of posts in tonight and tomorrow morning. Then I am off to Denizli to see Besiktas get crowned. I will get back to regular blogging by Monday.
Sent by BlackBerry Internet Service from Turkcell

Weekly Hurriyet Column: The curse of the emerging world

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. Note that this is about 10% longer than the final version: I really do a good job in writing in my 3500-3700 character limit set for my column. And when I am not, I can cut it down after half an hour of editing, and I am usually satisfied with the end result. However, I felt that I had lost something by cutting, so I am keeping here the longer version for my own records.


In a matter of weeks, my contrarian argument that the IMF agreement was not a done deal has turned out to be the consensus. The hopes of the few optimists were shattered after Central Bank (CBT) President’s admission of a Plan B last week; the very same Durmus Yilmaz had noted that an IMF deal would be a good idea only three weeks before.

I remember first voicing my doubts over the deal chatting with a bond trader over drinks in mid-March, exactly a day before the CBT delivered the expected 1 percent cut. The trader was extremely bullish on Treasuries, given that the CBT would continue with rate cuts and the stand-by would materialize shortly after the local elections at the end of the month.

Fast forward one month, and the bond market was indeed rallying strongly in mid-April. The same trader told me that local banks as well as London-based short term trading desks were driving up Treasuries. After all, now that the government had revised its targets, an IMF deal was imminent. With expectations of another 1 percent cut (the Bank ended up delivering 0.75 percent) and the rosy global environment, no wonder Treasuries rallied.

If anything, the inconsistencies in the revised projections, especially on the fiscal side, should have convinced markets and economists alike that something was amiss. In fact, I was irked enough to question the wisdom of crowds in the immediate aftermath of this strong rally, risking to look like a complete fool.

Each day after that has brought more people to my camp, with Yilmaz’s comments and the plethora of analyst reports popping up in my mailbox right afterwards closing the matter once and for all: The cap had fallen and the baldhead had been spotted, as the age-old Turkish saying goes. However, notwithstanding the bond pullback, Turkish assets held quite well. To understand this interesting phenomenon as well as the government’s IMF strategy, we must rise above Turkey and look at the bigger picture in the emerging world.

In fact, Turkish assets have not been that spectacular when compared to other emerging markets (EM) for the last couple of months: It is the emerging world as a whole that has been performing well. Part of this reflects the continuation of the global green shoots scenario: Never mind that USA’s banking woes have yet to resolve and housing prices, where all the mess began in the first place, have yet to stabilize. In fact, with the previous two hanging in thin air, my only necessary condition for revival that is satisfied is the inventory depletion. Yet despite many major economists thinking along these lines, the optimism continues unabated.

To give markets some credit, one place where there is marked improvement is the credit front. With central banks throwing everything but the kitchen sink, funding costs and counterparty risks have returned to pre-Lehman levels. Similarly, risk aversion, while still high, has fallen remarkably. With markets flushed with liquidity and carry trades once again profitable, hedge funds and the like have once again turned to EM. With all the conditions that drove EM to negative territory in the first quarter reversed and the reemergence of decoupling (what the Economist calls version 2.0), no wonder EM are in vogue, again.

It is probably this emerging market-friendly environment that is causing the government to drag its feet towards the Fund. Never mind that Turkey is, despite the PM’s claims that the crisis would pass tangent or brush past in the worst case scenario, in the bottom tenth percentile in terms of growth performance, not only at last year’s numbers, but also according to the IMF’s 2009 projections. Without a coherent fiscal framework that will put the much-needed fiscal reforms in place and take care of debt sustainability, the crisis may not pass easily, either- despite the PM’s declaration on Friday.

It is really fun to ride the emerging market wave- until a great white spots you and bites right through your board. Once you end up missing a leg or an arm, it is not much use to call for the lifeguard.

EconNews Roundup

Here' s my choice of reads from Friday through the weekend:

Hurriyet summarizes a recent Barcap report on the neverending saga of Turkey and the IMF.

...Simsek sends the ball to Babacan- that should be one part of his old jobs he does not regret not dealing with anymore....

....While economists have found the replacement to the IMF deal: Barter. That's it, I am changing my official profession to Besiktas fan. Joking aside, kudos to Hurriyet for not being blown away by the comments and opting for a balanced/realistic headline.

First, the crisis passed tangent to Turkey. Then, it brushed past. Now, the PM declares Turkey will pass crisis easily. The fact that he said these words at an automotive factory, one of the sectors hit worst by the crisis, proves once again that he does indeed have a good sense of humor.

Revitalizing Interesting Picks

Long-time followers would know that this blog has morhped somewhat since its inception in September. I started off with the intention of covering the Turkish economy, but with a global twist, but it wasn't long before the international twist, originally intended to spice things up, turned out to be main dish. The choice was personal (at the time international developments/markets were more interesting) and practical (you only have so much time).

