A step in the right direction for GDP reporting

To my surprise, TURSTAT started releasing working day and seasonally adjusted GDP, going back to 1998. I know I have quite a few readers interested in growth, so I am happy to provide qoq growth numbers.

The wd and sa numbers are from TURKSTAT, whereas the trend numbers come from my friends at Turkey Data Monitor, who just apply a Hodrick-Prescott filter on the working-day and seasonally-adjusted series. You might also be wondering if the wd adjustment makes a big difference, so here are the yoy figures for the regular and wd series:

As you can see, there are only three quarters where there is a significant difference between the two series. That's why economists usually account for wd in Industrial Production, but not in GDP.

Thanks to TURKSTAT for this nice surprise, but it'd be better if such surprises were announced beforehand. Now, let's hope that they will release the GDP figures in a more timely manner.

My initial take on the GFSR

The IMF disclosed the Global Financial Stability Report this morning, with your friendly neighborhood economist present with a brand-new press badge (thanks to friends who helped facilitate the process) that arrived just an hour and a half before the meeting:)

Anyway, there is no way I could compete with the mighty FT with my one-person outfit, which sent an email update as the meeting was in progress, but where I could provide some value added is on the Turkey implications of the report:

First, the Fund notes that as credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey (my own metrics suggest there is not much pent-up demand right now), with the credit demand expected to increase as the economy recovers, the private sector is nevertheless likely to hit credit constraints hard in 2010 as well. The Fund recommends continued support from Central Banks to alleviate these constraints. In the Turkish context, with the private sector lending being crowded out by banks' appetite for Treasuries, an expected consequence of rollover rations of over 100%, it remains to be seen where the Central will start buying Treasuries to unclog credit markets directly, as direct rate cuts have so far had limited impact on market rates.

Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates, at least of history is any guide. This is risk for Turkish rates that is not discussed a lot. As Turkish Treasuries are more responsive to core market long-term rates than short-term rates, such a bear steepener would create an upward pressure on Turkish rates, forcing the Central Bank abandon its announced (but not believed) policy of on-hold policy, in effect changing the causality relationship between the benchmark and the policy rate.

As for the Turkey findings, the report notes that Turkey's largest risk is in external debt refinancing needs in 2010, with the bulk coming from corporate rollovers. However, Figure 1.19, contributions to changes in EM sovereign external spreads, should hang on the wall of all EM policymakers: The analysis shows that increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed since then, and it is safe to claim to a retraction of risk appetite is probably the single largest risk to EM assets at the moment.

Weekly Hurriyet Column: Great expectations, greater disappointments

With the hustle and bustle of the IMF/WB Annnual Meetings, it took me for days to finally post this week's column. Below is the unedited version; you can read the final version at the Daily News website. There is the usual cheesy reference, this time from literature, although it has been adapted to the silver screen numerous times.

As for the column, I am skipping the usual discussion, as I had already discussed most of the issues before the column got published, thanks to illuminating comments from Mary Stokes. But now that I think about it, I look like a fool stating that the modest expenditure cuts of 2011 do not look realistic in an election year: Maybe, 2011 is not the election year, 2010 is!!!


After a delay of roughly three months, the government disclosed the medium-term economic program (MTEP) nearly two weeks ago.

Having been late to the game, even my own rather lax standards, due to the Eid publishing break last week, I will only briefly summarize the main tenets of the program before trying to offer some value added.

The MTEP in brief…

There is mutual agreement that the strong point of the program is the realistic projections. While I find the 2010 unemployment and inflation forecasts a bit too optimistic for my taste, the rest are in line with the economic scenario I have been sketching since early in the year. In fact, the government managed to take my number of the devil projections a step further by forecasting the deficit at 6.6 percent of GDP.

But as many analysts have already noted, the fiscal side of the program does not lie on firm foundations. For one thing, almost all of the mediocre fiscal adjustment next year, which incidentally falls short of securing debt sustainability, is coming from robust revenue growth stemming mainly from the expected economic recovery. Moreover, even the modest expenditure cuts of 2011 do not look realistic in an election year.

