Monday, December 14, 2009

Weekly Hurriyet Column: Box of bittersweet chocolates

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As you can see, I could only last two weeks without a cheesy movie reference of a title, and this one is one of my all time favorites.

As a great American philosopher once said, life is like a box of chocolates; you never know what you are gonna get. That’s certainly true for Economics, as I found out after last Thursday’s busy agenda.

While third quarter growth came in slightly better than expected, consumer demand is still weak despite all the tax incentives. And although its rate of contraction is decreasing, private investment remains low notwithstanding the encouraging upward crawl in machinery investment. Without a significant improvement in consumer confidence, capacity utilization or the uncertain outlook, it is not realistic to expect strong investment spending.

Moreover, revisions to the first two quarters have decreased the unexplained gap between the manufacturing component of GDP and industrial production. As third quarter manufacturing is also out of whack with the quarter’s production figures, I would not be surprised to see the third quarter growth figures revised down when final quarter data are released.

Speaking of inconsistencies, November capacity utilization was a wake-up call to those rejoicing over Tuesday’s surprisingly strong October industrial production reading. It is nevertheless a welcome development that manufacturers are becoming more positive on domestic demand. So are the CNBC-E consumption indices for November, which are creeping up. In sum, the latest real sector data, while all but rule out the dreaded W recovery, do not offer more than a very gradual revival.

As for the main events of the day, the Treasury and the Central Bank noted, in their annual Financing and Monetary Programs, that their baseline scenario is one without an IMF program. But even a casual look at the Financing Program reveals exactly why the IMF program would be a good idea. With lira rollover ratio at over 100 percent, fiscal dominance could be a drag on growth.

In this sense, the continuation of loan growth, to which Central Bank President Durmus Yilmaz alluded during the press conference for the Monetary Program, is a bane disguised as a boon. Crowding out has not been a real issue so far, as loan demand has remained weak. Thursday’s weekly lending data hint that potential borrowers will hit Chinese walls early in the year, when the Treasury’s redemption schedule is the heaviest.

Another case for the IMF could be built from the balance of payments. While Thursday’s surprisingly large October current account surplus will likely be revised downwards, as has been the case for the last three months, traces of the challenging external outlook can be seen in the capital account.

The weak FDI and portfolio flows, corporate deleveraging and normalization in net errors & omissions all seem to scream that, contrary to what many –including Fitch- claim, external financing will be challenging next year. The dismal capital outflow outlook also supports the tight liquidity argument, as it is not realistic to expect a large monetary expansion, and therefore an increase in financial sector’s debt absorption capacity, without an increase in net foreign assets.

In this sense, the Central Bank’s insistence that its bond-buying has nothing to do with the liquidity shortage is truly remarkable and equally understandable, as it would be disastrous if its actions were seen as fiscal accommodation. Although the Bank has deserted the earlier collateral argument in favor of technical reasons, Yimaz spent a lot of time at the press briefing talking about the liquidity squeeze, which he expects to materialize later in the year than I foresee.

It appears that Thursday’s box of chocolates was a mixture. While most commentators have tasted the sweet ones, I have been blessed with the bitter.

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