My main international flavor at the time was to link to and very briefly comment on interesting blog picks. What I aptly called Interesting Picks was rather popular with readers at the time. After my nearly two-month blog vacation, I was never able to bring myself to do that stuff again. I still follow those stuff, but reading is one thing, reporting is another; with the increased Turkey coverage in the apres reposer blog, I just did not have the time to do the interesting picks and an occasional international flavored entry in addition to the Turkey stuff.

Anyway, starting today, I am hoping to revitalize Interesting Picks. While I am not certain I could squeeze in the global stuff from time to time, I hope to continue the links entries on a regular basis. So, here's the first set, based on some interesting stuff I picked up in the last few weeks (in the future, I'll only post items from the last couple of days, but I have a lot of ground to cover this time):

CSFB VIX replacement: I am not sure how popular it is nowadays, now that the good old VIX is down as well...

The international institutions have recently set up a G-20 data site.

Now that summer is around the corner, it is time to get in shape, not only physically but also financially.

A concise financial crisis summary/chronology by the Unicredit chief US economist.

Those who have read last week's Hurriyet column would know that I feel a tourism forecasting guide would be a nice addition to the library for many economists covering Turkey.

I just noticed that the New York Fed has a big section on the yield curve as a leading indicator.

Short speech by New York Fed President going over Fed's liquidity facilities- nothing fancy, but nice overview.

EconNews Roundup

CBT President Durmus Yilmaz's Tuesday speech, that I had discussed yesterday, is in today's Hurriyet Daily News.

Turkey loses coveted spot in top 10 current account deficits.

Beşiktaş Futbol Yatırım, the football club that is close to being the champion at Turkcell Super League: That's what I call accurate reporting. The incredible rise of Besiktas stock may not be such a big surprise, according to a recent academic paper by Hakan Berument & co. But a Fenerbahce championship might have been preferable, not only because the PM is a fan, but also because of production spillovers. Too bad they ended up with zilch:)....

A real estate tale (II)

Some time ago, thanks to David Lloyd, I had written on the real estate foreclosures in Didim. It turns out the problem may be more widespread than I imagined. Here's an excerpt from the weekly of my good friends at Istanbul Analytics:

As for the effects of the global crisis, a report by Istanbul Chamber of Public Accountants stated that bank’s foreclosures for the past due loans increased by 100% compared to last year. Banks took over 2,744 pieces of real estate against last year’s 1,100 and announced the sale of 51 factories for TL235 million and real estates for TL627 million. The report stated that the textile factories ranked number one in forced sales.

I asked for the report, but Istanbul Analytics does not have the source, either: They were just reporting on a news item that appeared on several newspapers (and which I still managed to miss).

Anyway, any more on this and/or the actual report would be most welcome...

EconNews Roundup

Now, I know why the government has cold feet for the IMF: It's just reflecting on its constituency's feelings for the Fun: A true democracy, you might be tempted to say, if only it were true:). I enjoyed reading the funny comments, especially ones such as the deal will lead to price hikes and the age-old logic that the countries that took money from the IMF are all in a bad situation (never mind this has got the causality all wrong, this is like saying that doctors make people sick). But at the bottom of it, the issue is purely fiscal, as anyone following the debate is well aware of. And the impression I am getting is that the differences between the two sides are larger than I imagined.

Joking aside, the article shows that the public at large is misinformed about the IMF. The case in point is the guy who think an IMF deal would be an EU requirement, while the other comments are not less out of reality. Incidentally, while I have no formal proof of this, the public in Turkey is more informed than many other countries, as they at least knows of the existence of the Fund. From anecdotal evidence from friends working in country desks in the Fund, in many countries, even the media do not know much about the Fund. However, in places with large Fund programs like Argentina, Ecuador and Turkey, the name of the IMF recalls more than Ethan Hunt. But then again, I am not sure who said it, but too little knowledge may actually be worse than no knowledge.

Anyway, refer to my recent entry for a short discussion (and link to a longer one) of the merits and evils of the IMF.

Coming to other news of the day, a Merrill Lynch economist says Eastern Europe and Turkey are to have high growth rates in the next two quarters, I say he is daydreaming. According to the article, he has in mind 3.1% and 4.4% for the next two quarters. Let's do some elementary algebra: Let's assume that (as economists always do) he is right on the recovery, so let's take his numbers for 3Q and 4Q as given. He must also be more or less sure about the double-digit contraction in 1Q, let's give him -12% for that. Plugging the numbers in and if he is expecting the n0w-consensus 4-5% contraction for the year, it turns out that his 2Q contraction is on the order of 15%! The simple explanation is that he is going for a smaller contraction for the year, say 2-3%, which would put his 2Q expectation at 5-6% (negative, of course). While early indicators show that we have seen the bottom of the Turkish recession and the contraction will be much less in this quarter than the last, I see growth near standstill in 3Q and a slight recovery in the last quarter. This puts me at my famous 5% I have been holding on to since November, with the risks slanted downwards (more contraction).