…And the fiscal rule

In fact, the only thing that has kept sound economists even mildly optimistic is the mention of the implementation a fiscal rule sometime in 2011. Although the details are still sketchy, it seems that the government has in mind a cyclically-adjusted fiscal rule, as Turkish daily Referans went ahead and published a formula based on debt sustainability.

Such a rule that adjusts the fiscal position for the economic cycle could make sense for Germany, to which Economics tsar Babacan alluded during the unveiling of the MTEP, but I doubt it’d be the appropriate rule for Turkey, especially if it overlooks the composition of the budget. In other words, numerical policy rules do not make sense for a country with a poor fiscal track record like Turkey if they are not accompanied by procedural rules such as a cap on non-interest expenditures.

Even if the government manages to come up with the right rule for Turkey, implementation will be a huge challenge. Unless the rule is hammered into the constitution, there will always be the risk that it will share the destiny of the ill-fated borrowing limits in the fiscal control law, being cropped or even nullified with subsequent laws.

The biggest danger of the fiscal rule lies in the false hope that it will be the answer to ensuring fiscal credibility. One useful analogy is with inflation targeting: After lots of trials and errors, it is now well-understood that inflation targeting per se or even attaining the inflation targets does not make a central bank credible, with the Central Bank of Turkey being a case in point.

In fact, one general misconception about fiscal rules is the assumption that they automatically deliver fiscal credibility. Without an independent and authoritative budget monitor or fiscal council, it wouldn’t be a big surprise if the Turkish fiscal rule, even after being ironclad in the constitution, would not gain much ground.

In any case, fiscal policy experts have repeatedly been pointing at lack of full transparency and shenanigans in public accounts, which do not bode well for the implementation of a fiscal rule. So, at the end of the day, maybe fiscal policy independency for Turkey should not go beyond being an academic curiosity, especially after the PM has disclosed his distaste for central bank independency in admirable frankness.

Or, if the government is just providing opium to the masses with hopes of an IMF deal and a fiscal rule, it should also be ready for the withdrawal to come.

On tomorrow's Hurriyet column

This is a first: I am commenting on a column of mine before it has appeared in the blog or in Hurriyet Daily News:)...

Mary Stokes, one of my few loyal readers:), has left a comment on my post "Weekly Hurriyet Column: Happy Ramadan/Eid" about the fiscal rule, which is what tomorrow's column is about:

"Regarding a fiscal rule in Turkey, I think it's interesting to look at what is happening in Poland right now where legal safeguards kick in when public debt-to-GDP breaches a certain level.For me, Poland's example highlights that having a fiscal rule is not a panacea for solving the problem of fiscal deterioration. While there are many positives to the legal safeguards in Poland (eg increased investor confidence, less maneuver room for a spend-happy government), it appears to me that having the fiscal rule has also led to a number of smoke and mirrors tricks to get public finances into line.Plus, Poland will need to tighten fiscally at a time when unemployment is still rising.So I personally will reserve judgment on the fiscal rule until we learn more....the devil's in the details, as they say. I look forward to reading your coming article!"

I was going to wait until I got home to reply, but I liked what she was saying so much that I had to respond right away, on my Bberry- so apologies for the bad formatting.

Anyway, as you'll see tomorrow, I am more or less in line with Mary's line of thought. Other examples that could be relevant for Turkey are Hungary, Sweden, Chile (obviously, we do not have the equivalent of their copper, but theirs is a fine example of a fine-tailored rule for the specifics of a country rather than copycating) or the US, the latter for the CBO- I doubt the CBO would work in Turkey in copied in its entirety, but some parts of it are admirable.

