A small detail on Yilmaz's Inflation Report presentation

I will be writing on the bread and butter (and the stomach aches associated with consuming too much of it) of the Inflation Report on Monday's Hurriyet column (unfortunately, the tourism column got brushed under the carpet, but I had warned of this possibility at the end of the latest column), but here is one interesting side dish from Yilmaz's speech:

According to Yilmaz, the CBT has been able to account for nearly for 40% of the UFOs, or the mysterious net errors and omissions term in the last quarter of 2008 from the BIS locational statistics. This is similar to my calculation of one half for the first quarter of this year.

Yilmaz also noted that they'll be disclosing more figures on August 10, so I'll be waiting for that...

Interesting Picks: Turkey

I've come across quite a bit of papers explicitly or implicitly applicable to Turkey in the last few days:

Predicting Military Performance from Performance Measures: I could not download the paper, buyt since the authors are Turkish, I suppose it is on Turkey. I wonder how they got their data.

A new paper uses a global VAR to document international inflation linkages: The effect of external shocks on domestic inflation. I intend to touch upon this issue in next week's Hurriyet column, but a bunch of different methods all seem to show that Turkish inflation has increasingly turned into an external-driven animal.

Some lessons for the Central Bank from a CBT researcher: In their framework, credit market imperfections and deposit rates cause a sluggish transmission mechanism.

Some lessons for the Treasury: Panel evidence on the crowding out effect I have been writing about again and again and again and again....

Coming to more mundane matters, IMF has a nice article, with all the relevant links embedded, on the upcoming IMF-World bank annual meetings in Istanbul.

Interesting Picks

My first attempt to revive interesting picks failed miserably. Here's another shot before I leave for vacation:

A summary of of the crisis measures of the EU member states. This might make for an interesting Hurriyet article.

How is as important as when- when it comes to the Fed balance sheet

The much-touted-for debt-for-equity is actually an old idea from Islamic finance.

With the crisis, traditional forecasting is out. But we knew that already...

Some more crooks, this time on the online FX scene.

Paper with elegant (at least according to me) model that links market liquidity and traders' funding liquidity.

Why is supply and demand so confusing? If you don't want to read the whole thing: It's movements along the curve versus shifts in the curves.

WSJ ranking of top Economics blogs. I generally agree with their list, although FT Alphaville should have been there (it isn't for obvious reasons). Anyway, I have my own list as well.

More on the latest Daily News Column

I got quite a few emails on the academic research I referred to on rationality; I had no idea I was writing to such an academic crowd:) Anyway, here's one of the papers; there were a couple of others that came out recently, but this is the only one I read and saved in my harddrive.

BTW, I also mentioned in the column that the next two weeks would be tourism and industrial enterprises. But I just found out that half of the ISO survey will not be coming out until August 26, so I will devote the following week to the Turkish savings rate, using a couple of recent well-written papers.

Real Sector Confidence indices: Mixed signs

CBT's real sector confidence index was in positive territory again after more than a year:

But when you look at the sub-indices, some interesting patterns emerge:

While the current conditions indices continue to improve, albeit at a slower pace, the future conditions indices have been worsened.

Overall, these figures are consistent with the Turkish recovery story I have alluded to many times in my Hurriyet columns: The tax measures led to a sharp recovery associated with the destocking process going on. Now that this process has come to an end, further real sector improvement are likely to come at a snail pace.

Weekly Hurriyet Column: From V for Vendetta to tears in heaven

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive- in fact, you can not: As readers let me know, my columns have not been archived since July. But I have let my editors know of the problem, and they are notifying the Dogan Media executioners to punish the wrongdoers:)...

Coming to comments: First, you should be relieved to see that the titles are as cheesy as ever:) I have been eying for an opportunity to use the V for Vendetta title for a long time, as it is my favorite movies; last week's rally was the perfect opportunity. Second, I have provided more details on the Treasury's latest eurobond reopening at an entry on Friday. Finally, I have more on a false sense of fiscal responsibility at last week's column as well as at a separate entry.

BTW, from this week on, I will have the weekly column posted to the blog at the first minute of the new week. Daily News uploads the new day's news at around 2-2.30am or so; this way, I am providing a small reward for followers of my blog.


The global theme of last week was the return of the V-recovery, which led to across-the-board 2009 peaks for many asset classes.

But when you look at the details, you notice that the sharp recovery that many are betting on is not based on firm fundamentals: Signs of stabilization in US housing and labor markets are tentative at best. Corporate earnings reports were not only slightly better than dire expectations and based on belt-tightening rather than genuine improvement (in fact revenues carry on with their sustained declines), they were also coming from the second quarter, when green shoots were sprouting. In any case, Turkish assets had a swell week, and the Treasury, as opportunistic as ever, tapped international markets once again at their zenith.

Maybe it is just me, but I just fail to see how a sustained and strong recovery would take place while banks are still in need of repair in the sense that toxic assets have just been brushed under the carpet and money is parked in central banks rather than lent to the real sector. In that sense, while it is always fun to ride the risk wave waves, I can not help but heed Nouriel Roubini’s (aka Dr. Doom) warnings that what we may be seeing is the first upward leg of a W rather than a V with a vengeance.

Although homegrown banks do not have toxic assets and in many ways are sounder than their (formerly) glorious Western counterparts, a comparable play is going on in Turkey as well, with the only difference being Central Bank liquidity parked at the Treasury in terms of government bonds rather than back at the Central Bank. In a similar fashion, markets have started seeing solely the good in almost any news, whether it be the knockoff fiscal measures or latest tourism statistics, or choosing to ignore the data when there is nothing positive to be found, as in Istanbul Chamber of Industry’s (ISO) annual Turkey’s Top 500 Industrial Enterprises survey.

