Friday, October 30, 2009
Wednesday, October 28, 2009
Simple cross country comparisons, which ignore the vastly different absorption capacity of countries, can be highly misleading. Fellow economist and friend Murat Ucer of Turkey Data Monitor summed up very well in a recent report:
So to those who keep telling us that the debt-to-GDP ratio is very low in Turkey, and hence further fiscal expansion and/or a very gradual adjustment are affordable, our response is unchanged: it’s not the level, but the speed (with which debt is rising), the maturity (still short at about 3 years on newly issued debt), and absorptive capacity (of financial markets) that are concerning us.
You can see below that debt has been rising quite fast recently, after having turned an inflection point during the summer of last year. As for the maturity, while the maturity of new debt is promising, average maturity is still way too low.
As for the absorptive capacity of markets, I think it is about to be tested soon; there are several ways of showing that, but I am leaving that to another post.
In sum, unless a big positive exogenous positive shock such as improvement in global risk appetite or an IMF agreement (the latter could also be considered endogenous in the sense that the challenging scenario can induce the PM change his mind on an agreement with the Fund), a tough year awauts the Treasury in 2010.
I always thought that journalists could make interesting stories out of flow data; the FT just loves EPFT, which publishes global fund flows, but their Turkish colleagues rarely pay attention to bond and equity flows data. So even though I would be careful before making the Brazil link, as correlation is not causation, I still like the piece on the return of the foreign investor.
No disaster without the IMF, says Finansbank Deputy Director Saruhan Dogan: I agree, as I stated clearly a couple of weeks ago. But it is not given that next year, interest rates will stay low while liquidity will be in abundance and Turkish Lira maturity terms will extend. If anything there will be tremendous upward pressure on rates, as the CBT starts hiking. I am not sure on liquidity, but some of the saturated demand for bonds will be channeled to credit, and the CBT is ready to intervene if liquidity gets too tight (look for OMOs in excess of TRY 20bn or so for that). As for lira maturity, it is already extending, but I doubt it will reach the levels to comfort markets.
Fitch follows Moody's with an outlook upgrade; a rating upgrade is on the way as well. Contrary to conventional wisdom, I do not think that Turkey deserves 2-3 notches of an upgrade; a one notch adjustment should brng to Turkey where it should be. Part of my objection is related to my view of debt, which I will refer to in a later post.
CBT lowers its inflation forecasts, albeit only marginally for 2010- 2011 stays the same.
Tuesday, October 27, 2009
Anyway, the bond traders I spoke to told me that locals do not want to take maturity risk at such low carry. Besides, there has been some foreigner sale as well. In any case, the latest Inflation Report also suggests that we have come more or less to the end of the easing cycle barring unexpected events.
On the positive side, the traders I talked to do not believe IMF is priced at all, pointing out that the recent decrease in reserve requirements supports this view. This means that, if there is a deal, bonds are sure to react strongly, not only because such a deal would affect the debt calculus profoundly, but also because it'd come as an unexpected shock...
Monday, October 26, 2009
As for the article, a really good commentary appeared on the Financial Times the same day as my column- definitely recommended reading, especially if you liked my pieces on the changing role of the IMF. I had never thought of this way, but as the authors suggest, rather than stating the obvious, that such measures will not work, the Fund should channel its energy into coming up with ways that they will. This fits in IMF's new role as well. It seems the Fund springs underneath every stone these days:)...
Brazil stole all attention last week with its 2 percent tax on portfolio inflows, igniting a discussion on not only whether it will work, but also on whether other countries will follow, with Turkey’s name coming up among the candidates.
On the first question, it is important to note this is not the first time Brazil is trying to put sand in the wheels. It had introduced a 1.5 percent tax in March 2008, only to drop it shortly after the Lehman collapse. Just as the previous attempt had not stemmed the real from rising, it is safe to assume that the measure will not have much effect, as the size of the tax is small compared to the underlying forces of appreciation.
Brazil’s problem is that the real could be strengthening not only because of capital flows, but also because of a permanent shift in the country’s terms of trade. While there is room for policy action for the former, at least theoretically, there is no easy fix to the latter other than a rise in productivity, which is definitely more easily said than done.
Terms of trade improvement or not, capital flows emanating from developed country central banks and looking for a new home with high returns had been with us since March, but have gained considerable pace in the last couple of months. According to Emerging Portfolio Fund Research, which collects data on dedicated emerging market (EM) fund flows, flows to EM bonds and equities have already surpassed 2006 and 2007 highs.
These loose cannons wandering around have, in turn, led to asset price booms in EMs across the globe and reawakened the familiar EM drama “fear of appreciations”, as central banks try to prevent their currencies from appreciating through intervention. With the resulting increase in foreign exchange reserves only partly sterilized, the domestic money supply expands, resulting in credit growth and unsustainable rises in asset prices. Looking at the forest rather than the individual trees, this process is also impeding the global rebalancing act needed to put the world economy back in track.
The Turkish case has been different from this textbook scenario in some small but important aspects. To begin with, the lira has performed worse than peers, having lost around 15-20 percent to comparison currencies such as the real, the South African rand and the Hungarian forint. Moreover, flows into equities and bonds have slowed down considerably in the last few months, with anecdotal evidence and banks’ off-balance sheet activity suggesting that much of the action is now in derivatives such as swaps. As for the Central Bank liquidity injections, they have almost exclusively channeled into bonds, and the resulting rally has been a boon not only for the banks holding the Treasuries but also for the Treasury issuing them.
