More on today's growth figures

Daily News asked for my comments on the Turkish growth figures for an article, so I wrote the earlier blog in a hurry. Therefore, I have a couple of comments to add:

For one thing, the huge positive and negative contributions from net exports and inventories, which more or less cancelled out, were also noteworthy. Experience has told me not to make too much out of the stocks figures, but the sharp decline is in line with the large falls in industrial production in the first quarter. As for next exports, both exports and imports contracted, but imports by a much larger amount on the back of the large demand pullback and oil price declines.

It might also be somewhat of a surprise that government spending rose only 5.7% yoy despite a fiscal deficit, mainly on the back of non-interest expenditures and current transfers, in the first quarter in the run-up to the local elections. Leaving statistical measurement errors aside, this mainly reflects a base effect, i.e. government had opened the coffers in 1Q08 as well.

Looking forward, forecasting 1Q was rather easily, as seen from the convergence of market economists on a 12-13% contraction. 2Q will be much more difficult, as there will be two affects more difficult to estimate: There will be a natural bounceback, amplified by the impact of the fiscal stimulus, especially the tax cuts. Therefore, forecasting 2Q will be more of a guesstimate than anything, and I would not be surprised if forecasts diverged a lot this time around. But for one thing, today's April trade data hints that the contribution of net exports will not be large in 2Q, as imports seem to be stabilizing faster than exports after falling much deeper. However, I would want to wait for the volume figures to say for sure.

Battle of the Bear Stearns has-beens

I have carried over to my blog RBS analyst Tim Ash's argument that Turkey is underrated (or maybe it is the other way around, i.e. the peers are overrated), by the rating agencies. It turns out Suna Reyent, who writes at Seekinghalpha and is a former Bear employee like Tim, beat him by a few months: Her article back from January is touching on the very same issues that got Tim kudos in Turkey.

Although I do not agree with some of Suna's points (as the principal author of a World Bank report on higher education, I can testify that Turkey does have a really poor education system, for example) and believe that the Turkey ratings are not way off the mark, I would still highly recommend her article for a neat discussion of some of the key issues on the ratings debate (and more).

Speak of the devil: 1Q GDP

It must have been the curse of the black eagle (after all, the PM, the Econ Minister and the FinMin are all ezikbahce fans) when I was writing on my updated forecasts yesterday. A contributor to Dealers of Turkey, a yahoo newsgroup, summed everything up by simply pasting the Wikipedia definition for tangent. I have likewise been claiming that the PM missed the geometry class in primary school when tangent and diameter were introduced, as he does not seem to know the difference between the two. After all, it is not often that you set to get two medals with one performance: While 1Q09 growth easily brushed past the 1994 and the 2001 crises to secure the gold medal for the largest contraction since the series began more than two decades ago, it also barely beat Lithuania for the bronze medal in the international competition for the worst growth performance, right behind Latvia and Estonia. As a side, note that all these countries are in the same region, which is what I was arguing in my last Daily News column to explain Turkish assets' relative resilience.

Anyway, coming back to the figures, while the 13.8% yoy (I'll be using only the yoy figures here) 1Q growth figure was not that off from expectations in the range of 12-13% yoy, the devil is in the details. Specifically, looking at the contribution to growth on the expenditure side reveals important facts. First, make no mistake, the private sector hit rock bottom in the first quarter: The contribution to growth of private consumption and growth were -8.3% and -6.6% respectively. Second, even though the government used fiscal measures to the full at the expense of risking to disrupt debt dynamics, increasing the rollover rations and crowding out private credit in the process, the public sector's positive contribution to growth has been a limited 1.2%. I am aware that this accounting view is a bit too simplistic. After all, you can argue that private sector figures would have been worse without government intervention. But the figures below illustrate the general dilemma faced by many countries: Because of the sheer size of the private sector and crowding out effects, the effectiveness of fiscal policy is debatable. As for the implications of these figures for 2009 growth, yesterday's 6.66% contraction does not look that fictional anymore, even though my main scenario is calling for 5-6%.

In any case, the billion dollar question I brought up earlier is not what happened, but what will happen: While the global and domestic economic skies are too hazy to have a clear look at the horizon, the latest data are not that encouraging. For one thing, even though the the government's timely tax cuts (render unto Caesar what is Caesar's) have boosted consumption in 2Q, it is questionable how much of this will carry on the the rest of the year. While anecdotal evidence is rather mixed, May real sector confidence indices hint that destocking has come to and end. After all, they may come if you build it, but they will not definitely consume if they are not meant to consume. Moreover, rising unemployment and falling real wages make a strong and sustained consumer comeback very unlikely. As for investment, according to the same survey, there is only a limited improvement in investment prospects, with the outlook continuing to look dire.

The trillion dollar question, on the other hand, is what will happen in 2010 and beyond. Here is where an economic policy framework would be extremely useful, with or without the IMF. Otherwise, we may see a repeat of the lost 90s during the next decade. As for greenshoots, the only good part of today's release is that the PM might have finally learned the difference between tangent and diameter and that these figures could serve as a sharp wake-up call...

EconNews Roundup

If the Europeans are not spending, switch to the Arabs. But this is easier said than done. While I was OK with the article in general, one important omission is the fact that this is going to matter only on the margin, as the number of Arab tourists coming to Turkey is a fraction of the Germans, Russians or Brits. It may boost sales for a few shopping malls in Istanbul, but the Marmaris carpet shop owner will not feel this (or see any Arabs for that matter).

Speaking of retail, the May retail index points to a limited recovery in May. But there are two important disclaimers: First, the index, prepared by Nielsen for AMPD, measures shopping malls and organized retailers, which makes about 40% of the sector. So the small guys are left out. Moreover, the real question is not whether there was a recovery or not in the spring, there definitely was. But the billion (as I will detail in my next blog on the latest GDP figures) dollar question, which I touched in my latest Hurriyet column, is whether the recovery will continue into the summer.