Also, I am disappointed not to find this in any English daily, but CBT President Durmus Yilmaz made some interesting comments yesterday at the Turkish Finance Managers Foundation/ Finance Club. If you speak Turkish, a detailed summary is at a good Turkish econ blog I recently discovered or at almost any daily. When I look at headlines from the speech, like I look at the empty part of the glass, rate cuts reflect to the market with a 3-9 months lag, public finance is grabbing money for the private sector (as if CBT rate cuts weren't providing the cultivating ground for that), I feel that most of this stuff could have come from me: Many of his headlines are the recurring themes in my blog and columns. I keep wondering, then, why I am so worried about their monetary policy strategy. I mean, if I am in agreement with everything the man is saying and yet oppose their reckless easing, then there should be something wrong with me...

EconNews Roundup

A summary of CBT's latest International Investment Position data.

EU no anchor for foreign investors: What a surprise! After all, the EU has to put its own house in order first. Moreover, tracking and enforcing economic criteria have never been EU's strong points. That's what the IMF is for.

Speaking of the devil, markets start to doubt the IMF deal? Good morning in Uskudar, as the English version of a common Turkish expression goes. Luckily, markets are acting as economists: Just assume that there is an IMF deal:)- HT to David Lloyd; from a recent comment he posted to the blog.

Summary of a Moody's Turkish Municipals report from last week.

What I've been reading

I have brought about a dozen books with me to Marmaris. Without any premeditation, I decided to do a small Jose Saramago fest: I have read first The Double, then Blindness (incidentally, I was thinking what a great movie it would make, when I found out, searching the Amazon link, that it has already been made- out in Turkey in a couple of weeks) and now I am off to History of the Siege of Lisbon.

I am not really into fictional reviews; in any case, I am waiting for the movie for Blindness for a joint review. But my good friend Emin, a loyal Besiktas fan when we play Fenerbahce, has a review on The Gospel According to Jesus Christ.

Among the other books I have with me are: What Makes a Terrorist, The Price of Everything, Economic Gangsters, Nudge, All the News That's Fit to Sell. I'll probably review at least some of those.

Weekly Hurriyet Column: The unbearable lightness of cheerleading

Below is the unedited version of my column for this week. You can read the final version, which has bypassed my allusion to Milan Kundera's deeply moving work (I guess the title was too long for the allotted space) , at Hurriyet's authors archive. BTW, I just noticed that the paragraphs have been messed up in the online version. Since it is rather tough to get the paper in Marmaris, I haven't been able to check if this is also the case in the paper version, but apologies if you read my columns at the Hurriyet site. Anyway, the text should be as below.


Last week, I provided an introduction to the rationale behind the “all is well, send the doc away” camp. However, I failed to mention that this philosophy is in fact the latest reincarnation of the macro cheerleading that has been going on for some time. This perennial optimism rests on three pillars: That we have seen the bottom of the contraction, the external gap is shrinking and fiscal deficit can be financed easily & cheaply. We received more data on each of these this past week to form a better evaluation.

Monday’s April Capacity Utilization did indeed hint that economy’s trough could have been at the end of the first quarter: Industrial Production might have bottomed out in March, as the Capacity Utilization numbers point to a slight recovery in April after adjusting for working days and cyclicality. However, with the tax cuts ending in June and the uncertain environment, a W-shaped recovery cannot be ruled out at this stage. W, U or V, the recovery is likely to be slow and painful.

As for the external gap, Monday’s March release reveals that the current account deficit continues to shrink on the back of a slowing economy and lower energy prices. But the cheerleading squad insists on overlooking some bad omens: First, while single successful rollover stories, like a bank achieving 100% a couple of weeks ago, adorn headlines, corporate rollover ratio is down to 63%.

Second, the fall in tourism revenues is gaining pace. In this respect, I am in awe that the cheerleaders are pointing to the robust summer reservations, most of which are not confirmed until the last minute. In any case, the simple fact is that we are past mid-May, and almost all the major destinations are noticeably less crowded compared to last year. I know that, writing from Marmaris this week, I am at a minor observational advantage, but tourism statistics are really not that difficult to observe in real time.

All in all, when you add the numbers up, 7-10 billion dollars of IMF money seem to be necessary to cover the external gap, even after assuming that the IMF deal will be supportive of debt rollover and capital flows.

As for the fiscal deficit, even the incurable optimist could not but notice the one-off or temporary factors behind Wednesday’s benign April headline figure: Rolling over of tax receipts from March, dividend income from state banks and GSM license fees. In fact, the IMF-defined primary balance, which excludes the latter two, is around 0.2% of GDP, down from 1.9% at the end of last year.

More worryingly, the deficit is likely to continue to worsen. The almost-consensus view is a year-end bill of around 60 billion liras, one and a half times the government’s projection. While such a large amount could be acceptable this year, the neverending IMF saga is proof that the government is unwilling to undertake precautionary measures to ensure debt sustainability in the following years.