I see these global and domestic developments as another bout of irrational exuberance. While the economic debate has been centered on whether investors are rational, as in textbook economic models, or subject to animal spirits, as Keynes noted, the truth is grayish rather than black or white. In fact, there is some fresh-off-the-oven research that shows that rationality is actually time-varying; it tends to be enforced by high market returns, which in turn feeds back to markets. Therefore, it is only natural that the nasty details in data are being disregarded.

Coming back to Turkey, I have to give credit to the government for managing to knit together a profession where disagreement is the norm rather than the exception: Most economists, while they could not agree on the IMF implications, were highly critical of the knockoff fiscal measures for the reasons I outlined last week. Still, I am having difficulty in grasping how a couple of foreign research outfits managed to describe the measures as moving in the right direction, confirming my fears that they would provide a false sense of fiscal responsibility. To give these guys some credit, perceptions matter more than facts in financial markets, at least in the short-run. But facts always catch up with you sooner or later, and that’s when you start singing tears in heaven, at the same time blowing into a handkerchief.

The worst part of this drama-in-the-making is that important long-term issues are being overlooked, with the tourism and ISO data being cases in point. Therefore, in the spirit of commemoration, I will devote the next two weeks to such trends, first in tourism, then in industrial enterprises. If nothing big comes up in the meantime, of course. And that is a hell of a disclaimer for Turkey.

EconNews Roundup

Even in a crisis, you've got to eat.

As USDTRY falls, Central Bank bashing starts. BTW, it was a shock that the news item referred to CBT's biweekly expectations survey, where they ask markets their expectations of various economic and financial variables (this was one of my regular duties as a market economist), as CBT's own expectations. It seems the article was a translation from Anatolian news agency, but still...

Another alternative export markets story. Talk is cheap, and this is all good talk, but at the end of the day, we are stuck with EU in the short (and even medium) run.

I knew that not only talk, but also other things were cheap in Turkey.

Last but not the least, rosy investors...

Global markets at local peak

The Treasury tapped international markets today. Bid-to-As I had noted earlier, they are famous issuing their eurobonds at the very top of the market. These day, everyone has their own weird markets leading indicator. While it did not work the last time I used it in May, my own TEISI (Turkish Treasury Eurobond Issuance Sentiment Indicator) index suggests global markets may be heading down from here. And I wouldn't be surprised either: As I plan to touch on my Hurriyet column on Monday, what we have going on right now is V for Vendetta (recovery that is), built on jubilation on a few mixed-at-best data and earnings reports slightly higher than expectations (but still quite bad). So, we may be heading for tears in heaven soon...

More on Monday's Hurriyet column: A false sense of fiscal responsibility

The one-sentencer below, from a recent research note on Turkey, illustrates what I meant when I said the government was providing a false sense of fiscal responsibility with the latest tax hikes.

Furthermore, Turkey’s fiscal backdrop seems to be moving in the right direction with the recent measures and that makes us more bullish.

I hate repeating myself, so please have a look at Monday's column to see why Turkey's fiscal backdrop is not moving in the right direction. An article of similar tone appeared in the FT today, with the title IMF hopes push Turkish lira to year high. Here are some excerpts:

The Turkish lira hit its highest level so far this year on Thursday as hopes rose that government spending cuts would push the country closer to a loan deal with the International Monetary Fund. The Turkish government is working on a number of measures aimed at unwinding fiscal policy that sent its budget deficit soaring. The IMF, which is in talks with Turkey for a new loan deal worth up to $45bn, has called for controlled spending, pointing to budget deterioration. Shahin Vallee at BNP Paribas said there was a widely held assumption in the market that a deal would be struck in the autumn between the IMF and Turkey after the summer recess. “In any case the need for an IMF programme in Turkey is waning as the recent pick-up in risk appetite has boosted emerging markets,” he added. The rally in equity markets over the last four months has boosted emerging market currencies across the board as rising risk appetite has prompted investors to abandon the relative safety of the dollar in search of yield. The lira rose to a high of TL1.4780 against the dollar, its strongest level since November. This took the currency’s gains against the dollar so far this month to 4 per cent and represented a 23 per cent rise since the start of the rally in equity markets in March.

Despite the title, the article notes that the latest bout of risk appetite, especially from yield-hungry Japanese investors, is behind the rally in EM assets. I found it interesting that FT, which I usually trust for accuracy, mentions this as sort of a footnote after elaborating on the Turkish fiscal/IMF story. If anything, Turkish assets joined the rally later than most peers. But there is nevertheless some of the FT story in play as well.

For tourism the bells toll

As I always say, a picture is usually worth more than a thousand words:

But this time around, a little bit of explanation is needed as well:

At first sight, the small yearly fall (-1.3%) in incoming tourists in June may not look that bad. But when you look at the yearly changes in the previous Junes, the picture gets uglier:

Of course, what I am wondering (and too lazy to do) is to see how this compares to global trends. This is in fact another topic I am thinking about covering in my Hurriyet column, and if I do so, you are sure to get some comparative statistics.

So what's the moral of the story? If a picture is not worth a thousand words, two pictures definitely are:):):)

More on UFOs a la Turca

Whenever I write about Balance of Payments data, I mention without fail the recent rise of the Turkish UFO- unidentified financing objects-, or in the official lingo, net errors and omissions. Since the domestic data agenda has been quiet this week, I thought I might look at the issue in next week's Hurriyet column and did some basic research. Here's what I came up with:

First, some of the UFOs are just resident deposit flows from abroad, which can be tracked down from the BIS locational statistics and CBT local banks foreign branch data. A rough, back-of-the envelope calculation reveals about half of the UFOs can be accounted this way. But there could be other factors in play, which would be more difficult to measure.