Finally, I should say that the CNN-Turk presentation of the index, which I happened to listen to on the radio on the way to the meeting yesterday afternoon, was a disaster: The Nielsen CEO giving some figures without explaining if they are monthly or yearly increases, seasonally adjusted or not. Luckily, the Daily News article is much clearer.

Book Recommendation: Acik Pozisyon (Open Position) by Yusuf Goz

This is a review I've meaning to do for the last few weeks... And as I found half an hour waiting for a movie in Cevahir, I wanted to jot down a couple of paragraphs.

Yusuf Goz tells his life as a trader in the 1990s in Turkey in the highly entertaining Acik Pozisyon (Open Position). Such books are in abundance in Wall Street and the City, with the most famous example arguably being Liar's Poker, but I guess Goz's book is the first of its kind in Turkish. It is a short and fun read, which you can finish in a long afternoon, which is exactly what I did on a Sunday afternoon last month.

The most important insight the book gave me is that the incentive problems at the heart of the 2007-2009 financial meltdown are not specific to Wall Street at all. Throughout the book, I could see the same traces of skewed incentives.

Overall, it is a fun introduction to the trading environment, full of anecdotes and lively descriptions. If you speak Turkish, I'd definitely recommend it.

My New Forecasts

Speaking of forecasts, I have been updating my own forecasts thanks to my friends at Turkey Data Monitor, who were kind enough to share their data Excel sheet with me. Interestingly, I came up with the devil theme, with all the key forecasts having the infamous three sixes:

It all started when I was doing some fiscal projections at the end of last month. I came with a deficit figure of TRY 65-70bn, so why not write the official projection at TRY 66.6bn? Recently, I have been looking at growth and inflation: For growth, my 5% contraction from early in the year now look a tad bit too optimistic. I now see growth contracting at 5.5-6%, but with just a bit of darker assumptions on oil prices and the world economy, my VAR, one of the frameworks I am using, easily spits out -6.66%. As for inflation, my earlier projection of 7% seems a tiny bit too high. I have now come with a figure of around 6.5%, so I can jot down 6.66% for that.

This makes life very easy for me. Now, when someone asks about my Turkish economy projections, I just refer them to the fallen angel. This also makes things comforting, as we seem to have just the right government to combat with such devilish figures:)....

BTW, feel free to email me if you want to know the methodologies and the details.

Morning Fun

I try not to pick on anyone with the blog or the weekly columns, but I just couldn't pass the opportunity this time around. Here is an excerpt from an bank's Turkey preview:

Q1 GDP will probably see the sharpest contraction since the beginning of the current data series in 1998. Back in Q4 2001 GDP shrunk by 10% y/y but we expect an even worse reading of -11.89% y/y in Q1 (consensus: 11.9% y/y).

I wonder where the 0.01% difference from the consensus comes from. The report continues with inflation:

We anticipate June consumer prices to increase by0.07% m/m and 5.7% y/y. We expect that the weak HUF vis-à-vis the EUR is passing through to inflation with a lag but that weak domestic demand, lower oil and food prices will have a negative effect.

This puts all the existing passthrough theories to the garbage can: I had no idea EURHUF had an impact on Turkish inflation. Joking aside, this proves that copy pasting is not a good idea.

This also reminds me a famous Economics urban legend: During the height of the Asian crisis, Fund's Korea review had supposedly written Thailand all over it- the authors had obviously been inspired by the earlier report, but obviously forgotten to control+H, i.e. find and replace, Thailand with Korea's that is. While that story is probably not true, there is a widely-held suspicion that the Fund has a one-size jacket, as illustrated by RBS analyst Tim Ash's comments this morning. If you are interested, I can refer you to an interesting paper written by two economists, one of them an Econ. minister now (Hint: I have never been in any government under any capacity):)...

EconNews Roundup

Automobile production increasing. But don't get too excited; the article refers to last year's figures, not last month's:)

More last year's news on corporates: It seems that their margins have been falling, at least according to the article.

I am not sure if there is indeed a causal relationship, but an interesting article on the effect of the changing financial architecture, which I had discussed last week in Hurriyet, on the greenback.

Last but not definitely the least, Hurriyet Daily News' favorite analyst makes headlines again: Much of what he is saying makes perfect sense, but I just have a small footprint to add: Such conditionality might in itself un-nerve markets, notes Tim, speaking of the IMF agreement. Well, the reason it will unnerve markets is not because that conditionality will be harmful to Turkey, but because markets will start thinking the government will renege on the promises.

Weekly Hurriyet column: The VolksWagen debate is irrelevant

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. As usual, I have a few additional points:

• By the swords of Damocles, I have in mind all the various economic and political tension points that the country has been tensed with in the last couple of years. On the politics, a couple of elections, sort of an e-coup, and of course Ergenekon and Lighthouse. As for Economics, open positions of the corporates, the IMF mambo jumbo I have been constantly writing about and your main export market slowing down considerably are just a few.
  
• I used the word seeming dichotomy because revising growth forecasts downwards and seeing green shoots are not contradictory. Simply put, it's all relative, my dear Watson...
• I recently discussed the W debate in more detail.
• As for the commendable WB work I am referring to, I have in mind the recent higher education studies, of which I was lucky enough to lead the higher education part, and the more recent labor market study. Moreover, I learned in the seminar that they have just finished up an informal sector study, which is now undergoing government approval.
  

The World Bank introduced its annual Global Development Finance report with short seminars in Ankara and Istanbul late in the week. I found the Istanbul leg a much more appeasing introduction than the markets’, when the growth revisions in the report led to sharp selloffs amidst a mood of uncertainty on Monday.

The seminar featured presentations by two of the principal authors of the report, Mick Riordan and Dilek Aykut, as well as one on the Turkish economy by Is Yatirim’s Serhat Gurleyen. The World Bank economists concentrated on their respective sections of the report, Aykut on private capital flows to developing countries and Riordan on global economic prospects. The tone of the presentations was one of muted optimism, with both emphasizing that while the impact of the current crisis had been much deeper and broader than previous ones, recovery was on the way. Unfortunately, this seeming dichotomy got journalistic instincts rolling, and other important messages got lost in the process.

