Monday, May 11, 2009

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

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