For one thing, there could be under-the-mattress foreign currency and a few large swap operations. While the former is almost impossible to quantify, there is some anecdotal evidence for the latter, at least for the early part of the year. Moreover, outflows could be overstated by valuation changes, which could have contributed around 10% in May.

In addition, the May figure, which posted another significant positive UFO turnout after April slightly negative reading, could be reflecting lira carry trade in with instruments not adequately covered in the Balance of Payments data. If this is indeed the case, we may end up with positive UFOs in June and especially July, as lira's carry value seems to be have come to the spotlight (along with others like Australian dollar, South African rand and Brazilian real) with the reemergence of the risk appetite play on EM.

If I take this issue on Monday, I will try to quantify the different factors at play a bit more...

Countdown for the Hurriyet blog and question

As I had mentioned before, a carbon copy of this blog will appear in the Hurriyet Daily News website under the name Emre's Market. I am happy to report that thanks to Latis, who is providing IT services for the Daily News, all my old posts have been imported into the Hurriyet blog.

They are still working on how to set up the RSS feed so that when I write this blog, it will automatically export my entry into the Hurriyet blog immediately or soon after. This is what Google Reader does, and Facebook has this system as well- in fact, most of my friends read my stuff from Facebook. If you have done this before/ know how to do it, I'd be glad if you could write under comments or drop me an email so that I can get some valuable knowhow from you. Thanks in advance...

Weekly Hurriyet Column: Of Mrs. Tasimasu’s watermill and 007

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. Just a couple of quick comments: First, I know that the title is really cheesy, but I just couldn't pass on the opportunity. Second, for those of you who speak Turkish, the Turkish translation of knockoff is "cakma". I had to think a lot to come with the right word, and I think knockoff is the closest match.


Every Japanese kid knows the story of Mrs. Tasimasu, who lived in a remote village in northern Japan and tried running her watermill by hauling water from the nearby lake when the river went dry.

No, not really! The title is a play on words with the Turkish proverb tasimasuyla degirmen donmez, which roughly translates as a watermill can’t be turned with haulage. This is exactly what the government has been doing with the latest tax hikes in tobacco, tourism and fuel.

Knockoff fiscal measures

Economists do not like indirect taxes for their distortionary effects of reducing welfare and increasing inequality. However, in the Turkish context, it could be argued that the government is trying to put its fiscal books back in order and getting ready for an IMF agreement. Such an argument loses on several grounds.

For one thing, the impact of the tax hikes will be limited. This is because in a crisis environment, people start cutting down on other expenditures even when you raise taxes on "necessary" items such as tobacco and fuel. Overall, I have penciled in a revenue increase of 0.6-0.7% (of GDP) as a result of the latest measures under a very optimistic scenario. Incidentally, this amount is more or less what the inflationary impact of the measures, spread over this month and the next, will be.

Moreover, even a casual look at last week’s June budget figures reveals that the fiscal deterioration is mainly coming from the expenditures side. In that sense, tax hikes will have only limited impact in putting the budget books back in order. As for the IMF implications, I wouldn't try to get too much out of the last two week's measures such as the hiking taxes, putting a stop to being nutcases on nuts and limiting wage increases; they could also mean that the government is trying to do it alone with knockoff fiscal measures.

On a more philosophical level, decreasing taxes in certain sectors and increasing in others is remnant of a bygone era in industrial policy. Such an approach was in vogue for a while, due mainly to the success of South Korea in implementing this strategy of handpicking sectors, but it is now widely accepted that this is not the way to go, even if the measures are temporary.

The Goldfinger approach to interest rates

But one thing such knockoff measures will do is to provide a false sense of fiscal responsibility, which will be supportive of Turkish assets, especially bonds, for a while. In fact, there are other rate-friendly factors in the short run, which are likely to provide resistance to yields from creeping higher in the near term.

For example, while the relative easing of liquidity conditions of late has taken them off the spotlight, nonconventional monetary policy measures I outlined last week could kick in anytime, presenting an opportunity for a rates rally. Similarly, despite a hefty redemptions schedule, primary surplus is likely to be high due to seasonal factors next month. Besides, with nearly 20 billion liras of deposits in its coffer, the Treasury could easily opt for a lower rollover ratio if there is a sell-off ahead of the auctions.

Once these factors fade away, bond-killers such as the end of the Central Bank easing cycle, banks’ high funding costs, fiscal irresponsibility and negative inflation surprises are all likely start kicking in. I would pay extra attention to October, when the Treasury faces heavy redemptions early in the month after an easy September. But I am sure the government would not want nasty surprises on the dawn of the IMF-World Bank meetings in Istanbul.

Then, without and IMF agreement or another wave of risk-induced gold rush to emerging markets, I expect you to die, Mr. Bond…

A few quick thoughts on monetary policy

On Thursday, I had coffee with one of the few market economists I always try to read (despite the dozens of reports I get each week). Surprisingly!!!, the conversation turned to monetary policy after a while.

Now, I should tell you that my buddy does not share my cautionary view on monetary policy. He was arguing for (predicting) rate cuts before anyone else in the profession, and he turned out to be right. But one thing we managed to agree is the asymmetry in the Bank's policy response. My friend was arguing that the Bank should have cut larger amounts in a couple of months rather than slow and sort of preannounced cuts- what he had in mind was the Bank's rapid response to the mini crisis of June 2006. Another asymmetry I had noted a couple of months ago was the Bank's asymmetric response to low and high inflation. Now, there is no golden rule of policymaking that says that policy response should be symmetric; in fact, there are many reasons that justify why it shouldn't be. But those reasons should be spelled out clearly, which to my knowledge (and my friend's) hasn't been. Turning to my friend's point, although I always would like to err on the side of caution, if I had to choose, I would definitely pick two cuts of 100bp over four of 50bp each. The former would have probably worked at least marginally better in transmitting to the financial sector and the real economy.