For example, the presentations had some important Turkey implications. For one thing, among developing regions, Europe and Central Asia has been affected most from the crisis, with Turkey’s immediate vicinity of Eastern Europe worst hit. In fact, even the Bank’s 2009 Turkish growth forecast of 5.5% does not look that bad next to Lithuania, Latvia or Russia. More importantly, banking sector woes, the region’s Achilles’ heel, have not been an issue in Turkey, partly because of the painful lessons of the 2001 crisis. Another factor, highlighted by Gurleyen, is the households: With low indebtedness and long FX positions, they have been much more cooperative than their European counterparts. I believe that such strengths are some of the key factors behind the relative resilience of Turkish assets despite all the swords of Damocles.

In a similar manner, the Bank’s Ankara lead economist Mark Thomas set a tone of cautious optimism for Turkey in his opening remarks, with his argument of green shoots based on data as well as anecdotal evidence from the IFC, the Bank’s private sector lending arm. However, all data lag behind, and most recent figures hint that the spring recovery might have been largely induced by the tax cuts and therefore temporary. For one thing, the latest real sector indices indicate that destocking seems to have come to an end in May and investment continues to look dire. As for anecdotes, Kaan Sariaydin, former head of Morgan Stanley Istanbul, who now gives talks to businessmen across the country, was telling me over coffee right after the seminar that while Thomas’ story held well until June, the picture has been changing for the worse as of late. If so, the Turkish recovery could be shaping like a W or a very wide V.

But regardless of who wins the VolksWagen debate, it is important not to get complacent if Turkish markets continue to hold well or if the recovery turns out to be sharp. For one thing, we all agree that a structural fiscal framework is needed, with or without the IMF. However, the crisis has surprisingly led us to tuck labor reforms underneath the carpet. With unemployment very high and likely to improve slowly, measures to decrease the cost of hiring workers and making them more employable should be key. In fact, the Bank has been involved with commendable work on labor market and educational reform as well as the informal sector. It is a real pity Thomas’ comments on these issues were largely ignored in favor of a pointless debate.

In fact, maybe a W recovery would be better for Turkey in the sense that it would serve as a wake-up call for the folks at the government and remind them to get off the complacency wagon.

EconNews Roundup

Yet more IMF mambo jumbo.

Despite the downward bias of the reporting, neither the one-pager or the summary minutes reveals that measured rate cuts are on the way from the Central Bank. Sustaining the downward bias is not the same as cutting rates. In fact, market economists are a bit undecided on how much further the Bank will go. While the consensus view is another 25bp cut next month before the Bank stops for a while, there are those who expect as much as 75bp cut in the next couple of months. There is further uncertainty on how long the bank will stay put and when the rates will start rising again, although rates are seen about 100bp higher a year down the road.

It is a good idea to shift exports to developing markets as the crisis lingers on, but it is more easily said than done. Besides, this is a very gradual process, as EU (particularly Germany) is by far Turkey's leading market, and you can not implement such drastic changes overnight.

Live from WB GDF Istanbul launch (I)

Hakan Ates, Denizbank:
Good start with a summary of worries from 2 years ago- major themes then were globalization, more liquidity, and ABS-related worries.
Does not think return to 1930s because of the humongous fiscal monetary support. But it won't be easy for the policymakers because of exit strategies, i.e. 1. Fiscal worries 2. Central Bank asset blow-up- inflation pressures. But policymakers can not exit too soon because of the Japan example. He believes return to the past will be slow and hard.
ED: nothing original, but a decent summary of recent economic developments.

Mark Thomas, chief economist, WB Turkey office
Says TUSIAD is main source for Turkish private sector- ED: uppppssss:) what about SMEs?
3 messages on Turkish economy: 1. Turkey has been hit by the crisis. But signs of bottoming out seen. 2. Turkey has the tools to manage in the post-crisis economy. 3. But we can not be complacent, as post-crisis will be more difficult.
Why turkey hit hard: 1. Exports fell a lot. 2. Domestic financial system is one of low leverage and high risk aversion since 2001- they pulled back. We talked to IFC clients and heard many stories of how finances became more difficult. The good news is that channel has recovered (ED: I am not sure). 3. Real side: in a period of high growth, Turkey invested a lot. In the uncertainty, companies took a step back. Now, better as inventories have been depleted. Many foreign companies have not cancelled investment plans, just delayed. ED: but real sector confidence does not support this story.
Also, corporates have been able to rollover debt and paying back as they delayed investment plans. Turkey is able to raise capital.
3 strengths of 2001: 1. Turkish banking system is very strong and robust to shocks. 2. Turkish public debt half of levels a few years ago. 3. Many globally competitive firms in Turkey. Able to finance themselves.
3rd message: Now is not time to be complacent. 3 areas: 1. Fiscal plan: crucial now to put medium term fiscal framework. Tax policy tax admin. improvement needed. 2. Labor market: measures to increase labor force participation. 3. Social policy: education, improving quality of workforce. Ireland has done this successfully (ED: really good example).

I will summarize the panel later on, as I do not want to miss out the nice charts...
Sent by BlackBerry Internet Service from Turkcell

EconNews Roundup

The smoking ban is supposed to actually attract more customers. Having lived in the US more than a decade, I can confirm that is true for that country. It may have been true for France as well. It actually had a perverse affect in the Boston area about a decade ago, when only the city of Boston put the ban. As a result, restaurants just outside the city limits, which did not have the ban, flourished... Anyway, I don't think it will hold for Turkey, as I don't know a single person who shuns restaurants because of smoking. At the end of the day, it all comes to the number of active smokers, which definitely works against the restaurants in Turkey. But the ban does definitely present an excellent opportunity for a before-after study. Empirical economists take note; if noone takes interest, I'll just email Stephen Levitt:)...

Just to fill up space, more of the IMF mambo jumbo...