In terms of the financing, the Treasury does not seem to be hard pressed except for the heavy redemptions in August and October. However, failure to sign an agreement with the IMF is likely to lead to more fiscal questioning and finally sting via an increase in the country-specific risk premium. In that scenario, I would not expect a sudden rise in yields, but a gradual creep upwards. With the Central Bank approaching the end of its easing cycle and real yields at record lows, I also hold onto my rather contrarian view that there is limited opportunity for further downward move there.

All this cheerleading is good even if you are not long Turkey; if anything, it keeps the morale high. But like all artificial stimulants, once the effect wears off, an awful lot is going to feel really down.

EconNews Roundup

I got a little bit lazy in Marmaris, so here's the roundup from Friday and the weekend.

Unemployment on the rise

I am not referring to the latest CBT cut in tomorrow's column at all, as I have written a lot on that, and I don't want to repeat myself, but in case you're interested, here's Hurriyet's take.

This is what banking on rate cuts is about.

Interesting piece on microcredit for women in Turkey. Incidentally, I tried to find some research on the impact of these programs in Turkey, but I couldn't find any. But now that I think of it, I don't know a single major Turkish development economist calling a Turkish university home.

EconNews Roundup

I was on the road yesterday, so here is the roundup of Wednesday & Thursday:

Swine flu could increase tourist flows to Turkey (HT to David Lloyd): I guess the argument is theoretically possible, but then the problem with Economics is that almost anything is theoretically possible, if you make the "right" assumptions. I had discussed the two sides briefly earlier, so no need to be repetitive, but as a more general point, I think there is great confusion in the Turkish press, and even some economic columnists on the relative powers of income versus substitution effects. There is a column I have been planning to write for some time, which I will call "some common misconceptions about the Turkish economy". This has to be in that article.

See what happens when you make people unemployable and reduce incentives for work for year with one of the weirdest social security systems ever to grace the galaxy.

I am contining to delay my take on Turkish fiscal affairs, which will probably be part (or whole) of coming week's Hurriyet column. So here's an appetizer until then.

Mixed signs from the Eurozone continue: Just how sweet were the OECD leading indicators a couple of days before.

The hard copy of Hurriyet (no web link) was reporting Deuthsche as the new recruit to the "don't send the doc away" camp. And according to the paper's summary of the bank's Turkey chief economist's report, which I somehow missed, "the narrowing of the current account and higher borrowing by the Treasury shouldn't weaken the case for an IMF loan"- more or less what I was saying at my latest column. He further adds that "there seems to be some confusion regarding the role of an IMF program and growing complacency regarding the need and size of funding." I have never met the chap, but glad to know there is still some common sense in the market.

Last but definitely not the least, a new comic drama from Fenerbahce SK: The "Cupless" Years, shot in Izmir with an international cast of 18 (and extras of 40,000) directed by Luis Aragones, produced by Aziz Yildirim- I am sorry I can not refer to the duo by their stage names, but this is a strictly PC blog (boos to Hurriyet for not covering this and forcing me to link to the competition).

EconNews Roundup

TUSIAD is a bit late in joining the large contraction camp.

If my two-sentencer wasn't enough, here's more on the latest Capacity Utilization figures.

Key rate may (actually will) see new low. Incidentally, this is the CBT policy rate we are talking about. BTW, it is THE key rate for Treasuries or banks banking on rate cuts, but it is really not that key for lending rates for now...

Followup on weekly column: Latest Data

Capacity Utilization did indeed rise, but only modestly. Moreover, the figures suggest that Industrial Production might have bottomed out in March, as the numbers point to a slight recovery in IP in April- after adjusting for working days and cyclicality of course. But it seems this will be a very slow recovery....

As for the Balance of Payments (BOP), March current account, at USD 1.0bn, was below expectations and shows that the contraction there is continuing. However, contrary to the consensus view, there are some bad omens as well. First, corporate rollover fallen to 63%. Second, the fall in tourism revenues, 13% yoy, is gaining pace. Optimists say it will be much better in the peak summer months, adding the stable reservations as evidence. But, ask anyone in the tourism sector, and she will tell you those reservations don't mean a thing, as they can be cancelled at the last minute without much, if any, penalty (just think of it as the interaction between the oligopolistic tour operators and near perfect competitive hotels- a topic worth devoting a separate entry to).

In fact, the good thing about tourism is that unlike most other statistics, it is very easy to observe. Here is devoted column and blog reader David reporting from the frontline (from a recent comment to another blog):

The hotels here in Didim are completely empty, indeed if you were not in possession of a calender - there would be NO indication that the holiday season had started!!