A corollary of my friend's line of thought is that the Central Bank should not be all clear and transparent on its policy actions all the time. Good communication doesn't hurt, but he believes that the Central Bank should surprise from time to time. Now, this is again an area where there is considerable debate. I should say that transparency and predictability has been the norm in the inflation targeting literature, as the importance of managing expectations has been understood. But you could easily make a point for the opposite case. This is something I could devote to in my next Hurriyet column, perhaps.

Incidentally, the one-pager to the latest cut has sort of divided market economists. While some have seen the tone as an end to easing, others are sure that more cuts are to follow, even more than one final cut of 25bp embedded in expectations at the moment. I guess this kind soft ambivalence is what my friend was asking for (we talked a couple of hours before the MPC meeting, and I haven't checked up with him yet).

As a side point, Turkey is probably the only country where the hawk is the one with the easing bias: In quite a few newspapers, VP Erdem Basci was being labelled as the dove and President Durmus Yilmaz as the hawk...

EconNews Roundup

Introduction to economic forecasting from Referans, translated by Daily News: BTW, CNBC-E keeps track of some basic forecasts for about a dozen or so outfits, so doing a formal scorecard has always been one of the constantly-postponed projects of mine.

Consumer confidence continues to rise, but there are a couple of caveats. First, the level is still quite low. But more importantly, as I have explained many times in my columns, asset prices (especially USDTRY and the ISE index) and political shocks go a long way in explaining consumer confidence, so I try not to make too much out of this index.

Turkish prices in the context of Eurostat relative price data. Incidentally, someone had asked about such data about a year ago. So if you are reading this, yes there is such data:)

This is not me speaking;

It's the IMF's daily bulletin of press around the world, which I am simply copy-pasting below without any comment:

Figures released this week show that Turkey's budget deficit increased thirteenfold in the first six months of 2009. Foreign investment fell by half in the first five months of the year. One in four youths are now unemployed. To crown it all, GDP shrank by a record 13.8% in the year to the first quarter, putting Turkey among the economies worst hit by the global recession. The IMF expects the economy to contract by 5.1% this year, after registering average annual growth of 6% in the past six years. When the global financial storm struck in the autumn of 2008, Recep Tayyip Erdogan, the prime minister, boasted that "the crisis has bypassed Turkey". He also claimed that there was no need for his country to renew a standby deal with the IMF that expired in May 2008. He has since been forced to eat his words. "We do not have a full-blown crisis, but everything has got significantly worse," says a Western economist in Istanbul. No wonder Mr. Erdogan has now begun to talk of doing a deal with the IMF after all.
Sent by BlackBerry Internet Service from Turkcell

EconNews Roundup: Format Change

As much as I love to inform, I am doing this blog for my own archiving purposes as well. And lately I have noticed that the Econnews Roundup is just being too cluttery in its current daily or bidaily format. Therefore, I decided to to the roundup once a week on the weekends. Therefore, it will be one big post every week instead of one very day or every two days.

A hell of a fiscal day...

Yesterday was exactly that, with the government announcing new tax hikes and the June central government coming out.

Economists do not like indirect taxes much, as they are distortionary: Negative in terms of welfare and inequality. Moreover, in a crisis environment, they result in people cutting down on other expenditures even if you hike taxes on "necessary" items such as tobacco and fuel. But at the end of the day, more money is more money:)...

As for the IMF implications, I wouldn't try to get too much out of the last two week's measures (tax hikes, stopping being nutcases on nuts, hard wage bargaining); they could mean that the government is trying to do it alone with "cakma" (fake) fiscal measures as much as preparations for an IMF agreement.

But one for thing, my back-of-the envelope calculations reveal that the overall net effect of all the tax hikes to July and August inflation will be 0.666% (I actually found 0.6-0.7%, but I just want to continue with my old theme). So the government is helping out for the realization of my 6.66% end-year inflation, for which I am eternally grateful.

As for the budget implications, I am coming up with a 0.666%:) of GDP contribution to the 2009 budget figure after penciling in a moderate demand contraction.

Speaking of the budget, June budget figures came out yesterday, for which a table is worth more than a thousand words:

Before I go on, a couple of "teaching notes" are in order. First, it is always wise to look at real growth to judge budget performance to weed out the effect of inflation. Second, because of the many one-off large items (just look at social security and non-tax revenues, last June's huge number in the latter is the Turktelekom payment), it is usually better to do yearly or year-t0-date comparisons rather than to compare figures with the same month last year.

As fort the figures, there are quite a few observations: First, the fall in indirect taxes has slowed down considerably, hinting strongly that we have seen the bottom of the Turkish slump. And nope, it is not because of the special tax cuts, at least not directly: Because of the size of the tax cuts, automotives and durables collection is still considerably down. Second, a casual look at the figures reveals immediately that the real problem is coming from expenditures. In that sense, tax hikes will have only limited impact for putting the budget books back in order. In other words, it is the expenditures, stupid!

EconNews Roundup

Thoughtful piece from Daily News editorial on education and schooling. I would agree with almost everything in the article, but much of Turkey is still in the industrial world. As the principal author for a World Bank report on higher education and the labor market in Turkey, I can attest that the Turkish higher education system is not faring well (except very notable exceptions such as the Eskisehir universities and Cappodocia Vocational School) in terms of preparing students to this industrial world. Even worse still, most universities feel very strongly that that is not their objective at all.

Speaking of these reports, the team that did all the interviews did a tremendous effort, so my part, analysis and writing, was a piece of cake. But I feel all that fell on deaf ears. Even the person in charge of the project summarized the findings as businesses asking for computer and English skills in a recent column he wrote.