Also, an advance notice: I am off to the Global Development Finance meeting in Taksim, from where I will try to blog live, summarizing the highlights of the conference. It will be in "notes" format and full of typos and the like, but it could definitely be useful. At least, I will be able to use it for my own archiving purposes.

W a la Turca

Nope, I am not talking about the Turkish version of the honorable former US President, although I do find him and PM Erdogan similar in the sense that both are highly entertaining:)... I am talking about the Turkish recovery in terms of the alphabet, as it has been done for the US.

While the latest rise in the real sector indices was interpreted by many that the recovery is under way, there are also discouraging signs suggesting that we may be in the first half of a W and further falls might lie ahead.

The overall index is almost in positive territory, and this surely can not be a bad omen. But the devil is in the details, and one detail we get from the latest figures is a decoupling between the present and the near future. Another is that the destocking, supported by the special consumption taxes, seems to have come to an end, and stocks could be building up again. Despite the latest encouraging signs on the consumption front (such as the consumer sentiment indices, which I don't trust that much anyway), consumption seems to have kept behind production as of late. Last but definitely not the least, especially in terms of the country's growth prospects, investment prospects continue to look dire.

All in all, all this seems to indicate that after the spring-summer recovery could be short-lived, with the economy seeing another dive after the cyclical factors die down towards the end of the summer. Of course, an IMF deal could provide a boost, or the CBT rate cuts could start working their way into the economy, but these are anybody's guess at this time.

EconNews Roundup

The quote below is from a Bloomberg item on an emerging market news conference:

For Turkey, it was 2001 when the currency collapsed and crippled the country’s economy. Policymakers in these countries understand what happens when they lose credibility and they understand how painful it is to regain credibility,” said Finegan. “These economies have been more prudently managed....

The credibility part really killed me... And the Turkish economy has been really prudently managed of late; if you don't count the fiscal mess we are in... Or the IMF mambo jumbo... Or medal-worthy performances in growth and unemployment...

In other news, OECD updates its Turkey forecasts.

Blog coming to Hurriyet Daily News

My readers at the Hurriyet Daily News have been consistently complaining on the insufficiency of the paper's web page (design, content, etc...). Luckily, the folks at the paper are aware of the issues and have been working around the clock for the past few months for a complete overhaul of the web page.

One of the changes will be the introduction of blog content: There will be a few blogs integrated into the paper, and mine is one of them. I will continue blogging here, and my blogs will automatically be imported to the Daily News address. Anyway, in a manner that would put Ricardo and his comparative advantage/specialization writings to shame, I put a lot of effort to finding a name and designing a logo, coming up with the following:

Other than the economic connotation, "market" is homage to the greatest sports fan club ever, which how their name would roughly translate in English. Similarly, the anarchy sign, while symbolizing my non-traditional approach to Economics, is also their symbol.

The Greek letters and the integral are supposed to evoke Economics, but I have got feedback that it is too confusing. The other option would be the minimalist design the other Daily News blogs are opting for, here's an example:

Basically, this is a representative picture (more on that later) that is supposed to evoke the blog's topic and simple capital letters underneath. I could adopt this, and just use the A, the anarchy sign, rather than the Greek letters and the like. I would love to get your thoughts on that.

Another issue where I need reader wisdom is the picture: It was designed by the ever-helpful Daily News in-house designer, and I think he did a quite decent job with that. But I am looking for something more inspirational and original, like the growth book design I had mentioned way back. Any ideas/suggestions would be greatly appreciated.

I will announce when the new blog opens doors for business. Right now, I am waiting from the Daily News IT specialist to write a script for RSS feed automatic updating, but even when that is done, I might have to wait for the official launch of the new Hurriyet web page.

EconNews Roundup: Boneheads or Bondheads

The econ. environment continues to be rather quiet. The most interesting item of the day was the coverage of yesterday's Treasury auctions.

I will not single out any daily in particular, but the general reporting mood on those was positive, highlighting the (relatively) low rollover ratio of 80%.

What these gents are forgetting is that for any good there is demand as well as supply, and Treasuries are no exception. The bid-to-cover ratio was a mere 1.5, compared to 3 last month, for the benchmark. With the Treasury not getting attractive offers and low redemptions for the month, it is not much of a surprise that it ended with a low rollover ratio. The cash balance will easily handle the rest. The high redemption months of August and October will be key in this regard...

EconNews Roundup

This one is a bit short, but the domestic economic agenda has been calm for the last couple of days:

And I thought I was lame....

World Bank joins the block, though a bit late...

Turkish bonds climb on IMF expectations: What can I say? The higher the expectations, the larger the disappointment...

Weekly Hurriyet Column: Building a new monetary system with BRICks

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. As usual, I have a few additional points: First, I have to admit that the first sentence is a really lame joke. Second, the speech by the Chinese Central Bank Governor from March was what brought the debate to attention at first. Third, it was actually Keynes who said that even the most practical man of affairs was usually in the thrall of the ideas of some long-dead economist. Fourth, I should have made this more explicit, but just imagine for a moment what would happen if the governments decide to get rid of their dollars. The bond market would be the one to be frightened, for a change. And last but not the least, the wise man is Peter Parker's uncle. BTW, I have no idea how I managed to mistype minuscule:) I mean with Word, even a dyslexic should be able to type error-free:)...


Despite claims from the sage of Omaha that he had nothing to do with it, the dollar was buffeted last week by debates over its status as a reserve currency during the inaugural summit of Brazil, Russia, India and China, the so-called BRICs.

While the summit officiated a term created by Goldman Sachs chief economist Jim O’neill nearly a decade ago, it would be a bit ambitious to coin it the “epicenter of world politics”, as Russian President Dmitry Medvedev put it. While the summit had a noble agenda, including a fairer world order and more say for emerging markets, the dollar debate took the attention.

In fact, the argument is not that new. It first appeared in the height of the financial meltdown, and after being on and off, resurfaced again in the St. Petersburg Economic Forum early in the month. At the time, the Russian plan, which envisaged a set of regional reserve currencies accompanied by IMF’s special drawing rights (SDRs), did not get much attention, as Russia has traditionally used the forum to argue for the ruble as a reserve currency.