Highlighting these differences is enough to make the case that Turkey is unlikely to enact a similar tax, but a simple comparison with Brazil yields more insights. For one thing, Brazil’s current and fiscal accounts are in better position than Turkey’s, making the former less in need in of capital inflows. Perhaps more importantly, interest rate differentials are also working in Brazil’s favor. While Brazilian officials have hinted that they are in no hurry to hike rates, with the country set to weather the recession with a slight contraction and inflation worries likely to emerge in 2010, the next direction for rates is up rather than down. The Central Bank of Turkey, on the other hand, has at least 50-75 basis points of cuts in its sleeve.
Brazil put sand in the wheels when it felt those wheels were turning too fast. Turkey cannot put any sand in the wheels because its wheels are stuck in the sand.
Friday, October 23, 2009
Unlike in earlier months, the yoy figures are not that different from last year, but last September was right the middle of the crisis, so I would not make too much out of this. But one thing is for sure: Although in an absolute sense, the crisis seems to have passes tangent to Turkish tourism, to use the PM's Econospeak, high growth rates in tourism came to a sudden halt with the crisis. In fact, as I argued in a Hurriyet column back in August, once you take this braking effect into account, Turkish tourism has not fared much better than other Mediterrenean countries such as Spain, Greece or Croatia.
A neat piece on the changing composition of Turkey's exports.
Mehmet Simsek prepares markets for the inconvenient truth: No IMF deal. But wait until the next large Treasury auction (early next year) and more IMF rumors will drive a rally:)
Last but not the least, I should I am glad David chose one of my more civilized quotes from my summary of the Meetings.
Yearly inflation will most likely shoot below 5%, as October inflation has come in at a sultry 2.6% mom last year. Then, we'll probably see inflation shoot up rapidly in the final months of the year, as there are no more base effects, ending the year at just below 6% (and shattering my otherwise immaculate number of the beast forecasts- but don't worry, I'll have my revenge next year).
Speaking of comments, one of my readers told me, on condition of anonymity, that he was at a meeting with bank CEOs recently and the financial center project was mocked upon. It is nice to know that I am not that crazy or pessimist after all....
As for my articles on the Fund's new face and clothes, I should say that after conversations with friends in the Fund and a bit more reading, I am even more convinced that we'll be seeing huge changes before the next Annual Meetings. But I should add that I bring up the issue with economists I trust, only to find that they are extremely pessimistic, and some of these guys are ex-Funders. The good thing is that if the Fund fails to deliver, there won't be much of a disappointment.
Monday, October 19, 2009
Although I love my editors at the paper, one thing we can not agree upon is referencing. I like to give full academic-style references to any papers I am referring to, while they do not like footnotes too much. Of course, I could reference the papers in the article, but then given that I only have 600 words or so space, I am reluctant to do that. So to make it easier for those who want to go ahead and read the papers, I have included hyperlinks to the papers.
In addition, I should tell that a conference call I had with analysts from Dr. Doom's aptly named Roubini Global Economics Monitor really helped me organize my ideas, so a "thanks" is due to them as well.
Just to give you a bit of a background, this savings discussion is not new: It started during the summer when internationally-known Turkish economist such as Dani Rodrik and Kemal Dervis highlighted that Turkey needed to increase its savings rate; Cevdet Akcay's response came at that time as a response to those arguments.
Finally, there is quite a bit of support for the reform argument in the latest Doing Business Report of the World Bank. In fact, one of the undersubscribed seminars at the Meetings was precisely on reforms. Although the official name of the Meetings is IMF-World Bank Annual Meetings, the World Bank part usually gets overlooked, and with the crisis and all that, this year would naturally be no exception. But I would have hoped that longer term issues in the Bank's sphere would not get as ignored. Anyway, a couple of newspapers/columnists did highlight recently Turkey's lackluster performance in these rankings in the past few years. I would not make too much out of the numbers per se, but anyone following the Turkish economy would agree that the government has been suffering from reform fatigue in the last two years.
'nough said; now to the column:
One of the big themes of the IMF-World Bank meetings was that global imbalances, widely seen as one of the underlying causes of the crisis, need to be corrected.
In fact, when you think about the great emerging market reserve buildup of the last decade, IMF’s efforts to broaden the flexible credit line and turn itself into a lender of last resort suddenly appear as a crucial part of this rebalancing act. A natural consequence of this process is that international capital flows will not reach the highs of the few years.
Such a transition and the new normal that is associated with it, which was outlined in an excellent article by bond investor Pimco’s Mohamed El-Erian at the end of last month, has important implications for the Turkish capital flows-induced growth model. Having opened its capital markets, secured customs union with the EU in 1996 and cleaned up its banks after the 2001 crisis, Turkey was in an excellent position to take advantage of the 2002-2007 liquidity glut.
Therefore, it was only natural that import dependency of exports rose considerably in the last decade, with 1996 and 2001 being inflection points. More surprising was the decline in the private savings rate, which Turkey’s demographics should have favored. Several notable economists I chatted with during the IMF-WB Meetings in Istanbul did indeed admit they were puzzled by the low savings.
Notwithstanding the fact that the theoretical relationship between demographics and savings is rather tricky, the impact of Turkey’s booming economy on its middle class has largely been ignored. YapiKredi economists Cevdet Akcay and Murat Can Aslak do show in a recent research note that the middle classes have been increasing their share of consumption in the past few years. A short drive around booming districts of Istanbul such as Umraniye and Gungoren, which have developed into buzzing consumption centers, confirm their findings.