Coming to other stuff, Daily News reports on yesterday's data, i.e. unemployment and the budget. The article is to-the-point and correct, but I found the title unfortunate: As is noted in the article as well, the monthly drop is solely seasonal; on a yoy basis, unemployment is actually continuing to rise. That's what I've done in the graph below:

There are more scientific methods for weeding out seasonality, but this is by far the easiest one, and it delivers the message: The employment drought is continuing. As a side point, statistics such as these are usually ignored, even when in the US, where the data is delivered in a much more timely response, simply because unemployment is a lagging indicator. I would mostly agree, but I have begun to think in some instances, it could be a leading indicator as well. I'll come back to this, maybe in the Hurriyet column.

Last but definitely not the least, the irresistible fall of capital flows. Note that, as I have mentioned earlier, portfolio flows have picked up in May, as risk aversion subsided, and preliminary data hint that the trend continued in June.

Yet more on the Hurriyet column

On Tuesday, CNBC-E released its latest MPC guesstimate poll: Nealy 2/3rd of Treasury guys and economists are expecting a 50bp cut in Thursday's meeting and probably at least another cut further on. Considering that everyone was unanimous on a 25bp final cut just two weeks ago, this is what I would call effective communication.

But then again, if you go in front of a bunch of academics, journalists and finance professionals, show that a comparative real rates graph and say that Turkish rates still have room to go down, even a chipmunk will get the message:):):)

More on yesterday's Hurriyet column

I just noticed I had forgotten to comment on the most important part of yesterday's Hurriyet column, the title.

The comments that MJ was the greatest showman ever brought to mind another great showman, one whose passing away was much more in his prime than MJ's. In terms of showmanship, his band's 1985 Wembley performance for Live Aid is considered by many to be the greatest live gig ever. Anyway, the title was a homage to one of their great songs, which was also one of the highlights of Wembley. I had the fortune to sing aloud word for word another another of their memorable songs in Izmir in mid-May, thanks to eziks and Grandpa, but that's another story.

Speaking of MJ, The Economist did it again. Their MJ obituary is by far the best I've read, and while loyal fans are sure to have protested, is written in the style of a true Economist...

EconNews Roundup

According to a recent report, there are green shoots in Turkish real estate. Incidentally, I've been burning brain cells on how to measure real estate in real time for a while. It is not that there are no good statistics, the problem is that they lag behind a quarter...

After investment incentives, agricultural incentives are changing as well. Again, it is an improvement, but still a lot of way to go.

Weekly Hurriyet Column: A crazy little thing called liquidity

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. As for the liquidity squeeze, the two graphs below speak for themselves:


You can clearly see the mechanism I described in the third paragraph in these two charts. As for the margins versus averages argument, again, a picture would be worth more than a thousand words, but Blogger's upload picture is not responding:) Anyway, I had this really nice chart which showed that deposits had stalled in the past few months (despite the recent rise) while Central Bank funding was becoming more and more important.


Even though we have had our differences from time to time, I have to render unto the Central Bank (CBT) due credit for effective communication.

While markets were getting prepared for one last 0.25 percent points cut this month, expectations were deftly managed in a couple of days so that now almost everyone concurs that at least two more cuts are in the pipeline, with the base scenario being a 0.50 percent cut next week followed by a 0.25 percent final cut in August, after when the Bank would go on to hibernation for a considerable time. But the talk of town has been the technical rate cut.

To understand this issue, you need just two pieces of data and some basic knowledge of Central Bank accounting: The Central Bank has been losing reserves for almost a year, so cannot create money through foreign exchange operations anymore. As a result, liquidity shortage has turned sticky, and the CBT has been increasingly providing funding to banks since early in the year.

The Bank actually saw this coming, and outlined two policy actions to remedy this liquidity squeeze in the Liquidity Management section of its Monetary and Exchange Rate Policy for 2009 document, which was published mid-December.

First, it would implement a technical rate cut, whereby the repo rate, which drifts around the borrowing rate, would become the benchmark rate, with the new borrowing rate set 1.25 percent below. Second, to ensure that funding the liquidity shortage only with short-term repos would not have any adverse affects on long-term rates and the credit mechanism, it would hold repo auctions with maturities up to 91 days and purchase government securities, or reduce lira required reserve ratios is these don’t work.

In this sense, the extension of repo maturities after last month’s MPC meeting was a first step of these policy actions towards easing liquidity. While I do not want to speculate on the nature and timing of the Bank’s next move, all of these are, in essence, the CBT’s offer of a life buoy to banks to help them carry on Treasuries, as debt rollover is projected to remain high and capital flows weak.

Of margins and ghosts

As for the technical rate cut, it is likely to lead to lower rates as interbank lending would get more attractive than parking excess liquidity at the CBT. However, it has been argued that its effect will be marginal since deposits are the banks’ main funding sources, and their rates are rather high. While it is true that the average funding costs of banks experiencing lira shortage will fall only marginally, it is the marginal costs that will make the difference, as lira deposits have stalled recently. In short, the technical cut would lead to more bond demand and interbank lending as well as lower market rates. And if we are lucky, there may even be some leftovers for corporate credit.

IMF money fits in this context in the sense that it would decrease rollover ratios and ease up liquidity. So far so good, but one of the great ideas of Economics is that there is no free lunch. Without a credible fiscal framework, with or without the IMF, there is a serious risk that all of this could be perceived as fiscal accommodation, or even worse, debt monetization. These ghosts of Christmases past practically ruined the country in the last two decades of the last millennium, so even the thought gives me the shivers.

The CBT’s continuous pleas for a sound fiscal framework, which continue to fall on deaf ears, take an entirely new meaning when looked through this lens. I guess they are well aware that they are about to enter very dangerous waters with unconventional monetary policy, and the government is not really making it easy for them.