While it has certain advantages, the use of a national currency as reserve is bound to create conflicts of interest between domestic and global issues. Keynes had actually put forward the “bancor”, to be based on the value of thirty representative commodities, during the formation of the post-war monetary system in Bretton Woods, but the idea was rejected by, surprisingly, the US. While the global crisis has acquainted everyone with him, it turns out that this long-dead economist has other ideas in his sleeve that continue to thrall us.

On a more practical level, there aren’t enough dollar assets out there to satisfy the appetite of governments: Out of the seven trillion dollars of central bank reserves, two thirds to three fourths are in dollars, with the bulk in long-term US government debt. In fact, more than one half all long-term US Treasuries is parked in official bodies, definitely not a healthy concentration for any financial asset, for the issuer as well as the holders. No wonder the Chinese got jittery during the great upward move in yields.

However, setting up a new reserve currency is more easily said than done. Let’s take SDRs: Notwithstanding their limited use as country deposits with the IMF and the lack of a payment system set up with SDRs, illiquidity is the primary issue that needs to be surmounted before they could even be a candidate for a reserve currency. Issuance of SDR bonds by the IMF is definitely a step in the right direction, but the amount is minuscule, and it is not clear whether the bonds will be tradable.

Then, a second-best solution would be to decrease the role of the dollar, replacing it with other currencies. In fact, agreements within the BRIC to use their national currencies for trade transactions and Chinese currency swaps are steps in the right direction. However, these steps are very small, and while BRICs would indeed need to lead the way, they would have to sacrifice a lot more. For one thing, China, which holds nearly one third of the official reserves, would need to increase its consumption from the current one third of GDP to at least a half. As a more general point, BRICs and other emerging markets would have to shift their saving patterns for the correction of global imbalances and be able to swallow the appreciated exchange rates that come with the package.

A wise man once said that with great power comes great responsibility. It is obvious that BRICs have the power, and they have not been shy to show it of late. But until they have the guts to take on the responsibility that comes along with it, we are all stuck with the greenback, like it or not.

EconNews Roundup

The ratings war continues. Just like the Mehmet Topuz incident, although both Tim Ash and Fitch have made good points, I think the real winner here was the media. Hurriyet Daily News did a pretty good job covering the issue from scratch, and Referans and Dunya, the two Turkish business dailies, covered the Fitch conference well as well. Incidentally, I had coffee with someone who was the meetings: I was told that the Fitch Turkey head actually named a finance house as an example of behind-the-doors government critique of Turkish economic policy. I have nothing against Fitch (except for a general dislike for rating agencies for having done their share in the financial meltdown) and have never met their Turkey head, but I just found this extremely unprofessional. Luckily, none of the newspapers I checked revealed the name, so a big kudos to the media. BTW, half of the speech shoudl be at bigpara.com, but I haven't had the time to check it out.

I try not to include Turkish links here, but this one is a must: Referans claims that the Ministry of Finance (MOF) has really won out from the special tax cuts three months ago. This is exactly the opposite of what I was claiming a few days ago, so I read on: The taxes they are referring to VAT, which wasn't cut in the first place. Of course, if you sell more cars as a result of the VAT, since you didn't cut the VAT, you are bound to collect more VAT. As for the figures that matter, i.e. the special consumption tax, I had already reported the figures. The article has also some figures and graphs that have nothing to do with the article: They report the special tax figures, but then talk about VATs in the artcile. Disappointing from a daily I usually trust...

Lies....Was there an album by Guns'n'Roses with that name? I really hate to be taken for an idiot, so that's all I have to say about that. In the meantime, business leader do all the crying.

It is not the best time to argue for weakness in Turkish bonds, after Treasuries have rallied 100bp on the back of a larger-than-expected cut from the CBT and IMF mambo jumbo. But I am only joking, I fully concur with the analyst, as I have been detailing in my columns for the past month or so.

New kids on the blog:)

Some time ago, I had listed my favorite Econ. blogs, where the top honors for a Turkish blog in Economics had been a no-contest, as there was only one. Recently, there have been two promising newcomers: One by a journalist and the other by a professional economist- in fact the latter claims that his is the first blog by a professional economist. Even if you take me out of the picture since I write in English (and since I hope to regain my international flavor soon), I think that statement, which could be true if you limit your definition of professional economist to a bank/market economist, is nevertheless unfair to my no-contest winner, who I would also classify as a (non-market) professional economist... BTW, the latest blog there is a critique of one of the points I am making in my unemployment critique.

In any case, I am really glad Burumcekci has taken into blogging, as he is one of favorite columnists and one of the few market economists I really trust. My only other critique for him is that Economics is solely just Economics:) Well, enough critiques already; just welcome to the blog:)...

EconNews Roundup

It is definitely not the Econ. event of the year, but since I have friends working there, the Pronto press conference got my attention. The part I found the most interesting was:

Out of Germany’s 90 million population 65 million travel abroad. Out of Turkey’s 72 million, a mere 8 million go abroad. According to Onaran, visa obstacles Turks face create this large gap. "If Turkey did not have a visa problem, the number of citizens traveling abroad would rise tenfold." Onaran said.

From an economist's point of view, this is very easy to test: Just look at a country that recently changed its visa requirement from Turkey and use other countries as control- simple before after study. But my hunches tell me the correct statement should be: "If Turkey were as rich as Germany, Turks traveling abroad would rise tenfold".....

Coming to more serious stuff, the CBT surprised markets yet again, opting for a 50bp cut rather than the expected (and priced in) 25bp. Interestingly, analysts are undecided on whether this was the last cut, another 25bp is in the works or the Bank will cut even more. But rather than the amounts, this month's meeting and the accompanying lengthening of repo auctions could be the harbinger of unconventional central banking. Of course, don't expect anything nearly as drastic as the Fed. All the Bank will be doing are small steps in easing liquidity. The technical rate cut could become reality soon, but we are likely to see the Bank purchase government securities (a really bad idea) or even decrease reserve requirements before that. I might decide to write on this new era in my weekly Hurriyet blog. In any case, I hope to go into more detail in the next couple of days in a separate blog.