Another point Mary raises is that we have to simply wait and see. I handed in my column an hour before she wrote, and now I think about it, I've been a bit too judgemental and unfair to the government. After all, this is something they are still working on, as Econ. Minister Babacan noted. We'll just have to wait for the devil:)

Anyway, thanks a lot Mary; great comments and highly-appreciated...
Sent by BlackBerry Internet Service from Turkcell

EconNews Roundup

SMEs in tourism areas hit by the crisis hard, reports Daily News Antalya representative. Note that while anecdotal, the piece implicitly contradicts the so-called research findings I was reporting on Wednesday, highlighting that it is really difficult to determine whether it is the SMEs or large guys affected more from the crisis.

The quick road to riches: Start up a mutual fund firm and invest in Turkey. I guess after March, you could have invested anywhere and would still have got extraordinary returns, but Turkey has been one of the high-fliers in terms of equities.

CBT President Yilmaz is the Central Banker of the year. I wonder who was voting- maybe Turkish banks and bond traders? The funnier thing is that this comes amidst the PM expressing his disdain for Central Bank independence in sheer frankness. BTW, maybe it is my memory playing tricks on me, but wasn't Gazi Ercel receiving similar awards in 2000 for the rapid inflation reduction in the tablita program at the time, before it all went bust with the constitutional (literally) crisis of 2000. Wasn't the same true in 2006 when failure to appoint a new governor following the applauded tenure of Sureyya Serdengecti coincided with a small EM bust. To be clear: I am in no way holding the CBT presidents of the time for the mishaps (there wasn't one in 2006 anyway), but there is an interesting correlation here, if not causation:)

New Kid on the Block

In addition to the weekly columns and special analytical pieces, I also work towards improving the Econ. section of the paper as an external (and sometimes internal) consultant. One of my short-term goals is to find quality columnists; for some time, I have been trying to get someone with significant markets experience. This is for my own benefit as well; once we have someone who concentrates on markets, I can turn on to more hard core Economics stuff I am more interested in rather than having to deal with currencies, rates and the like, issues on which I get a lot of reader (but not much writer!) interest.

I finally persuaded my friend Kaan to write a column for the paper, which appeared last week. It is a thoughtful piece on the current euphoria that should serve as a harsh wake-up call. I share thoughts with Kaan a lot and he is one of the few people that convince me that I am not insane in thinking we are living in yet another bubble, albeit a much smaller one than the one in 20o6. So I highly recommend his piece.

I am not sure Kaan will turn this into a regular weekly piece (I am sure the editorial would love him to, I am not sure he has the time), but I hope so, as I've found a guy who will more or less say what I would have said, and I don't have to lift a finger:)....

EconNews Roundup

Interesting take on the G20 meetings although I would not call it a crash course in global economics- it is was too specific to be that. In any case, I have been seeing some papers lately that relate the global supply chains as the primary reason why the supposed decoupling did not happen. Basically, the idea is that, using the examples in the article, if Lenovo suffers India, Mexico, Poland and China suffer; if Apple sells less Ipods, companies in South Korea, Taiwan, Singapore and Japan feel the strains...

Dr. Doom comes to Istanbul.

IMF rumblings

I am currently in the brainstorming process for an article on the IMF that will feature in a special supplement, to be prepared jointly with Daily News, Hurriyet and Referans and distributed the weekend before the meetings.

I am thinking about devoting some part of the article to misconceptions about the IMF, and a natural extension would be misconceptions on the IMF-Turkey saga. I don't know if these will feature in the piece at the end of the day, but just to set the record straight, I will address two important misconceptions:

First, the fact that I favor an IMF deal does not mean that I believe Turkey will sink without the IMF. It sure will not. It is just that an sans-program will surely be more costly than with program, especially given that there is a revamped leaner and meaner IMF out there (this is one my key themes for the column, so I won't give out any more spoilers). This is a point Econ tzar Babacan has emphasized a few times recently as well. When I say more costly, I am not only thinking about borrowed money and opportunity cost of holding reserves (wait for the column for more on these) but also the external financing and credibility.