EconNews Roundup

Demand from Iraq is supposed to give exporters a bliss: As I have argued before, while this may be true for a few lucky guys, the numbers are way too small to make a macro difference.

Short summary of the latest Capacity Utilization figures. For more on this, see last week's post.

Cry, the beloved country

http://www.newsweek.com/id/204316/output/print

A friend of mine sent me this link (sorry no hyperlink, as I am on the Bberry) in the morning with the following note:

"In a world where Newsweek publishes articles by people who decide how a country is doing by visiting the most expensive clubs on the coast of the Bosphorus and collecting information during dinner chats with "businessmen" who are probably buddies, the people who work hard to get an article published after much research can only despair..."

My friend is only half right. As a former bank economist who used to shuttle hedgies around town in these so-called information trips, I can confirm that not only these guys talk to a few people over dinner at Reina, they also invariably talk to the same guys, ending up with a consistent misrepresentation of the economy. In terms of econometrics, their Turkey estimator has low (actually zero) variance, as they always get told the same story, but is biased! Even the respectable WSJ and FT, who have embedded journalists in the country, can not avoid this error...

Coming to specifics, here are a couple of points my friend brought up, with my (and his) comments:

"The federal budget is a shambles, "
We call that the central government here, buddy...

"In recent weeks, Istanbul buzzed at its usual frenetic pace and the Bosporus was jammed with tankers, freighters, and cruise ships. The hotels on the coast were packed with Germans, Russians, and Israelis working on getting tans and skin cancer."
Kudos for inventing new economic indicators that we Turkish economists did not know about. BTW, I was in Suada (aka saibesaray island) the other day, and it was packed as well.

"Signs that the local economy is rebounding include increasingly busy factories, with capacity-utilization rates at 70 percent in May, up from the trough of 64 percent in February"
See yesterday's post on what to make (not too much) out of the latest CUR and IP figures.

"Domestic demand is clearly improving,"
It is clearly improving very slowly from a very low base. All we are see is the limited effects of tax cuts. If you don't believe me, check out consumer credits data.

I think I should be the one to be despairing (at least that's what my buddy was implying), but hey: At least, guys like Barton Biggs provide me with entertainment on a one and a half hour ferry:)...
Sent by BlackBerry Internet Service from Turkcell

Dreaming Inflation

I have been playing with price indices for a while, and I noticed something weird in core inflation:

On first sight, this is a rather comforting picture. All the core inflation measures are down, with I, the CBT's preferred measure, below 3%. Moreover, services inflation (not in picture) is around 6.2-6.3%.

However, I noticed that the F measure, excluding energy, liquor and tobacco and more importantly and administrative prices and indirect taxes, has been hovering around 6-6.5% for the past three months, i.e. the three months when the tax cuts were in effect.

I looked at the latest CBT inflation summary for more on this, but I did not find any references. Not that the CBT will miss the end-year target, but just another pointer that my 6.66% year-end expectation may not be that fictional after all.

A few observations on May Current Account

Let's cut to the chase right away:

1. Current account is shrinking faster than you can say current (see picture below).
2. The mystery of the UFOs (i.e. net errors and omissions) continues after a one-month pause (see picture below).
3. Tourism held out well in May, as hinted by the arrivals figures.
4. On the capital account front, portfolio flows took up the slack from dismal FDI and corporate borrowing (rollover at 60%), but we already knew this from the CBT weekly bulletins.
   

Followup on weekly column: Latest Data

I had noted in my last Hurriyet column that forecasting second quarter GDP would not be easy:

Looking forward, while forecasting the first quarter was rather easy, as seen from the convergence of market economists on a 12-13% contraction, projecting the second quarter will be much more difficult, as there will be two affects more difficult to estimate: A natural bounce-back, amplified by the impact of the fiscal stimulus, especially the tax cuts. This week’s May industrial production and June capacity utilization releases should clear up the outlook a bit.

After the marginally positive May Industrial Production (IP) outturn, June Capacity Utilization (CUR) was again marginally positive, with an across the board recovery. The CUR figure roughly translates to a 2-3% mom rise in IP in June, as the series are closely correlated:

This week's IP and CUR figures all but ensure that we will get a positive, albeit small, qoq growth in the second quarter. However, this would translate to a yearly contraction just short of double digit territory, so we are definitely not out of the woods yet.

In the Hurriyet column, I also noted that the contribution of net exports to growth is likely to be smaller in the second quarter:

But for one thing, while I would want to wait for Friday’s volume figures to say for sure, last week’s April trade data hint that the contribution of net exports will not be as large in the second quarter, as the gap between the contraction of exports and imports is narrowing.

Today's trade volumes have more or less ascertained this prediction, as the gap between exports and imports is closing fast:

EconNews Roundup

TOBB urges the government to focus on production rather than investment incentives.

The great downward move in Treasury yields: After hitting a historic low of 11.4%, yields are at around 11.50% as of Friday morning. Interestingly, the benchmark-ON premium is still high by historical standards:

Devout readers of my columns and this blog would know that I have been arguing for a couple of months that the risks in yields are upwards rather than downwards. But if I still haven't been able convince you, then I can at least use the picture above to assure you of your conviction that the Treasury rally will continue:)...

Finally, while June primary cash balance seems to have improved slightly when compared to same period last year, June revenues had shifted to July last year, making the June07 figure look much worse than it actually was. Once you adjust for this, the fiscal deterioration becomes much more pronounced.

May Industrial Production

Kudos to Daily News for capturing the essence of the May industrial production data:

It is true that the decline was somewhat larger than expected, but once you adjust for seasonality and working days, you end up with a 1.5-2% mom rise, which points to a slow recovery.