To add some controversy into the menu: In disclosing their 2010 growth expectations, Fitch Turkey head made some interesting remarks:

...Turkey would grow below average of the group 2B in which Turkey is evaluated. Despite all improvements in Turkey's budget balance, Turkish economy has the deepest budget deficit in its group...When gross external debts are compared with current external incomes, Turkey has the highest ratios from 1999 to 2008...

I am noting these in response to the hottest news item of last week: An analyst's claims that given its macro fundamentals, Turkey was unfairly rated by credit agencies compared to other countries. Of course, the analysis touched the proud Turks, becoming a big item and forcing the analyst to do a follow-up note the following day. Now, I am not claiming Tim is wrong; in fact, much of what he said makes perfect sense. I am just illustrating the dangers of using selecting certain macro figures to make a ratings point: For every indicator you can find to show Turkey is underrated, you can find another that illustrates it is overrated. However, I have to agree with Tim that anyone who rates Turkey higher than Latvia should see a doctor. Or maybe, it is the whole 2Bs that have been unfairly rated.

Now, on the a bit of realism: Kudos to Babacan for admitting the harsh reality that the fiscal/debt situation is unsustainable. I wouldn't agree with everything in the article, especially the V recovery mambo jumbo, but it is good to know somebody in the government has waken up. Unfortunately, his boss seems to still be in Wonderland.

Last but definitely not the least, it is good to see that highly-respected (at least in my humble opinion) BETAM agrees with me (as I outlined in my last Hurriyet column) that we have seen the bottom of the Turkish slump. Incidentally, they are skeptical of a sharp recovery as well.

Wrong side of the Laffer curve?:)

I missed it out in my last blog, but Monday's fiscal figures have been interesting as well, as they have led to premature jubilation, with many declaring that the fiscal weakening is over. It is true that non-interest expenditures increased less than in previous months. But here's my words of wisdom on this rather noisy series: Don't let the monthly figures fool you. If there ain't no fixing, it will come back with a vengeance. I am no fiscal expert, but I can tell you that unless we see some corrective measures, the worsening in budget figures will pick up again in the coming months.

But what really took my attention in the May central government figures was the tax cut-related numbers: Auto sales rose by 16% in April-May, but tax revenues were down 31%. In a similar fashion, white good sales fell 5.6% yoy, but revenues were down 46%. These figures make me wonder whether we were on the wrong side of the Laffer curve after all:) Of course, I am just joking: Even if the concept held in the real world, the tax cuts were large enough to take you from the right side of the inflection point to the way left, to the point, where tax revenues would be much less. Anyway, getting more revenues was not point in this program, getting consumption rolling was. While I am not sure how effective its toned down version (the newly announced rates) will be effective going forward, the program has definitely been relatively successful, making me proud of one of my rare moments of support of the government- see my Hurriyet column, when I took on the issue just before the program had been officially announced.

Some news impressions

Here's my take, as promised, on some of the key Econ. news of the last few days:

On unemployment, the Daily News made the same mistake as almost all the others in calling the latest (March) figures a drop over the previous month- interestingly, they had got it right in the early reporting, so it's a pity they changed it in the full article. All I will say is that when I do my Economics trainings (more on that in a separate post in a couple of days), the examples I choose to depict seasonality in Turkey are in unemployment and tourism revenues because they are the easiest to grasp for a layman. Moreover, in terms of unemployment, this effect gets magnified because you are actually comparing two time periods three months apart: This is because TURKSTAT reports the average of three months. The March figure is the average of February-April and the February figure January-March. Therefore, disregarding month to month measurement errors, the difference between the two reads boils down to the difference between January and April. This is no rocket science, but nevertheless all but a couple of columnists got this wrong as well. Spare yourself the misery, and just have a look at Seyfettin Gursel at Referans after the employment statistics come out (if you speak Turkish); he's one chap who knows what he is talking about on employment.

Babacan stole the show on Monday, announcing easing of restrictions of Turkish companies for borrowing from abroad and credit card restructuring relief. Again, I was disappointed for the relative positive reporting mood for the latter. We are all humane do not want to see anyone committing suicide over credit card debt, but almost all the newspapers/commentators are missing the big picture: This is virtually a repeat of past tax and social security premium amnesties. Basically, the government has been punishing those who have been paying up on time and therefore creating moral hazard big time. In fact, it has come to such a point that paying up on time has definitely become time inconsistent. Keep up the good work, Babacan...

As for the easing of borrowing limits, although they will polish the external debt statistics and enlarge bank balance sheets a bit (but not too much), I am not sure how they will affect FX liquidity and the FX market. There could be some pressure, theoretically at least, on FX liquidity, but we'll just have to wait how this works out in practice.

Speaking of the highly esteemed Econ. Minister, since he is back on the job as Econ. Minister, articles commending his 2002-2007 performance are popping up like mushrooms. This is a topic I have been dying to go into for some time, so here's my brief take: 2002-2007 was a time when the government managed to practice considerable fiscal restraint for the first couple of years and put a crisis-struck economy back in order. But contrary to the consensus view, fiscal easing started as early as 2005-2006, as looking at the discretionary spending figures attest. Basically, since the economy was growing, it was easy to get high primary surpluses. But this is a time when the government also missed on a very good opportunity to enact the structural reforms it is quarreling with the IMF on and really save for the rainy days. This would make a perfect Hurriyet column, and if I decide to do that, you'll be able to judge Babacan more objectively.

Speaking of structural reforms, I really felt like an idiot last week: For some time, I've been straining to understand why the government would be vehemently opposed to an independent tax administration. Then, I saw the owner of Hurriyet win an award and lightning stroke in my head: This is exactly what I had written about following the infamous Dogan tax levy.

That's all folks; I'll return to my daily commenting starting tomorrow...

