Monday, May 18, 2009

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.

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