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.