I'm back

I'm back after a short absence. Thanks for the encouraging emails, which motivated me to a relatively speedy return this time around.

I'll be archiving my weekly Hurriyet columns later today for a start. But before that, I would like to relay my thoughts on some recent news items, but only briefly since I am on a Bberry. I hope to do that in the next couple of hours.
Sent by BlackBerry Internet Service from Turkcell

Weekly Hurriyet Column: 2010: An Economics Odyssey

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. As usual, I have a few additional points:

For the recovery, I read today that the folks at BETAM expect a slow recovery as well.

As for consumers having the means to consume, that in itself would warrant a full column. Leaving aside technical issues like MPC and permanent income hypothesis, that argument, even if it were true in an aggregate sense totally ignores distributional issues: the PM should have a look the distribution of, say, deposits before making such bold claims in the first place. In fact, that is the one issue with the otherwise successful (so far) tax cuts, which were, by the way, extended today. The noted cuts, while they may have worked in an aggregate sense, would probably not have had the economy-wide participation that spending checks would have established. Such a policy would also have helped the real needy, but to give government some credit, with the unregistered workers out there, that would have been harder to implement as well.

As for the silly campaigns to get consumption rolling, as noble as they may sound, just as consumers will not rush to the market when you tell them to (unless, of course, Azize has their bonsevvis and can order them), let there be no unemployment won't work either- unless you are a higher being.

Coming to monetary policy, the lengthening of the repo auctions was exactly what I had in mind in terms of "keeping the dice rolling". With the liquidity tight, the Bank could opt for buying Treasuries (a really bad idea in the Turkish context) and decreasing reserve requirements before opting for the technical rate cut everyone is talking about these days.

Finally, I did not have a chance to mention this, but the net error & omissions in the BOP is not that mysterious after all. They are most probably flows of deposits of domestic residents back home, which can partially be tracked down from BIS statistics and CBT data on banks' foreign branches. Of course, there could be other factors: FX under the mattress getting into the system, swaps, or even overstatement of outflows because of valuation changes.


With mid-year around the corner, I would like to look further out and outline next year’s economy. However, don’t expect a full snapshot, just some brash strokes in the impressionist style.

Last week’s April Industrial Production and May Capacity Utilization, while showing that the freefall in production is finally over, have also led to premature jubilation. For one thing, the 2.5-3 percent (after adjusting for cyclicality and working days) monthly increase in production has been mainly domestic demand-driven, where the temporary tax cuts seem to have played a role. But Capacity Utilization hints that the monthly rise could have slowed down to 2 percent last month. For now, evidence hints that the April rise in production was an overshooting reaction to the rapid inventory depletion following the tax cuts, and a slow recovery lies ahead.

However, the real question is whether private consumption and investment will be able to follow production’s lead. In this regard, leading indicators such as consumption and confidence indices paint a bleak picture. First, the apparent rise in consumption is mainly driven by durables, reflecting the effect of tax cuts. As for investment, there are only scant signs of recovery in the real sector indices.

Looking ahead, given the close correlation between investment and external financing and the uncertain economic landscape, I would not bet on a sharp investment revival. As for consumption, despite repeated claims from the PM that consumers have the means to consume and silly campaigns to get consumption rolling, even those with the means will never mean to consume as long as the dwindling income prospects and the crowding out of private lending are in place. When you add the numbers up, following a 5 percent contraction this year, growth is unlikely to exceed 3 percent in 2010.

Coming to prices, I am projecting year-end inflation somewhat higher than the Central Bank’s forecast of 6 percent. In any case, while the inflation target of 7.5 percent is a piece of cake this year, I am much less upbeat for next year, as exchange rate pass-through will kick in, and temporary local (tax cuts, inventory depletion) & global (low oil prices, weak demand) disinflationary factors will start to wane. Add in the sticky inflation expectations, and I am rather confident that even if inflation does not reach my projection of 6.5-7 percent by year-end, it will soon after, forcing the Bank to a modest rate hike in 2010.

In a similar fashion, if you found the fiscal/debt scenario I have been outlining for the past few weeks gloomy, wait until next year, when redemptions are likely to increase by at least one third. While the Central Bank could keep the dice rolling for some time by funding banks through open market operations and technical rate cuts, debt rollover concerns are likely to stay with us for a long time. With the bond-friendly days almost certainly over, without capital flows back with a vengeance, the direction in Treasury yields is definitely upwards next year.

As for the external accounts, while the appropriately named Balance of Payments always balances out at the end, the billion dollar question is how: After a summer with current account surpluses, deficits are likely to surface starting the third quarter of this year and continue to widen into 2010. With the miraculous unidentified flows over, the financing picture is unlikely to improve, either. While Turkey could certainly make ends meet this year, an external gap in the order of 15-20 billion dollars is on the menu for 2010, which would imply reserve depletion and lira pressure.

If all this left a sour impression, please accept my most sincere apologies.

Weekly Hurriyet Column: Much ado about nothing

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


Prime Minister (PM) Erdogan disclosed a large stimulus package on Thursday. As is the norm for Turkish economists, comments on the package have covered the whole spectrum, all the way from declaring it a revolution to utterly useless.

The package is based on three pillars: Finance for small and medium-sized enterprises (SMEs), labor market measures and investment incentives. Of these, the first has been long in the making and is therefore not much of a surprise. It involves the setting of a credit guarantee fund with 1 billion liras from the Treasury, which will guarantee 65% of a loan, with the lending bank assuming the rest. However, the firms undertaking the scheme should have no overdue loans, so the program will not be a great help for those SMEs already in financial distress.

Temporary state employment for 120,000 forms the essence of the labor market measures. While the government will definitely do better than assigning half of these workers to digging holes and the rest to filling them, the caricature of such policies used during the Great Depression, one should nevertheless not expect a lot from this. On the downside, there is a real risk that these workers will stay on, especially if the government decides to go for snap elections. As for the other measures, most are unfortunately just rewrapping, i.e. policies that were already in place.