We are weeks away from the peak season, and some are still claiming "all is well".... And when you ask how come tourism revenues would not contract by much when all of Turkey's main markets like UK (Didim, Marmaris), Germany (Antalya), Russia (Marmaris, Antalya) are contracting, the answer is the weak exchange. Sure, this can come in handy at the very margin, but incime effects are way stronger in tourism, not just for Turkey, but also in almost any other country (just do a google scholar search for relevant papers if I don't sound convincing). Or in layman's terms, if the pockets are empty, it doesn't matter how cheap Turkey is!

One interesting result of the different tourist base of different destinations is that we could see some regional differences. Each country is contracting at a different rate. Moreover, it wouldn't be too much for consumers at different countries not to act in exactly the same way. Finally, the relative income strata of incoming tourists from different countries is different, which would also lead to different consumption behavior (in terms of deciding to take a vacation, and if yes choosing Turkey, sort of a hierarchical or nested model). I would therefore not be surprised if some destinations fared better over the summer than others. But to suggest that Turkey will have a swell tourism season because the exchange rate is weak borders between absurdity and outright insanity.

Just to diverge a bit, there are other interesting trends in the BOP figures: First, the upward trend in gold exports is continuing. As I mentioned before, this recent trend has been interpreted before as strained consumers turning their gold savings into cash, but although this explanation makes sense, I haven't done a thorough analysis to confirm it. Second, net errors and omissions continues to rise; USD 2.1bn in march and at USD 17.6bn in the last six months. The consensus view is that this is personal wealth being repatriated as corporate financing dries up, but again, although this is a perfectly logical explanation, there is no evidence either for and against.

To sum up: What to make all of this? OK, the current account is contracting, but the external gap is not shrinking as fast. Therefore, in my humble opinion, one of the arguments of the "send the doc away" camp is really flawed.

There is of course the state of fiscal affairs, the final data I had talked about in Monday's column, but that deserves a separate entry...

EconNews Roundup

Will it will it now? Sign an agreement with the IMF, that is. BTW, I would be really really surprised if Turkey did qualify for the flexible credit line.

Learning from crises in exporting: I wonder whether this would hold empirically i.e. whether exporters in countries recently exposed to a crisis do better in this global recession compared to peers.

The Treasury cash budget posted a surplus in April of TRY 0.8bn. While this looks well compared to April 08's deficit of TRY 0.4bn, a deeper look reveals that a shift in tax revenues is behind the large difference. It is therefore much better to look at the deficit year to date, and once you do that, with a deficit of TRY 1.4bn compared to last year's surplus of 7.7bn, fiscal performance does not seem so healthy any more.

So, it is the Fund that is undecided, or so we are told.

Current account is down, but external financing gap not as much- I'll come to this as a follow-up to today's Hurriyet column later on.

Weekly Hurriyet Column: All is well, send the doc away

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. I will come back to today's data releases I am mentioning in the column as well as fiscal issues later today in separate entries. But one point I would like to raise right now is the politics of the "send the doc away" camp. First, market economists have to tell what the government will do, rather than what it should do. In that respect, I can understand their point of view: The PM's remarks over the weekend show that the government, or at least the PM, is still unwilling to make any fiscal adjustments. On the other hand, there are those in the media who are in this camp only because they think the government will do this, but also because they strongly feel it should. Those are the dangerous guys. In any case, I believe that the episode is really starting to turn sour: Rather than confusing and conflicting comments, I think the government should just clear the issue once and for all: Either get the agreement in or just come out with something like this: "We are not doing a deal with the IMF because we can tap our external financing and fiscal gaps ourselves, and the Fund is asking for too much fiscal adjustment". In fact, it wouldn't have to be a logical or internally consistent explanation; any explanation, however crazy, would be better than the current impasse. But given the government's past performance on this issue, I very much doubt they will do it...


A couple of weeks ago, I had discussed whether there was any basis for the green shoots a la turca scenario, i.e. whether the economy was on the way to recovery. At the time, the answer was a resounding no.

Last week’s March Industrial Production release, despite the 20.9% yearly contraction, was interpreted by analysts and media alike as positive, with the lower-than-expected figure showing that the pace of the contraction was slowing down. However, a closer look proves otherwise: Once you adjust for the number of working days and cyclicality, the monthly contraction in March turns out to be no less than the previous month. If anything, these latest figures have all but ascertained a double digit slowdown in the first quarter.

But these statistics are lagging behind more than a month. Therefore, I will be looking for hints of recovery in today’s April Capacity Utilization outturn. An across-the-board improvement there would confirm signals from the real sector confidence indices that inventories are finally being run down, a necessary condition for recovery.

Even without clear signs from producers, there are other reasons to be marginally optimistic. Consumer credit seems to be thawing, albeit at a very slow pace. Yet it is way too early to make too much out of this, as it could also be a last-ditch attempt by cash-strained consumers. It is, after all, all quiet on the commercial credit front, although the latest Bank Loans Tendency Survey points to easing conditions from the supply side. The much-awaited credit guarantee fund could lead to more slack there.