Second, maybe it is just me but I just do not understand how Turkey could do without the IMF program if fiscal discipline was sustained. Sure, if the markets buy it, from a government (or rather PM) who has a really bad track record, facing elections in a year or two- and therefore is completely time inconsistent in terms of fiscal policy. In fact, I doubt whether the markets would even buy a constitutional fiscal rule after the PM's latest candid remarks on his appetite for Central Bank independency. Anyway, the fiscal side of the Medium-Term Economic Program has gone tangent to sustaining fiscal discipline, to use the PM's own economic phrasebook, so this argument is just academic...

EconNews Roundup

A recent study finds that job losses vary a lot by size of firm and region: I am wrestling with two newspaper columns, a PowerPoint, a project proposal and two syllabi, so I had to read through the article rather quickly. While I admire the ingenuity of looking at Social Security data, I have to say it is tough to jump to definite conclusions such as industry has shed more labor or bigger firms have adopted the crisis better later on after struggling at first. The truth is that there are huge inter-region differences, and you don't know if there are sectoral or size effects going on.

Foundations and cash cows, Turkey's latest cash cows, swimming in liquidity.

Letter to the Blogger:)

Gul, to whom I was asking to take notice in the past few blogs, responded this morning:

It turns out there are two search engines/archives in the system, one for the old web site and one for the new web site (the Daily News web site was recently totally revamped).

In fact, as Gul pointed out, a search with my name in the new archive brings up all my recent articles, even the special columns.

This solves the mystery of the missing of columns once and for all. However, I frequent the Daily News web site more than the average user, so if I am being misled, probably others are as well. Hopefully, both archives are to be integrated soon.

EconNews Roundup

Here's the wrap-up of the main Economics items just before the Bayram:

Another news item I would love to be able to quantify- just boils the academic blood in my veins, or rather whatever is left of it. Interestingly enough, such cases demonstrate how a poor approximation, at least for developing countries, the permanent income hypothesis is.

Once you taste the tax-break sweets, it is tough to let go. I believe the industry does not make a strong case, as they do not support their claims with hard facts.

What do we get out of the long-awaited Medium-Term Economic Program (MTEP)? Some controversy, better credit outlook, and uncertain IMF prospects.

While the world is locked in the US-China trade dispute, a smaller one is going on between Turkey and Indonesia.

Last but not the least, the latest CBT rate cut.

Housecleaning done!

It took me the better part of the day (OK, I was doing other things as well, like working on two bomber Hurriyet articles and a couple of syllabi), but at the end, I am done with housecleaning:

I archived the last four weekly columns as well as a special analytical piece, along with the usual accompanying commentary, and even managed to squeeze in a post or two on growth.

Starting tomorrow, it will be business as usual with the blog, hopefully...

More on Turkish 2Q GDP

One of the most interesting recent developments in Turkish GDP data has been the growing disconnect between industrial production and GDP (and GDP's industry component):

Given Turkey's past blunders with data (BTW, having spent time at TURKSTAT, I stand firm behind my lines over six months ago that the institute is really dismal), the media was like sharks smelling blood, adorning their Economics pages with headlines accusing TURKSTAT os mismeasurement and claiming a sharp revision was on the way.

What made the whole scene tragic in a comic way was an IMF report welcoming improvement in the quality of Turkey's reporting of macro data, which came out around the time of the release of the 2Q GDP data.

The truth, however, may be much less exciting: It might as well be that at least part of the discrepancy is explained by firms cutting down on their usage of intermediate inputs, at least relatively more than industrial production:

I would never, even in my wildest dreams, think of myself defending TURKSTAT. But here I am...

The case of the missing links solved

I had been complaining that my Hurriyet columns were not put in the Hurriyet Daily News web site. It turns out they have been; I stumbled upon them while looking at my latest column. However, for some weird reason, they do not show up when I do a search with my last name or just search with the title of the column. I guess there is something wrong with the search engine.