When you look at the sectors, you see that there is mixed performance at the sectoral level, which, after the across the board sharp falls in 1Q, is a positive sign as well. looking at the main sectors (below) also reveals mixed signals.

While the rise in capital goods is promising (but still long way to go), the recovery in intermediates has stalled. And while the durables have shown consistent rises in the last two months, nondurables has taken a fall in May.

EconNews Roundup

A couple of interesting pieces on energy.

YASED asks for economic reforms: The topics that need to be focused on, according to YASED, are are unregistered economy, certainty and predictability of the law, taxes and incentives, employment and education. Three of these topics were the highlight of World Bank lead economist Mark Thomas' introductory remarks at the Global Development Finance conference I blogged live from and then covered in my column. In Turkey, the problem is not that we do not know what the issues are. On the contrary, everyone more or less agrees on the problem areas. Nevertheless, it is a puzzle that not much concrete ever comes out after the identification process...

More on autos

To follow up on my small comment on automobiles from a few days ago:

A friend of mine who works for a major importer verified my claim that importers had eaten the cream and pudding of the tax cuts, with the <1,600cc seeing the most sales. He noted that sales of the mini Benz 1.6C were 1,500 in June alone. He also corrected me on the price: EUR33,000.

For the domestic producers, he confirmed the destocking, which we can not directly observe this in data. Interestingly, the latest data also hint that foreign demand might be picking up again, albeit very slowly.

EconNews Roundup

The end of the road for banking on rate cuts?

Nice summary of the week's domestic econ. data, with an emphasis on Industrial Production.

Weekly Hurriyet Column: Asking the right questions on growth

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. As for the sources of growth, the graph below is what the second paragraph is describing- have a look at the picture for a couple of minutes and you'll notice some interesting "reversals" in the last three quarters.



It is not often that you get two medals with one performance: While first quarter growth easily brushed past the 1994 and the 2001 crises to secure the gold medal for the largest contraction, it also briefly held the bronze medal in the international competition.

While the -13.8% yearly growth figure was not that far off from expectations, 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 investment were -6.6% and -8.4% respectively. Second, even though the government used fiscal measures to the full at the expense of risking a disruption to debt dynamics, while increasing the rollover rations and crowding out private credit in the process, the public sector's contribution to growth has been a limited 1.1%. Third, there were huge positive and negative contributions from net exports and inventories, which exactly cancelled out. 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. 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 lower oil prices.

On the production side, financial intermediation stood out from the across the board declines, but given the Central Bank/Treasury policy of money for nothing and bonds for free, this should not have come as a surprise. Looking forward, while forecasting the first quarter was rather easy, as seen from the convergence of market economists on a 12-13% contraction, projecting the second quarter will be much more difficult, as there will be two affects more difficult to estimate: A natural bounce-back, amplified by the impact of the fiscal stimulus, especially the tax cuts. This week’s May industrial production and June capacity utilization releases should clear up the outlook a bit. But for one thing, while I would want to wait for Friday’s volume figures to say for sure, last week’s April trade data hint that the contribution of net exports will not be as large in the second quarter, as the gap between the contraction of exports and imports is narrowing.

In any case, the billion dollar question 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 government's timely tax cuts have boosted consumption in the second quarter, it is questionable how much of this will carry on to the rest of the year. While latest real sector and purchasing managers indices hint to some restocking, a sustained recovery depends crucially on the consumer, with rising unemployment and falling real wages making a strong consumer comeback unlikely. As for investment, according to the same surveys, 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, with fiscal sustainability as one of its main pillars, would be extremely useful, with or without the IMF. Otherwise, we may see a repeat of the lost decade of the 1990s.

The only good part of the growth figures is that the PM might have finally learned the difference between tangent and diameter. The perennial optimist in me is therefore telling me that these numbers will serve as a sharp wake-up call, but I’ve been fooled before.

Special Hurriyet Column: Local boys shine among giants

I write for the Daily News regularly Mondays. But I do a special column from time to time, on request. The Economics editors at the Daily News asked me if I could do a news piece on the conference I had blogged live from last week. I told them it would be really difficult for me to write anything without giving my own opinion, so I offered to do an opinion piece instead, which they accepted. The column below ran in my usual spot in the second page on the weekend edition, but somehow did not make it to the web. As for the star kid (see below), the Daily News ran an interview with him in the weekend edition, where he elaborated on his thoughts on the savings rate and capital flows I had summarized in my column. I am not sure if the Econ. editors did that on purpose (I submitted the article on Thursday, so they had a lot of time to plan ahead), but in any case, it is a nice supplement to my article (or vice versa). As for banking, a picture is worth more than a thousand words:

It is not often that you see two Economics Nobel winners in one room, outside the University of Chicago, let alone giving speeches one after the other. Bahcesehir & Koc universities and the Central Bank of Turkey, therefore, deserve all the kudos for getting Robert Lucas and Edward Prescott to speak at the conference “Post-crisis Global Economic Order and the Turkish Economy”.

I should say I was a bit disappointed by Prescott’s presentation, where he chose to apply his recent research on the relationship between taxes and labor supply to Turkey. With its large informal sector and agricultural employment, I would expect the country not to fit into his framework, and my beloved country did not disappoint, standing out as a big outlier in his charts. In fact, it is Prescott’s earlier research that has the biggest implications for the Turkish economy. In an elegant paper more than three decades ago, he and his coauthor Finn Kydland showed that discretionary policy suffers from time inconsistency in the sense that the policymaker’s preferences change over time. In the Turkish context, the IMF saga and the regular tax amnesties are the most obvious implications of this work.