Further evidence comes from a paper on the evolution and determinants of the savings rate by Murat Ucer and Caroline Van Rijckeghem. They relate the decline in savings to the post-crisis credit growth and housing price increases. While this means that the savings rate is expected to increase naturally in the next couple years, their detailed run-through of different policy options comes to the conclusion that there is no quick fix to the Turkish savings drought, especially in the short to medium-run.
Argentine economist Guillermo Calvo famously noted once that we do not know much more about Macroeconomics than accounting identities. In this case, the identity is the equality between the current account and the sum of the government and private sector savings-investment balances. If the global economy is indeed sailing to a new normal and increasing the savings rate will be a bit harder in practice than in academic papers, the onus of adjustment will have to be on the current account. This would mean less import dependency of exports, definitely much more easily said than done.
In the meantime, maybe we should also be questioning if the current Turkish growth model is really so undesirable or impossible to attain in the new normal. As Martin Wolf has been emphasizing, capital should be flowing to where it will have the most use. This is a point Cevdet Akcay has been making, as he questions export-led growth models.
But with a smaller pie, countries will scramble for scarcer capital by pushing ahead with reforms; at least, this was the impression I got from the IMF-WB meetings. In other words, it will be a world of survival of the fittest rather than party until dawn.
And those falling back on reforms may not find markets as forgiving as in the last decade.
Friday, October 16, 2009
BTW, the construction is still in progress, as I still have to archive my last three Hurriyet columns. Hopefully, I will be done with that over the weekend...
Monday, October 12, 2009
With the IMF-Turkey saga looking more like a Brazilian soap opera everyday and market expectations changing by the hour, I will not like speculate on the deal, opting for a rough guide instead.
I should state my position upfront: I favor an IMF deal. But I do not think Turkey will sink without one; it certainly will not. It is just that a sans-program scenario will surely be more costly than one with program. This is a point Economics tsar Babacan has emphasized quite a few times as well. But when I say more costly, I am not only thinking about interest rates, which will definitely be lower than what Turkey could borrow from markets, but also about financing and credibility.
The recent normalization in Turkey’s Balance of Payments has led to a wide misconception that external financing is no longer an issue. It has been forgotten that the current and capital accounts summed up to a deficit of nearly 20 billion dollars from the Lehman collapse to the markets’ trough in March, which was mainly financed by the Central Bank, or CBT, running down reserves and UFOs, or unidentified financing objects. With an external financing requirement expected to approach 100 billion dollars next year, continuing with the same set-up is simply asking for trouble.
Even if all goes well on the external financing front, there is the risk that the banking system will not be able to accommodate the private sector’s needs. For one thing, with the high redemptions schedule, especially in the early months of 2010, Treasury borrowing could start to bite on lending. Moreover, the Central Bank’s liquidity injection into the system through open market operations has been running very high recently, ringing alarm bells that the liquidity shortage could be permanent this time around.
Rough banking sector balance sheet calculations and statistical analysis suggest that the annual nominal loan growth consistent with a 3.5-4 percent recovery next year would be 10-15 percent. If lack of liquidity in the system and allocation what is available into bonds clog the lending pipes, the CBT could have to resort to the dangerous road of buying bonds on the secondary market.
As for credibility, maybe it’s just me, but I just do not understand the argument that Turkey could do without an IMF program if fiscal discipline were sustained. Sure, it can if the markets buy it from a government who has a really bad recent fiscal track record, is 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 candid remarks on his appetite for Central Bank independency. Anyway, the fiscal side of the Medium-Term Economic Program, or MTEP, has gone tangent to sustaining fiscal discipline, to use the PM's own Economics phrasebook, so this discussion is solely theoretical.
But things are not as bleak as they look. It is likely that the Fund is ready to accommodate Turkey more than ever. Evidence to this bold statement comes from the Fund’s aptly-named paper, Review of Recent Crisis Programs, which was presented at the IMF-WB Annual Meetings. While I summarized the presentation in my October 3 column, the key result regarding Turkey is that the fiscal easing allowed in the most recent 15 Stand-By Arrangements is only slightly tighter than that envisaged in the MTEP. Skipping such a good deal looks like a missed opportunity.
In the meantime, I am becoming extremely paranoiac when rumors of large IMF deals emerge just before large Treasury auctions. Maybe, I should reread the famous Lucas paper showing that governments cannot fool people as a tranquilizer.
Friday, October 9, 2009
Anyway, as I mentioned before, I wrote daily for Hurriyet Daily News during the meetings, so in case you prefer to read my columns here or in Facebook rather than in the Daily News web site, I'll be archiving them, according to the dates they were published in the paper, today...
Thursday, October 8, 2009
I am concluding my week-long coverage of the IMF-WB meetings with my impressions regarding Turkey.
Before I go on, I should say I was very disappointed by the Turkish delegation’s presentations, with the possible exception of the Central Bank of Turkey President Durmus Yilmaz. With the world coming out of a major crisis, I would have expected the delegation to highlight Turkey’s experience with past crises, particularly the 2001 vintage that handed the country a sounder banking system. Also, despite the growing importance of the G-20, especially given the responsibilities it bestowed on the IMF at Pittsburgh, I would have thought the delegation would play to Turkey’s membership in the club.
Instead, the emphasis was on making a financial center out of Istanbul and the Medium-Term Economic Program, or MTEP. The attendees did not take the former seriously and did not care about the latter. Especially entertaining were Econ tsar Babacan’s efforts to present the MTEP as an exit strategy, boldly claiming that Turkey was the first country that had enacted one. That seemed to bring a smile to quite a few faces.
