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.