Anyway, I found out my August 31 and August 24 columns, which I were not able to link to before.

So the message for Gul is: Disregard the previous messages, the columns are there. But you need to get the search engine fixed...

On Turkish 2Q GDP

Anil, one of my few loyal readers, wanted to know how the 2Q growth figure compared to LR growth rates. As I always say, a picture is worth more than a thousand words:

In fact, you get even more insight from looking at the longer run:

Two points are in order: First, the slump of the last two quarters does not fare well in historically. Second, in the Turkish growth story, it's all about volatility. Here's a country that has a potential to grow 5-6% a year even without the much touted-for structural reforms, and manages that for a few years, only to lose all the gains in a year or two when a crisis hits. In fact, this point could be better illustrated with the the growth history of the country since the republic:

The second point leads me the comment from Eren, another loyal reader, who thought the 3.5% growth rate in Medium-Term Economic Program is not very realistic. I happen to have a similar forecast for 2010, and it is mainly because of the weak 2009 base. This also validates Anil's point that comparing to the previous year does not make sense, especially when there are huge swings, i.e. structural shifts in Econspeak. In such cases, it might be better to look at seasonally adjusted quarterly changes:

What do I get out of this? You don't need to be an economist for asking smart Economics questions. Thanks, Anil! Thanks, Eren!

Another house cleaning about to start

As loyal readers have noted, I have fallen behind in blogging.

Since Besiktas has spoiled the mood for the Bayram, I decided to use the calm news-free period to put the blog back in order.

In the next couple of hours, I'll first archive the Hurriyet columns for the past few weeks. Then, I'll go on to a couple of posts I had promised to my loyal readers Eren and Anil on growth.

Weekly Hurriyet Column: Happy Ramadan/Eid

As the newspaper did not come out today (due to the Ramadan/Eid holiday, a Turkish journalism tradition that used to be observed by all the papers until recently), there will not be a column for this week.

Next week's column will be devoted to the fiscal part of the Medium-Term Economic Program (MTEP), especially the much-talked-about fiscal rule.

Weekly Hurriyet Column: Life as a house (expert)

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As usual, there is the cheesy movie reference, another underrated favorite of mine.

As for the column, the topic was admittedly outside my area of expertise, but given the number of questions from readers and friends on the subject, I felt I had to delve in. My friend Eren was one of the first who made me think about the topic, so I emailed him the article as soon as I had finished writing it. He thought I did a quite good job until I started talking on house prices, after which he found my style a bit wordy and my recommendation without a definite conclusion. Below is my reply to him (unfortunately in Turkish), where I discuss how I had come up with my recommendations. Anyway, Eren is right that I do not offer definite conclusions on house prices, and for good reason, as I explain below. But if my good old friend Cagatay, who is a competent real estate development manager and equally incompetent skier and sailor, gets down to work, as he promised to, I'll have something more to say soon, as we are planning on doing some research with the Garanti data.

Neyse yazdiklarina da hak veriyorum; bence de ilk yarida iyi bildigim seyleri guzel yazdim da is hem iyi bilmedigim hem de cok iyi data olmayan seylere gelince cuvalladim galiba.....Bir de tabii biraz daha vakit olsa o Garanti verisinden daha somut seyler cikabilirdi; simdi real estateci bir arkadasla onun uzrerinde biraz calismayi planliyoruz, bakalim ne cikacak.

Wordy oldugu konusunda da hak veriyorum. Bazen (mesela gecen ve evelsi hafta) cok quantitative yapiyorum da bu sefer 2 saatlik bir analizin uzerine ev fiyatlari su tarihe kadar % su kadar inecek diye cok somut ve yaniltici birsey demek istemedim. Cagatay'la calismamizdan o tip bir sonuc (her ne kadar accurate olmasa da) cikar ama onun icin en az 10 saat filan datayla ugrasmam lazim. Bu arada gercekten big picture heryerde ayni, 2007 sonrasinda fiyatlar 2008 basi peak etmis ama veri dogruysa inanilmaz semtler arasi farkliliklar var, hem de yakin yerlerde bile.... Cok sasirtici....