As for the MTEP, opinion was divided, with the Turkish delegation and foreigners, with the possible exception of the still-cautious Fund, hopeful and locals equally cynical. Policymakers relayed their disappointment with the harsh local critics, noting that it has been tough to get the PM agree to even this much. Perhaps so, but this is no reason not to highlight the fiscal deficiencies of the program.
As for the Turkish economy, the attendees were divided on the underlying cause of the Great Turkish Contraction: The IMF laid the blame on the greater weight of manufacturing on GDP; Turkey’s durables have indeed been hit hard by the crisis. Others saw it as a typical case of capital account/ financing issue.
The World Bank noted that the poor had been hit very hard by the crisis in Turkey, highlighting the results of a recent survey conducted by the Bank, UNICEF and Economic Policy Research Institute, or EPRI, a think-tank in Ankara. Although the fact that unemployment doubled in a year is worrying by itself, the more scary part is the Bank’s finding that the incomes have been falling among the poor and self-employed.
Speaking of EPRI, the absence of Turkish think-tanks in the Meetings was a shame. This is partly because EPRI is the only real Economics think-tank in the country, which highlights the level of the intellectual policy debate. Another casual observation was the lack of Turkish presence in key events without celebrity speakers, two of which I have covered in previous columns. The quality of questions by the Turks, covering the whole range from the shoe incident to sector-specific requests and the standard anti-IMF rhetoric, was equally appalling.
The IMF and EU dilemmas
Another small detail I noticed was the relative lack of interest in the host country. This is perhaps understandable, as most of the attendees had more pressing issues in their minds, and the Turkish delegation did not help either, but I saw this as the only positive Turkey development of the Meetings. After all, you are usually at the table in the Meetings because you are in trouble, and next to Latvia, Ukraine or the financial sector, even Turkey looks OK. The one issue that came up repeatedly was the possibility of an IMF-Turkey deal. While I will cover the issue in detail on Monday, the general opinion was that while an agreement is not necessary, it will probably be beneficial.
Another topic relevant to Turkey was the EC’s response to crisis-stricken countries in Eastern Europe and the Baltics. While attendees were positive on the level of support to EU members like Latvia, Ukraine vice PM Hryhoriy Nemyria, LSE professor Willem Buiter and others were extremely critical of the EC’s ignorance of their troubled neighbors to the East. Even with Latvia, evidence on the EC success is mixed, as the Fund had to take as given the constraint of the pegged exchange rate. Buiter thought letting the exchange rate go would not have worked, as the real and nominal exchange rates are independent in small open economies, but I think that accelerating adoption of the euro at a depreciated exchange rate would have addressed his concerns. The Fund would probably agree with me, although they would never criticize the EC publicly. The lesson for Turkey is that the EU could not and should not replace the Fund as an Economics anchor.
The Meetings definitely put Istanbul on the map for a week, but I doubt Turkey made the most out of it…
Wednesday, October 7, 2009
Now that the IMF-WB Meetings are almost over, it is time to summarize my impressions from the seminars I attended as well as interviews and casual chats with the attendees.
The Istanbul Consensus
An Istanbul consensus has emerged, but at the least expected of places: The economics outlook. Independent of the shape, almost all attendees expected a slow US recovery. They were more bearish on other developed countries and more on emerging markets, especially Asia. There was also agreement that the woes of the financial system are far from over. I could say that the views in IMF’s WEO and GFSR reports accurately reflect the median attendee opinion.
Most attendees did not see inflation as a threat in the short-run; if anything, a few voiced deflation worries. But there was serious concern on the timing of monetary and fiscal exit strategies. The nightmare scenario is that inability or unwillingness to unwind at the right time could lead to inflation and a rise in long-term yields in the US, leading to yet another recessionary spiral. Martin Wolf, Financial Times Chief Economics Commentator declared that in this scenario, the dollar would collapse, and he was not the only one. However, this doomsday is still far away; no one expects these issues to be a problem before 2011. Finally, I have not yet met anyone who thinks that markets are reflecting fundamentals, but there is unsurprisingly huge divergence of opinion on the timing or amount of the correction.
The Supervitory Challenge
The attendees were less sure on the direction of regulation and supervision. This was one most controversial and discussed issues, precisely because the attendees were aware of the challenges. For one thing, the implicit financial sector guarantees have been made explicit during the past year. Moreover, finance is too large, powerful and smart: Without more efficient regulation and supervision, there is the risk that officials will be captured by the sector or end up chasing their own tails rather than the tail risks they are supposed to look out for. There is also the risk of overregulation, which would kill off all the beneficiary aspects of finance without touching the real issues.
Then, there is the problem that everybody loves credit, especially politicians. And Chuck Prince was actually right: You have to dance as long as the music is playing. So if a party-crasher comes out waving flags, she’d better be right! Therefore, you need stronger and more independent central banks, but actually, the trend is towards the opposite direction in most countries. In any case, giving policymakers more targets than instruments will be not only politically, but also technically feasible. Finally, one of the main lessons of the crisis is the danger of contagion from international financial linkages, so a national agency might not be able to identify all risks.
There is then an unequivocal demand for an independent body that can monitor the world economy not be afraid to raise flags when required, but there can be no supply of this service at the national level because of political and technical constraints. I know I am in the minority, but that’s why I see life ahead for the IMF-FSB initiative that I outlined yesterday.
In fact, while it was already beefed up in the past year, the Fund is surely emerging even stronger compared to a week ago. I am sure many disregarded Dominique Strauss-Kahn’s comments that “these would be the meetings we would tell our children about” as PR, but an interview with Lorenzo Giorgianni of the Strategy, Policy and Review Department of the Fund and a few informal chats have convinced me to give the benefit of doubt to the self-described socialist managing director. In fact, I would not be surprised to see profound changes in a couple of years in not only the instruments and workings of the Fund, but also its building blocks that could go as far as changes to the Articles of Agreement.