As for the new investment incentives, an overhaul of the outdated and inefficient Turkish incentives web has long been overdue. The announced steps, while far from perfect, are definitely a step in the right direction. Moreover, given the importance of private investment for growth in the medium-run, the idea does make sense. However the strains facing the corporates and the uncertain consumer demand are sure to put a break on the effectiveness of the program. In any case, with the time lag of new investment, the incentives are unlikely to boost the economy in the short-term anyway.

All in all, these measures are likely to support growth through domestic demand in the near term. However, I find it extremely disturbing that they were presented without the accompanying financing picture. In fact, we know neither how much these new measures will cost nor what, if anything, the government has in store for restoring the fiscal books. Such an approach not only bodes ill for fiscal transparency and predictability, but also runs the risk of losing any short-term gains of the measures in the medium-run. Even more worryingly, the PM’s answer to a question on financing hints that this is no inadvertent omission: “Do not worry, we will make all the payments”.

If that is indeed the case, no wonder the IMF is being kept off the table. But the government should know better: With this mindset, it will be only a matter of time before fiscal patching will start straining the private sector both through quantity (crowding out private sector) and price (higher interest rates) in a sense which would make the recent lending freeze and last week’s bond shakeup pale in comparison. The Central Bank could keep the dice rolling for some time with liquidity injections, technical rate cuts and the like, but without capital flows resuming, it doesn’t look pretty.

The government is continuing with its laundry list of measures rather than a comprehensive medium-term program or an IMF agreement. But then again, this has been its approach to the crisis from the very beginning: Throwing in anything but the kitchen sink without any sense of prioritization, impact analysis or a fiscal roadmap. If anything, no one can blame the government for inconsistency…

Weekly Hurriyet Column: Twin Deficits: A tale to end in tears

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. I am not sure if this is my most interesting column to date, but it sure is the one with the most interesting story:

I started writing the column in an Internet cafe while waiting in Denizli for my cousin to arrive. It was planned or anything, I just had some time to kill, and I already knew what I wanted to write about, so when I saw an Internet cafe, I just walked in. So here I was, sitting next to kids playing weird games, trying to write my column with my jersey on. Anyway, after two hours of hard work, just as I was finishing up, my cousin called to tell he was entering Denizli, and the lights went out in the damned city. Let me tell you, it is one thing to write a paper on infrastructure and productivity, it is another thing to experience it. Knowing that word does automatic saves, I wasn't too worried; I just sat in front of the computer, waiting for the blackout to end so that I could email myself the travails of my hard work. However, when lights did indeed come back in half an hour, the document just wasn't there. It turns out the idiots at the cafe had installed a weird program called antifreeze, which simply reboots the computer, erasing all the documents except those in a designated folder. Of course, the idiots failed to mention that to me, even though I had asked them specifically if Word was installed in the computers- or maybe they did it on purpose, thanks to the Besiktas jersey.

Anyway, I ended up writing the column from scratch after arriving at home from the funnest flight ever, continuous singing throughout:) I had to be in Nisantasi at noon, so I ended up getting 3 hours sleep after writing the column and went to the celebrations at Inonu afterwards, but it was well worth it. To the eziks: There are some things money can't buy (like the picture below). For everything else, there is Azize...



Economics Minister Babacan’s recent meetings with Economics columnists and market economists confused me yet more on the fate of the IMF-Turkey soap opera, on which I continue to write half-heartedly, knowing that while are probably sick of reading about it, thinking about it reveals important dynamics of the Turkish economy.

The participants were equally divided on a no deal and a deal right before the October World Bank-IMF meetings in Istanbul. The minister contributed to the uncertain atmosphere by declaring both that there wasn’t a consensus in the government on a deal and that a deal was being worked on. However, one thing is certain: The government has decided to keep the Fund at a literal stand by, only to be called upon when deemed necessary. But necessity could come under many guises:

With the yearly figure expected at 1-2 percent of GDP, the once-feared current account deficit has turned into a ghost of Christmas past. Notwithstanding the optimistic tourism revenues and oil price assumptions underlying this projection, it is clear that the deficit will stay at low levels. However, financing could still be an issue: The Balance of Payments has so far been balanced out thanks to the relative resilience of corporate borrowing and the puzzling errors and omissions item, part of which are probably repatriated deposits from abroad. With these likely to be weaker going forward, a significant reserve rundown should be expected without an IMF deal. September and October, with hefty external debt repayments, will be the key months.

On the fiscal side, the government seems to have been encouraged by the Treasury’s ability to manage the high borrowing, with a deficit of 66.6 billions liras (no pun intended) and a rollover ratio of 120% in the pipeline. However, congratulations should go the catcher, not the pitcher: With bonds starting off from a low base in their balance sheets, credit demand falling & risk rising while deposit growth holding up and regulatory changes allowing them to shift their Treasuries to hold-to-maturity portfolios, the banks would have turned to bonds even without Central Bank’s (CBT) excess liquidity through open market operations and aggressive monetary easing. Of these, only liquidity is here to stay, so even with an IMF deal, it is a much less bond-friendly world out there. As a more general point, notwithstanding the relative strengths of the Turkish economy in the region, the lira does not offer the attractive risk-adjusted returns it once did.

My only consolation is Finance Minister Simsek’s declaration that the government is working on structural fiscal measures such as revenue administration, municipality expense control and a fiscal rule, which would help keep the deficit under control for this year and ensure the sustainability of debt dynamics. However, the recent actions of giving yet another tax break to municipalities and authorizing the Grain Board to issue special government securities make the Minister’s remarks sound like an April Fool Day’s joke. The latter, which is also clever accounting as it will not show up in the budget books, brings to mind the aftermath of the 2001 crisis, when similar issuance by the CBT and banks had resulted in a significant deterioration of debt dynamics that took a few year to sort out. In any case, I still have to figure out why the government would go for a virtual IMF program without the credibility (and the money) of a real one.

I am not sure which of the factors above will break down first. But when one does, we are likely to see the unfolding of a drama that will leave not only the viewers but also the participants in tears.