Although it was a bit ironic that I was listening to one of the most prominent members of the Chicago school while the crisis was shocking the very fundamentals of the neoclassical Economics the university founded, Lucas’ speech was extremely illuminating. In one simple equation known to anyone who has taken a single Economics class in college, he showed how the Great Depression and the current crisis both involved a reluctance to part with dear liquidity, whether it be deposits in the 1930s or short-term lending today. However, Lucas could have offered valuable advice for Turkish policymakers as well. As Ayse Imrohoroglu noted while introducing him, Lucas is renowned for showing that governments cannot fool people. I hope the right people heard her.

Despite the economic giants, it was the local boys who stole the show. From the Central Bank, while President Durmus Yilmaz did not offer anything new, Vice President Erdem Basci noted, by comparing real interest rates, that there was still room for rate cuts. While a detailed discussion of this claim is not proper here, I should note that a comparison that ignores country risk, liquidity premium, currency substitution and the like could be misleading. In any case, my spider senses are telling me the Bank is preparing markets for another cut this month, and when seen in that context, Basci’s remarks stand out as good expectations management and effective communication.

Basci’s comments on the recent unresponsiveness of market rates to policy rates were also noteworthy. In response to a question by academic and columnist Seyfettin Gursel, Basci said that he saw the recent developments as a natural steepening of the yield curve. While I am not sure I buy the argument, I found his partition of market rates into maturity and credit risk an extremely useful way of thinking. As for government bonds, the credit risk translates into a sound fiscal framework, as Basci stressed. This was another very clear message from the Central Bank.

To me, the real star was Yapi Kredi chief economist Cevdet Akcay, who questioned some of the current dogmas of Turkish economic thinking. Specifically, Akcay noted the unrealism of adopting the Asian export-led growth model to Turkey and increasing the savings rate in the short-run. The latter view was especially timely, as hiking savings is being billed as the new haute couture of Turkish economic thinking. As Akcay underlined, with corporates not financially very strong and the rising middle-class just starting to consume, there isn’t really anyone in Turkey to increase the savings rate in the near term.

Akcay also struck a chord or two when he questioned Ziraat Bank CEO Can Akin Caglar’s claims that the state banks had taken up the slack from private banks’ tightening credit and made decent profits out of it. While a definite conclusion was not reached on the issue, the recent gap in lending practices of state and private banks, as evidenced from the rise of loans to deposits ratio of the former and the fall of the latter, is a phenomenon begging to be scrutinized further.

In short, the local boys made us proud in a well-run meeting.

EconNews Roundup

Great editorial from the Daily News on where the economy is headed. In less than 500 words, the article touches many of the issues I've been writing about for a long time. As for banking, it definitely looks good on the 1Q statistics, but so would I if I were getting money for nothing, and bonds for free:)

Some unconventional views from an unconventional economist. I should say I share many of his views. In particular, the savings rate camp is acting as if this is a question on a macro midterm.

Roubini on the Turkish economy. However, at this point, it'd take a lot more than him to convince the PM of the virtues of a sound fiscal framework.

While the yearly inflation edged up slightly, the Bank is expected to continue to cut rates. However, we may get another 50bp after Erdem Basci's comments on Wednesday that there is still room for easing.

Last but not least, it is the rise of the geeks. As an economist, what made me thinking is the discrepancy between the Software Developers Association's numbers and the official figures on software exports.

The Resistible Rise of PMIs

The PMIs released on July 1st raised recovery hopes. While all the indices except Turkey are still in negative territory, the rise is prominent in all major developing economies, as the graphs from a recent Danske report, which I shamelessly stole (at least, I am doing free advertising for them, while at the same time providing a sneak peek to my laptop screen):

In Turkey, as in other countries, the rises were across the board, but output, new orders, export orders and employment were particularly strong. Moreover, inventory indicators suggest that some restocking may already be underway.

I am not sure what to make of the restocking argument. In an accounting sense, it is definitely positive development in the short run, but it has to be accompanied by consumption to sustain the recovery.

In that sense, maybe I should have named this post the resistible rise of making too much out of the irresistible rise of PMIs....

BTW, for more on this, there is a well-written FT article.

EconNews Roundup

I kind of see the view of those those who support the CBT's aggressive easing and lifeline for Turkish banks (look at the financial sector in 1Q GDP figures). I can even understand the "all is well, send the doc away" camp. But when I hear that the government has managed the IMF process well, Houston we have a problem... At least, I know where I will not be parking by millions when I finish up with my "beam us up Scottie" device:)...

The automotive sector says they are still standing, but the numbers say otherwise:

Anyway, if they are in such good shape, why are they asking for new stimulus?

BTW, the chart above, from the Automotive Manufacturers Association, shows importers benefited relatively more from the tax cuts than domestic producers. I must say I was a bit surprised by this data; I would have expected the domestic guys to be able to respond faster. I guess buying a Benz for only EUR40,000 should have been attractive:)

The new logo of my Daily News blog:

As I noted before, you'll soon be able to follow this blog from the Daily News website as well. I decided to change my logo due to some really constructive criticism. In short, all the comments were saying that while the Greek letters and the integral were a good idea, they were making the logo too complicated. Therefore, I decided to get rid of those, but keep the Carsi sign. Here's what the ever-helpful Daily News designer came up with:

Again, comments would be highly appreciated.

EconNews Roundup

According to the Daily News, this is the Erdem Basci effect, although they do not exactly put it that way.

Despite the gloomy tone, TEA preliminary exports look marginally less gloomy than before, as the graph below illustrates:

This is what mathematicians refer to as the second derivative turning positive, i.e. the rate of the decline decreased in June. In all the sectors but agriculture, where there weren't large export declines in the first place, we have seen a lower yoy contractions. But it is not appropriate to rejoice yet, as the first derivatives are still significantly negative.

BTW, as you can see, I have started to make use of my new toy, as I got my official training today. I hope to make the blog more colorful with such charts in the future.