This is all good news: If anything, the Fund is turning to its roots: Keynes’ main ideas in the process leading to the Bretton Woods was the creation of an international reserve currency, the Bancor, and a lender of last resort. Although even high-ranking Chinese officials were frank to admit that we are very far away from the former, the latter might be much closer than we think.
What does all this mean for Turkey? What were the main issues that came up regarding the Turkish economy? This is where I will pick up tomorrow, the last in my week-long daily coverage of the Meetings.
Tuesday, October 6, 2009
The IMF has not only been tying to be more responsive to crisis-stricken countries, as I outlined in my weekend column, it has also been charged, along with the recently-beefed up Financial Stability Board (FSB), to identify vulnerabilities, warn of risks and prioritize policy recommendations. The two institutions were mandated to collaborate in conducting aptly-named early warning exercises (EWE) back in April, and the long-awaited initiative was unveiled at an undersubscribed seminar Sunday afternoon.
There is not much point in going over the details of the different mechanisms set in place. Suffice it to say that I have found the framework not a step, but rather a whole flight of stairs over the ill-fated early warning system (EWS) models of the nineties, which did a great job in predicting past crises but a very poor one in forecasting future ones. Not only the framework is much more sophisticated, it also takes into consideration the critiques of the likes of Nassim Nicholas Taleb, not only by concentrating on tail risks, i.e. Black Swans, and comovement of assets during crises, but also by adopting a more heuristic approach through making use of more qualitative indicators such as consultations with academics, market participants and policymakers. In fact, the Fund stresses that this is not an exercise in timing of crises, but one of alternative scenario analysis.
Since the whole philosophy of the exercise has changed, it is not much of an argument to declare the efforts pointless based on the Fund’s past forecasting performance. As Jeffrey Frankel of Harvard University recently noted, the crisis has already caused profound changes (and is likely to result in even more) in Macroeconomics thinking, so if anything, the IMF-FSB initiative should be applauded for being one of the early adopters.
But this does not mean that the EWE will be able to prevent all the crises all the time. Even if you have the perfect set-up, you just have to live with the fact that crises, by their nature, are unpredictable. The EWE efforts seem to have gone to great pains in incorporating lessons from the ongoing crisis, but the next major global turmoil will probably be entirely different in nature. But even if we end up getting an analogous crisis, it won’t be a walk in the park, as Jean-Pierre Landau from the Banque de France eloquently put:
First, there is the problem of signal extraction. The reason many could not see the crisis coming is the same reason Americans did not see Pearl Harbor coming despite all the indications. The signals that look so obvious in retrospect come bundled with a lot of clutter that make jumping to conclusions difficult. Moreover, even if the EWE extracts the right signals, whether to prick a bubble now or later is in fact a social welfare decision. I would not be surprised if an elected government would try to delay the adjustment as much as possible.
Then, there are the political issues: Even if the duo makes the right call, it will be very tough for a democratically-elected government to stop when the music is still playing. At the extreme, one can argue that the initiative may not have a viable future: For one thing, as the normal returns and the EWE starts raising false alarms, the exercise will lose its value added, as Peter Garber related from his own experience devising similar models at Deutsche Bank. While the framework can be adjusted to minimize erroneous whistleblowing, a major missed crisis will lead to the duo’s demise. Moreover, policymakers can never know for sure if there would have been a crisis if they had not heeded IMF-FSB’s advice, as Martin Wolf noted. They might see the nonoccurrence of crises not as the EWE working but proof that the exercise has outlived its use.
There is also the matter of communication: Economists have been aware of self-fulfilling crises and multiple equilibria for the past two decades. Simply put, the only thing worse than shouting “Fire!” in a crowded movie theater when the curtain is burning is to scream at the first sign of smoke, when in fact it is only the projectionist cooking. If you choose little or no communication, then you run the risk of losing credibility for lack of transparency and being accused of not having changed.
All these concerns are valid, but at the end of the day, someone needs to do this dirty work, and barring the operational glitches they too are aware of (after all, this is a work in progress), the IMF-FSB is in the best position to be the silent guardian, watchful guard that the world needs right now. In short, a dark knight…
Monday, October 5, 2009
And some confessions: While writing the column, I called up my friend Kaan Sariaydin to get his opinions on the issue as a market participant. It turns out that he has spent a lot of time thinking about it, and over the course of the next hour, he shared such valuable input with me that I offered to have a joint article. All the technical details in the second part of the article are from Kaan, and due to space constraints, I could use only a small portion of what he gave me. I also have to thank the editor-in-chief of Hurriyet Daily News, David Judson, for suggesting I write on this. My journalistic instincts are nowhere near as developed as his, as I had no idea I would get so many congratulatory remarks for the article.
BTW, the news items in the Turkish papers that appeared on Monday and Tuesday confirmed my gut feeling that the valiant efforts of the Turkish authorities would not be taken seriously by the attendees. Istanbul traffic was humorously cited as the biggest obstacle to Istanbul's, or rather the Turkish government's, aspirations; a joke that came up during my interview with Martin Wolf as well.
It is obvious that a lot of work has gone into the plan, for which the State Planning Organization (SPO) deserves praise. Seven broad areas have been determined: Enhancing legal infrastructure, increasing financial products and services, developing a simple and effective tax system, improving the regulatory and supervisory framework, augmenting infrastructure and boosting human capital. An organizational structure to monitor this workplan as well as to promote the city has been added in as well. All in all, 23 priorities have been revealed, along with 71 action plans to carry out these priorities.