Markets have been providing ample ground for optimism as well. The lira has held reasonably well, and demand at last week’s Treasury auctions was significantly more than expectations on the back of a record-low inflation print and favorable global sentiment. Bond markets are supposed to intimidate, as Clinton adviser James Carville famously noted once. Obviously, he has not been to Turkey: With the banks literally banking on rate cuts and another 0.50% cut on the Central Bank’s menu for Thursday, bonds just wet appetites here.

Moreover, the slowdown has tamed the country’s chronic current account deficit, as we will ascertain again with the release of the March turnout this afternoon. Therefore, if the external gap is shrinking, thanks to the recession, and the Treasury can borrow easily & at low cost, compliments of the Central Bank, who needs the IMF? This reasoning has started to surface here and there, and, in my opinion, is even more dangerous than trying to pretend that the Fund is around the corner.

In addition to the fact that this strategy has the rather unpleasant side effect of crowding out private lending and delaying the recovery in credit markets, public finances are deteriorating rapidly and the fiscal gap will need to be plugged with IMF money to the Treasury at some point. Furthermore, the coherence of an IMF program is essential for debt sustainability, one of the pillars of economic stability in the early AKP years.

If the government is dodging the Fund because it plans for more fiscal stimulus, it should know that with the high debt rollover and a weak primary balance, it is mixing a poisonous cocktail. In a similar fashion, the Fund’s structural measures that the government is –supposedly- vehemently opposed to ensure that it will not try to renege on its promises at the next general elections.

Odysseus tied himself to his ship’s mast to resist the lure of the sirens. I have known for some time that the government was not as wise. But I am surprised to see that the crew and the passengers are handing a knife to their captain- so that he can free himself and head for the cliffs.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.

EconNews Roundup

Sukuk Slowdown: Buna da sukur...

The never-ending IMF saga continues: This time, it is the PM who says he can not accept the Fund's demands to curb spending. Tomorrow's Hurriyet column is partly devoted to this issue, so I'll postpone the discussion of these remarks for now.

Finally, what if you could have your own economist at hand? As a disclaimer, I should note that Ozlem and Murat are good friends, but that doesn't change the fact that they have an excellent product.

March Industrial Production

Most analyst reports were almost positive on the March Industrial production data despite the 20.9% yoy contraction, as there was a small mom upward tick. They are other indicators that the economy might have hit bottom in 1Q. But just to put things into perspective and because a picture is worth more than a thousand words, as I have said before (from the same report):

I am so glad the crisis has gone tangent, as PM Erdogan insists on claiming. I guess the diameter would be something on the order of Slovakia...

EconNews Roundup

Quote du jour: As long as they can fund themselves, why go to the IMF? Let me tell you three reasons: 1. They won't keep funding themselves forever. 2. Expectations& investor confidence: The Fund deal has been built into expectations to such an extent that a no-deal at this stage would raise concerns with domestics and international investors. 3. It is the FX, stupid: Turkey still has a external financing gap, despite the decreased current account deficit. This has nothing to do with funding the budget deficit.

A real estate tale

David, a reader of my Hurriyet Daily News columns from Didim, asked me the following question last week:

The real estate market here in Didim is experiencing downside pressure from the economic crisis, as this is an area where a lot of British buyers have purchased over the last 5 years. I would estimate the amount of unsold properties to be over 20,000, for some reason many new buildings are still under construction even in the present climate!!

Last year I read that the title deeds office here in Didim was unable to transfer title deeds for property transactions between individuals, as all their manpower and time was being utilized working on behalf of the banks when they repossessed property from developers who had defaulted on their loans. The manager of the Deeds Office was quoted as saying that under Turkish law, they were obliged to prioritize the freezing of these assets on behalf of the banks.

This all seems perfectly reasonable and I can understand these actions. What I am increasingly confused about is what are the banks doing with these repossessed assets? They do not appear to be put back on the market in any volume anywhere in the resort. In your opinion, are the banks keeping these assets on their balance sheets at 'face value' or does 'mark to market' accounting apply here in Turkey ?

I would estimate that the property prices have decreased by about 25% in this resort from their 2007 peak, however it is very difficult to make an assessment as so few transactions are taking place to assist price discovery. Obviously, should the banks 'flood' the market with these properties; it would cause more downside on prices and further deteriorate their balance sheets.

I do know that some of these properties are changing hands between the banks, as a recent court case between a builder and a British buyer revealed that the tapu of the property in dispute had been transferred from the Is Bank to the Halk Bank.

I would be very grateful for your insight on this matter, although I realize you are very busy.

My quick answer to David was that nothing is marked to market in Turkey, with the commercial code almost as old as the ancien regime. But since this is really way out of my expertise, I had to consult a couple of bankers and a lawyer who specializes in the legal procedures. Here's what I have:

First, the banks could foreclose if the payment has not been made for over a year. Then, the legal process would take some time, including sending a formal notice to the contractor and then starting the procedures for seizure, including sending an expert to decide on the value of the property.