Sonuc olarak bence asil refinance edelim mi etmeyelim mi sorusuna net bir cevap verdim de ev alalim mi almayalim mi konusunda cok acik ve net konusmadim. Ama aslinda onun da mantigi refinace ile ayni; biraz bekle ama cok bekleme. Ama iste faizlerden fiyata etki ne kadar lag ile gelir ve de ekonomide zayiflik ev fiyatlarini dusurur mu, bu iki opposing effect nasil play out eder analizsiz kestirmedigim icin orada refinancingde oldugu kadar kesin konusamadim. Ama su gercek ki benim senaryomda en safe bet house investment; ona da elimination usulu ulastim; simdi faizler artacaksa bonda girmek zaten delilik; buyume stock positive ama cok yavas olacak ve de stock da da kurda da cok volatilite gelecek. Geriye de altin ve gayrimenkul kaldi yani.

Anyway, I've already chatted too much; here's the column:


I tend to rise to the bait when I get too many questions on a specific topic, with the latest example being housing prospects.

Of course, the main driver of the interest is the recent fall in home credit rates, and as most of the inquirers are thinking about refinancing their loans rather than buying a house, they are wondering if rates have further downside scope. To answer this question, we need to start with where it all began, the banks’ bank.

I have been arguing for a long time that the Central Bank’s (CBT) extensive monetary easing would not lead to an as large fall in market rates, and it hasn’t. One big exception has been the bond market, where knowing a continual easing is on the way, banks have pursued a gold rush into bonds, pushing yields into single-digit territory. Perversely, this mechanism has clogged the market for rates that really matter, i.e. loan rates, albeit to a lesser degree than commonly thought, as there is not much demand for credit.

The recent thawing in housing credit is due to this process ending rather than the monetary transmission mechanism’s wheels finally starting to turn. The CBT is likely to end its easing cycle towards the end of the year, and banks, knowing this, have started looking into alternatives. With the lowest potential for NPLs, housing credit is a sure bet.

It is then the very same mechanism holding back lending that has given the recent boost to housing credit. Seen in this way, it becomes clear that home loan rates have limited further room to go down until the end of the year, with the global environment, Central Bank policy and Treasury borrowing schedule, with light redemptions, all supportive. But I would not wait much longer: With the Treasury entering dangerous waters, as I outlined last week, and the economy picking up, the upwards potential for rates is high in 2010.

A simple question such as “is this a good time to buy a home?” is even more deviously complex. A coarse comparison with other countries reveals that Turkish median house price to disposable income ratio, at around six, is higher than many, but given Turkey’s demographics and the small detail that the comparison group is yet to emerge from a major housing slump, such benchmarking does not make much sense. Historical comparisons are difficult as well due to lack of data.

Using Garanti Mortgage’s price data from 2007 for the largest six cities reveals that house prices look quite reasonable compared to peaks of early last year, when looked at as simple time series or price-rental ratios. However, given that house prices are quite sticky and usually lag behind other asset prices or even economic data, there might be further downward potential. On the other hand, the key is again not to wait too long, as the lower rates will start biting into prices through pent-up demand sooner rather than later.

Complicating this analysis is lack of data on quantities, without which it is impossible to discern demand and supply affects. But available data does not point to any sudden shifts in either in the near term. Another issue is the remarkable intra-city differences, some of which hint at attractive regional opportunities.

Looking at the big picture, a house also seems like a good investment- if you share the rather gloomy economic outlook I have been outlining for the past few weeks. With the economy to recover slowly, debt worries on the way and inflation and rates poised upwards, albeit not significantly, gold and real estate look like safe bets with decent returns for a risk-averse investor with a medium-term outlook.

For gold, you also need to have a position on the global economy. If you can’t handle that, all you have is bricks.