We have yet to figure out how the seven main areas were determined. While they all make sense, it seems too much like a laundry list to us. In essence, the SAP has fallen into the Washington consensus trap: The World Bank and IMF had long been advocating a long list of reforms without identifying the binding constraints. Realization of this mistake has led to the Investment Climate Assessment framework in the Bank and focused conditionality in the Fund.
As for the actual determination of the priorities and actions, as one of us has been involved in a couple of such exercises with SPO, we are not that sure that, despite the best of intentions, they reflect responses to binding constraints. In such work groups, it is usually the loudest, not the wisest, who gets her ideas in. Another issue is benchmarking: Unless you are planning to tap into Martian or lunar colony funds, you’ll be competing with other centers, so you need to know how you compare to the competition. We believe this to be one of the fundamental deficiencies of the report. Without knowing binding constraints and relative performance, you wouldn’t know what you are getting for your buck.
But it is really the content that worries us. For one thing, to have a finance center, you need, well, financing. To start, the institutional investor base and institutional funds are still marginal in Turkey. With public placement low and most of what is out there grabbed by foreigners, there is not much of a domestic participation in the game. This leaves domestic financial institutions with very low placing power. The low free floating rate and corporate governance problems limit M&A activity, one of the symptoms of a well-functioning capitalist market. Despite great efforts from the ISE, there is no small or mid-cap market. Without much of project financing and venture capital companies, there is no real venture capital.
When you get into the nitty gritty stuff, it gets uglier. Just to give a few examples, it is impossible to hedge your delta by short-selling in the current set-up. Collateral usage of third parties is prohibited. The market maker is banned from offering a lower price to a big customer, and as a result, all the big deals go through New York or London. We could go on and on…
Does the SAP address these issues? Yes and no. The government could argue that one or more of the 23 priorities or the 71 action plans touch on these issues. For example, when you get the bottom of it, the binding constraints in the selective examples we have given seem to be concentrated in the institutional, legal and regulatory frameworks. So the government could point to the relevant sections of the report, some of which could get part of the job done, at least in theory, while others are just too vague to mean anything.
Of course, we could be wrong, but all this reeks of another case of opium to the masses.
Sunday, October 4, 2009
Coming to more serious stuff, Lorenzo told me more on the Latvian FX issue after the seminar, but I am not getting it here because as they say, what happens in the Meetings stays at the Meetings. We hope to do an interview with him tomorrow; if that materializes, I'll refer you to that interview.
Coinciding with the latest stint in the tragicomic efforts of the government to create a financial center out of Istanbul, one of the seminars in the meetings likely to have a lasting influence did not get the attention it deserved.
A Brave New Fund
One of the beneficiaries of the crisis has been the International Monetary Fund. Its existence questioned before the crisis, it has since then seen its influence grow virtually by the day. Recently, it was asked to help the G-20 with its analysis of how national or regional policy frameworks fit together at the Pittsburgh Summit. As noble as these and other initiatives may be, without some power to enforce its writ and, if necessary, wrath, I am not sure how this and other similar mechanisms will work out.
In the short run, the Fund will still be evaluated on its usual area of fame, how it helps out crisis-stricken countries. The Fund has been zealous in this area as well: While getting its resources tripled following the April G-20 Summit in London, it conducted a major overhaul of its lending policies. Of course, we would need to know if deed has indeed followed word, and a new paper by the Emerging Markets Division of the Strategy and Review Department, under the supervision of Lorenzo Giorgianni, who presented the paper at yesterday’s seminar, does exactly that.
Aptly named Review of Recent Crisis Programs, the paper evaluates the most recent 15 Stand-By Arrangements, in comparison to non-crisis countries in the current episode and past crises in terms of program design, fiscal policy, monetary & exchange rate policy, financial sector policies and crisis recovery.
The results are striking: Program countries have usually fared much better than crisis-stricken countries during previous episodes of turmoil and not much worse than non-program countries. For example, output losses have been comparable to non-program countries, once you account for differences in initial conditions, and external balance adjustments more modest relative to the past. Perhaps most importantly, sharp moves in interest & exchange rates and banking crises, ghosts of crises past, have been largely avoided. What has worked the magic?
For one thing, IMF support has been rapid and frontloaded, as well as being directed to the funding needs of the private and public sectors, rather than simply deposited in Central Bank coffers as in the past. Program ownership has been ensured by working with the full range of exchange rate regimes, enacting capital controls where necessary and working with institutional constraints such as the EU. Conditionality has been more focused than in the past, with the Fund opting for fewer conditions essential to the success of a program rather than a comprehensive laundry list.
With the adequate financing pouring in, there has been much more room for an expansionary policy stance, and the Fund has been glad to oblige. It used to be Mostly Fiscal, but fiscal policy has been more accommodative than in the past, keeping in mind medium-term sustainability. In fact, there is not much of a difference in fiscal stance between program and non-program countries once controlling for initial conditions. The same has been true of monetary policy, with program countries easing monetary policy, albeit to a lesser degree than non-program countries.
What about Latvia?
One striking feature of the report is that Latvia and Iceland emerge as exceptions to the rule, glitches in an otherwise-perfect track record. Iceland’s case is special, as it was hit with a major banking crisis before the global turmoil began. But the woes of Latvia beg for further scrutiny, and there are hints sprinkled throughout the report.