So mark-to-market is not an issue here. Actually, banks have to liquidify the property according to banking laws. It just takes some time. Therefore, the reason David is not seeing hordes of properties on the market could be that the seized properties have not hit the market yet and are still crawling through the legal process.

Alternatively, I have been told that there is a lively secondary market for seized properties; guys who make a living from following these auctions, getting the properties at bargain prices and then selling them at a mark-up. This could yet be another reason why David is not observing lots of property for sale at Didim. The new owners could have decided that it would be better to wait until market conditions improve.

Note that if it is only an issue of length of legal process, David is could observe a flooding next year. The secondary market, however, could dampen this effect somewhat.

BTW, the banks do not get involved in the auctioning process, it is outsourced and held as public auctions: You can see follow the auctions on the web as well; for example, see here and here.

Anyway, if anyone has more on this, I would be grateful.

Yet another grim tale

The EBRD just released its growth forecasts, following in the footsteps of other international agencies with a grim perspective. I was planning to go over some numbers when the IMF figures came out, but never got to it, so since the figures are almost identical, here's the regional summary for Emerging Europe:

• Turkey is to contract by 5.5% in 2009, which compares with the government’s own 3.6% contraction forecast, with mine of 5%, and the IMF’s 5.1%.
• Russia is expected to contract by 7.5%, down from the EBRD’s 1% growth forecast in January. However, I think that rallying oil&metal prices might change this picture. I am really curious how anyone is expecting a good tourism season in Turkey over the summer with Russia in this state. It is true that there aren't as many cancelled reservations for now, but most of these don't have a deposit involved and can be cancelled at the last minute.
• Ukraine is expected to contact 10%, with Baltic states in the same range.
• Only Central Europe is expected to do better than Turkey growthwise this year, with the Czechs at -3.5% and the Poles at zilch growth.
  
• Overall, the EBRD has cuts its 2009 growth forecast for Emerging Europe from 0.1% in January to minus 5.2%.
  

As is clear from the numbers, Turkey looks quite a decent performer even with its 5%-5.5% contraction. Another case where relativity seems to hold...

EconNews Roundup

Istanbul Gold Exchange reports Turkey imported 25.7 kilograms of gold in March after zero imports in January and February. March has also record exports, so one wonders...

I don't want to repeat myself, but this is what banking on rate cuts is all about.

Profit realization or feeling the heat of the global crisis: Why are expats selling property?

Two pictures on USDTRY better than a thousand words

USDTRY has recently been extremely correlated with global risk appetite, as the following picture, from a recent RBS report shows:

This high correlation explains why the lira is getting the best of the global rally. But the downside is that when things get bumpier, the lira is likely to suffer more than other EM currencies:

EconNews Roundup

Construction machinery producers are trying to enter the Turkish market: I wonder who they will sell to right now...

Easing inflation points to rate cuts and more banking on rate cuts and more crowding out of private credit. No wonder bond yields are going down.

The latest jump in consumer confidence, if anything, has reinforced my belief not to make so much out of these indices. The recent jump reflects not only favorable asset prices, an important determinant of the the index as well as the recent tax cuts. Note that this is not something specific to Turkey; Robert Shiller, for whom I was honored to serve as a research slave (and who later paid his debt for advising my thesis), has an excellent article on Sunday's NYT highlighting similar biases in the US version of the index (Michigan consumer sentiment).

Last but not the least, an interesting quote from the business world's view of the cabinet reshuffle:

Unakıtan had protected the Turkish currency well and I think Simsek can also manage to do that

Could anyone explain to me how a FinMin can protect the currency?

Weekly Hurriyet Column: (dis)Inflation Report and sloppy reporting

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. Again, here are a couple of extra points I would like to raise:

• Another overlooked part of the Inflation Report is the section where the Bank highlights the growing NPLs. I like that they have chosen to concentrate on consumer loans and credit cards, a dangerous issue I had raised in last week's column.
• In terms of shooting itself in the foot, the record auction demand and the ensuing bond rally (following a lower-than-expected April inflation reading) are certainly cases in point. It is great that the Treasury's borrowing is going smoothly, without much trouble from the quantity of price front, but this is definitely crowding out private credit.I had commented on the inconsistencies in the government’s latest macro framework two weeks ago. I am not sure if they were envious of the attention, but the Central Bank has now joined the bandwagon of sloppy reporting with its latest Inflation Report.
  

The feature of the report that got the most attention was the inflation forecasts, which were revised down to 6 percent for this year, 5.3 percent for 2010 (both mid-points of the Bank’s forecast range) and 4.9 percent for 2011. The one percent difference between my own year-end expectation and the Bank’s is just a matter of the alphabet: Bank’s outlook of an L versus my projection of a very wide V for the path of inflation. While inflation is expected to fall sharply in the next few months because of base-year effects, I expect it to creep upwards later in the year, while the Bank’s outlook is for inflation to more or less stay put after the sharp falls.