Weekly Hurriyet Column: The year of living dangerously

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. First, I have to apologize for yet another cheesy movie reference, but this one is one of Peter Weir's underrated classics, as he is better known for Master and Commander or Dead Poets Society.

As for the column below, there have been important developments in the two weeks since I wrote this column. First, the government disclosed the Medium-Term Economic Program. As I discussed in the preface to last week's column, while the macro projections are realistic and consistent, the fiscal framework lacks bite. For one thing, almost all of the mediocre fiscal adjustment, which incidentally falls short of securing debt sustainability, is coming from robust revenue growth stemming mainly from the expected economic recovery. Moreover, this limited adjustment is not enough to ensure debt sustainability. As for the fiscal rule, I am devoting the last column of the month to that, so stay tuned.

Another theme of the column is the 2010 redemptions schedule. The Treasury got the burden off the heavy January and February with a couple of swap auctions just before the Bayram. This made sense, as market conditions were rather suitable, and unsurprisingly demand was strong.


After going over my growth and inflation forecasts last week, it is time to broaden my horizon to fiscal policy.

Fiscal policy has been off the markets’ radar for some time for a number of reasons: For one thing, the government has been able to put almost everyone in a “see no evil, hear no evil” mode with its inaction. Not only waiting for the Medium-Term Fiscal Framework (MTFF), which should have been out early summer, has started to look more and more like Samuel Beckett’s famous play, the Ministry of Finance has yet to release the July and August budget data.

There are in fact three distinctively different rationales for the unresponsiveness. One group, which I aptly term the wait-and-see guys, is just waiting for the MTFF and a concrete conclusion on the never-ending IMF saga. It is safe to assume that the government will be more punctual than Godot, but even if it isn’t, these guys will not be as patient as Vladimir and Estragon. In fact, the October IMF-World Bank annual meetings in Istanbul has emerged as a consensus deadline for both.

To give the ostriches some credit, some had been vocal with their criticism of fiscal policy for a long time. However, they too have been quiet as of late, after being burnt by their earlier calls. After all, despite the sharp budget deterioration and increase in the monthly domestic borrowing, the Treasury has been successful in rolling over debt. A case-in-point is August, where the Treasury breezed past record-level redemptions with a rollover ratio of over 100 percent and historically low benchmark rates, consequentially quieting the burnt-by-the-Treasury camp for a while.

In fact, there is a third group, which I coin the optimists, who see these easing conditions as permanent and hail them as signs of normalization of the Turkish economy. However, this argument is not supported by facts. In fact, the return of global risk appetite, full Central Bank (CBT) support and the country’s large output gap explain much of the recent fall in rates. Therefore, just as I do not see benchmark rates going below 9 percent in a sustainable manner, I see no reason to believe that the ultra-low rates are the new normal. With the output gap closing and CBT hiking rates next year, market rates are likely to head north again.

As for the high debt rollovers, with ample liquidity, not much other use for their money and a high capacity for debt absorption, banks were behind the Treasury success story. Moreover, as foreigners got out, they have been able increase their share of the bond market significantly for the past year, a process that has left the big players with a lot of market power. To top all of this, contrary to the consensus view, the crowding out has not been as large as real sector representatives claim, mainly because of a lack of demand for credit.

Without a credible fiscal framework, this fairytale will not last much longer. With the deficit set to hit 66.6 billion liras at year-end, gross central government debt will make nearly one half of GDP. As a result of the short maturity of the debt, 2010 will be tougher, as my projected 170 billion liras of redemptions are evenly distributed after a heavy first couple of months, increasing the chance of an accident somewhere down the road. In all likelihood, debt sustainability will enter markets’ radar sooner or later. Moreover, as the economy begins to stir, crowding out will start to bite.

Barring a positive surprise, I will remain convinced that 2010 will be the year of living dangerously for Turkey. Then, 2011 could be the year where things fall apart, with the government unwilling to undertake a much-needed expenditures adjustment before the elections.