When you add everything up, it seems that Latvia’s plight had much to do with its pegged exchange rate, as its room to maneuver was severely limited. With prices (the exchange rate) unable to adjust, it was the quantities (GDP) that took the burden of adjustment. The report summarizes the immediate economic costs of abandoning the peg, referring to country reports for the benefits. I am not sure costs would have outweighed benefits if only economic costs were considered.
Latvia’s troubles bring to mind important questions: Is the EU the right economic anchor? Where does the jurisdiction of the IMF end and that of the EU start? The euro area has been deemed a success story, as the sovereign spreads of the lax Mediterraneans have been shielded by the stoic brother up north. Look further east, and the Latvians are sighing with envy.
Saturday, October 3, 2009
-3 out of 4 families cutting expenditures in Turkey- from a survey- probably the same survey as used in the ECA meeting.
- document from WB on LICs, presented to G-20, was taken as basis for discussion- must read in the next few days!
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Praised Fund's need for fiscal expansion- would have been as deep if not so good intellectual work.
Q. Does debt threaten macho and fiscal stability?
A: very country specific. UK, US, JP debt gdp ratios projected scary! But EM projections in G-20 likely decline in long run.
Q. How get them down?
A. Fund proposed many rules. WWII good example, but some differences. There will have to tax inc., bigger red in spending. In EM, problem much much smaller. Consolidation will req. Delicate mix of exit from fis. And mon. Policy. Doug XXXX has nice ppt on multipliers, and mon. Pol. Makes a big difference in effectiveness of fiscal policy.
Coordination Issue: was essential when world facing collapse when faced with son of great depression:) it is not as critical now as less than a year ago (I need to expand on that).
Then, he discussed Israel: lesson: we were in strong position when crisis began. Not that fiscal policy doesn't matter but how you go in determines how rapidly you go out. I hope Fund goes to help put fiscal houses in order...
We have boring fin system, was criticism, now compliment.
Will discuss how we got fiscal sustain ability.
Do budget annually on January
Moved quickly from surplus to deficit: reduce taxes, spending for job losing people, workshare programs.
Our lesson: 70sa we had deficit spending and public debt, accepted by public until noticed that tax money was going to interest.
Discipline and we had balance budgets. They use private sector forecasts for growth- has brought credibility to projections, now changing because hardly a consensus.
Use it or lose it policy to funding to regions,Temp measures to unemployed: half of deficit. For two years then we depend on growth, if growth less, we cut spending.
I encourage you to contain spending (advice to PM).
RWANDA minister or economic planning:
Not many notes as a result of massacre of Shakespearian and my own Inonu-like hearing problems. sorry:(....
What to do with limited needs?
Alejandro (MEXICO, ex-IMF)
I will talk about general fiscal policy, exit strategies and Mexico.
Key Idea in stimulis frameworks to concentrate on hardest-hit. Put this in programs right now so to be ready for next crisis.
Calculate steady state debt dynamics- measure fiscal adjustment, how we'll reach new steady state. Put adjustment ASAP. Optimal design. Frontload these because 1. political will to sustain these, sooner we cut, better 2. Credibility effects for LR adjustments. 3. Uncertainty of adjustment will effect private sector decisions. So accelerate design and discussion of programs- exit strategies. Mexico: severely hit by recession, gdp contraction like TR (keske bizde de boyel adam olsaydi). We were liq,but had solvency issues. We face fiscal problem associated with decline production of oil. So we have temporary and permanent shocks. Transitory will be done with deficit and nonrecurrent revenues. Permanent by increase in non-oil revenues, so increase income tax. We protect anti-poverty and infrastructure problems to compensate effects of recession.
Q: PM complaining about CBT independence. Gov does MTFR, fiscal rule? Is priority fiscal rule or creating jobs. Questioner CHP MP, I think.
A.SF:I don't follow Turkey closely anymore. Current priority is to get out of recession.
Q. What policies should be used by G-20?
A. Canada: coordination.
Q: what about exit? Are there objective criteria for exit.
A. Canada: when is when we see recovery for sure- sustained growth for a couple of quarters before implement exit strategy. Mexico: country-specific, need to balance out.
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PLH: Tough times. Global loosening of mon fis policy. Signs of recovery. Families under stress as breadwinner lose jobs+ food and oil price hikes made hh go deep in pockets. U going up, poverty growing. Danger is weak and jobless recovery. Financing needs highest in ECA by widest margin.
1. Clean up banking
2. Improve business climate
3. Make public exp. Efficient
4. Continue inv. In infrastructure.
I will share this message with Fin Min in next few days.
Bad news- crisis not close to over in ECA, esp. For workers and families but also true for gov. Working with smaller budgets.
- good news for businesses: IP stopped falling mid-year but external debt usd 350bn due.
- bad news for families: U, poverty- stress tests bad
- tough times for gov: fiscal def from 1.5-5.5; stress tests show pension def rising to 5-6 percent GDP.
IP stopped contracting in Q2. Interest rates come down for gov and firms but still twice before crisis.
Business regulations better! (TR bir bok yapmadi burada)
But huge debt obligations due
So mixed news for firms
Bad news for hh
Poverty rising throughout region
Numbers do not tell you how worse people become
Surveys in TR and Montenegro says people use access to utilities
Rising job losses: TR one of hardest hit- in TR doubled. (Rise in registered u)
ISKUR data used for TR
Incomes in TR falling
Reg U tip in iceberg: survey from june: self-employed especially hard
Income losses+ fuel+ finance: difficult to pay bills
HH hit fin, product, labor markets!
HH stress tests show distress:
1. Many poor hh insolvent before crisis (find graph for Turkey).
3. If public many used , it should be targeted at poor hh
- countries making small progress in fiscal until crisis. Em changed 2008, 2009 for rest. This year all deficits.