I would, however, not be too surprised if the Bank turns out to be right at the end. After all, they have infinitely much more research power than my team of three (me, my laptop and my Eviews statistical package). I would even be just slightly in awe if inflation continued to fall once global and domestic conditions cease to be supportive of disinflation even though I am even more skeptical of the Bank’s 2010 and 2001 figures. However, at the end of the day, it is not the numbers but the Bank’s policy stance that I am worried about.

The Central Bank’s main focus for the past few months has been thawing credit markets and reviving growth. To adopt such a stance, the Bank has effectively outsourced inflation targeting to exogenous events, betting that the recessionary domestic and global environment will keep prices at bay. In a similar fashion, the Bank is implicitly counting on the IMF program to take care of currency and fiscal risks.

Of course, other than the small detail that the IMF program still hangs in the air, this strategy involves major risks. For one thing, the easing has only exacerbated banks’ preference for bonds over credit. Moreover, rate cuts run the risk of slowing down locals’ foreign currency sales, which have been an important safeguard of the lira’s relative strength. Then, the corporate sector’s large foreign currency position would suddenly turn out to be a bigger danger than the Bank admits at this stage.

Despite all this, the part that seemed sour to me the most in the Inflation Report was the Bank’s analysis of output gap and inflation under different policy scenarios since November 2008. Such analysis could lead to dangerous questions: For one thing, it would be perfectly right to question, after reading the analysis, why the Bank had not pursued similar aggressive policy during when inflation had turned out to be higher than the Bank’s targets. For my part, I would have liked to see some justification for this asymmetric policy response.

Moreover, anyone who has delved into Economics at a somewhat rigorous level would know that such counterfactual exercises can be highly inaccurate. In addition, publishing such analysis in an Inflation Report runs the risk for misinforming the masses on the power of monetary policy, in effect raising the expectations bar and forcing the Bank to even more accommodative policy. Don’t get me wrong, I am all for transparency and information; I just think that putting the material of a working paper in an Inflation Report is not the way to go.

While the Bank’s actions could undermine its own efforts to combat the economic contraction, I have come to learn to live with this and even admire the Bank to a certain extent, as one admires a daredevil. However, it seems that the Bank is trying real hard to shoot itself in the foot.

EconNews Roundup

Turkey tapped international markets for a 10-year USD 1.5bn eurobond issue. According to market economists, this means something for the IMF deal, but what, they are not sure: While some claimed that this meant that the Treasury was taking precautions for a delayed IMF deal, others said the Treasury was just strengthening its hand with the Fund. While you could easily make a pro or anti IMF deal argument, there is one more thing the issue tells us: Markets may be going down from here, as the Treasury is famous for issuing its eurobonds at the very top of the market. So, the Treasury is implicitly supporting the "sell in May and go away" scenario as well.

It turns out that rumors were only partly true: In an extensive cabinet reshuffle, Mehmet Simsek did indeed leave his position as EconMin, only to take the helm at the Ministry of Finance. Unsurprisingly, FinMin Kemal Unakitan got sacked and according to him, it is not because of his deteriorating health. Surprisingly, Vice PM in charge of economic coordination Nazim Ekren got the sack. Minister of Foreign Affairs (and ex EconMin) Ali Babacan took over Ekren's responsibilities as well as the Econ Ministry, making him in effect solely in charge of economic affairs. Interestingly, it was being said that the Fund was waiting for the cabinet changes (see how everything is tied to the Fund in Turkey), so we'll see if there is any progress on that front in the next couple of weeks.

EconNews Roundup

Preliminary exports data is showing that the downward slide of exports continues. Speaking of trade statistics, the most interesting aspect of yesterday's official release of March figures was the larger-than-expected imports: Obviously, the tax cuts have helped, but the increase is way too much and way too across-the-board to be explained by that alone.

Hurriyet has a roundup of the best month for stocks since 2003. Of course As for whether the really will continue or not, it breaks my heart to see the most talented mathematician of the Middle Ages be degraded like that. Obviously, like many economists, I do not hold technical analysis in much esteem, but just enough to know that it is a self-fulfilling strategy- if everyone believes and acts according to it, it will materialize. But then again, any strategy would work that way. I mean, you could be buying in Besiktas victories, and the market would still have been bullish for the past few months.

Joking aside, just think about global developments of the last few days: Risk of another epidemic, widely blown green shoots scenario, a stock market totally pumped up by the Fed and at best a very wide V of a recession. Now turn to Turkey and you have uncertainties on the IMF front being manipulated by a couple of smart asses taking "appropriate positions" (yes, I am talking about Wednesday's rally), a deep slowdown and a government still slow to act. I would definitely agree that Turkish stock are very cheap in the very long run, but as for the next month or so, I would not be as cocky, despite what Fibonacci (or the Besiktas for that matter) analysis tells you.