Most countries did not save in goof times
- asked to do more with less!
- social assistance for needy
- soc second for elderly
Social assistance programs good in region and well-targeted (compare graphs for TR).
- reforms needed for social second, but possible: adjust pensions to COLAs, improves a lot! Increase retirement age, even more (purple line)
Good news for firms, no good shoots for workers!!!
Tighter money ahead (lowe growth, higher deficit)- smaller deficits for government.
So need fiscal consolidation, not indis. cuts. More efficiency of spending. But not easy, so we are helping out.
Last slide shows how they are helping out.
Q. Speed up reforms says reports. Are they doing well?
A. Difficult to generalize, but look at Doing Business report, region doing well. Risk is reforms stopping, don't forget EE convergence was mainly due to private. debt inflows. Now none so make sure there is rollover.
Q. Is EC doing well?
A. Yes, and coordination mechanism working as well.
Q. Can you talk about Baltics?
Baltics hit but they got demand inc. With inflows from Scandinavian, so important that these banks do not withdraw. IL: these are very small economies, so they needed to integrate markets. They did very well before crises, are giving back gains, but not all. On EU: I think done well in helping integrate markets, institutions. Q is whether this integration can continue. Key is strong institutions. Anecdote: german consumers bought cars in poland, this is well designed program, not national.
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Friday, October 2, 2009
I'll give my current outlook. 6 questions:
1. Current Outlook: shape of the recovery: V, U (like me), W.
2. ROW. Bottoming out- light at the end of the tunnel in Asia? Can china and EM be new locomotive.
3. Financial institutions in the US.
4. Whether inflation or deflation?
5. Exit strategies from monetary and fiscal stimulus. If too soon, back to recession, if too long and monetize deficits, uppppps....
6. What's been happening in mkts since March? How much of recovery by fundamentals? How much too quick, too fast?
1st observation: first we had freefall. Fall last year PM that had been in denial looked at freefall and decided to act with full force. Different degrees but most did. That stopped free fall, in Q2 rate of decrease. Close to bottom now. What is shape of recovery:
US: anemic, well before potential. Why? Job condition awful. Compared to january better, but still high compared to previous recession. Firms cuts hours, reduction wages etc, so impact on con. Bad
2nd obs: this was a credit of excessive debt, leverage. Develeraging is not occurring right now- massive releveraging of public sector.
5 reasons why recovery weak:
1. Consumer in trouble- it makes much of gdp.
2. Financial system still in trouble. Also destruction of shadow banking- SIVs, securitization, delevearing by priv. Eq, hedge funds.
3. Corporate sector: we have with so much debt they are lucky the don't shut down. Even others will not do much cap reasons because there is glut of capacity and because there won't be rapid growth in profitability.
4. We need fiscals stimulis. But large deficits crowd out private sector.
5. In last decade, we had imbalances.
I am more worried because:
1. Potential growth lower
2. Productivity will not improve by much.
More bullish because;
1. Did not have as much leverage
2. Good financial systems.
3. Potential growth rate higher. Already
Recovery in some.
4. Have room for countercyclical policy.
But could they be locomotive of growth? No. China not big enough!
Could they fully de couple? No. There is already some decoupling, but if growth weak in main, they won't go to rates before.
Was a sound econ. at eve of crisis. Corporate sector stopped capex. Reversal of capital flows. But since banking sector robust, no baling crises like other EM.
Prospects for TR: 1.since open econ. If eurozone robust, good for TR
2. Fiscal consolidation very important. Is the mt fiscal sustainability OK? IMF will be + for investors-confidence. Does not need IMF money, but signalling effects will be important.
TR will also do reforms, taxation reforms, flexibility in labor markets, liabilities in social security and healthcare. You need to diversify exports.
INFLATiOn DEFLATION: in short ruin deflation because 1.firms do nor have much pricing power. 2. Slack in labor markets. Slack in good and labor markets imply deflation. We have deflation today in many countries. In world more def than inf pressure. Wall of liq: not inflationary because lack of velocity. This liq go to assets, but not to goods. But next year inf risk because 1. If mon deficits, expected inflation could get out of control 2. Wall of money chasing commodities. 3. Usd main currency of carry trade, could lead to inf because of FX, through inverse relationship with comm. prices
V. EXIT STRATEGY; 2 edged shitty stick:)!!! If you don't if difficult to inc taxes, the bond mkt vigilantes will be worried- 8:52:18 PM bond yields inc- stagflation! Very narrow and razor-edged. Double dip risk is here.
VI. ASSET MKTS: Rally since march. Some warranted by fundamentals. Because L was being priced; that tail risk has been reduced by mon fis easing and backstopping of fin. Sector. There is now light at end of tunnel. 3. Risk aversion lower, so moving to more risky assets. Why do I worry about relapse? If recovery weak, 3 reasons for mkt correction in risky assets.
1. If U rather V, will be worse than expected.
2. Surprise on downside on earnings and profits. If rec anemic, quantity not growing, curring prices, so revenue anemic. Better results because slashing costs, but can't go on forever.
3. If high U, weakness of fin system bigger. Real estate prices lower, credit card losses.
CONCLUSION: either V shaped recovery or markets adjust (something's gotta give).If I am right, after new year, weaker than expected, than commodity prices, stocks, credit will correct. EM risky because money rushing to EM- they increased more than developed. But will not be as in March.
ED: so the light at the end of the tunnel is the train!
Q: where will liq. Go to?
A: still very easy, O rate, sharp increase in money. Chinese bank credit one third went to real estate, commodity. IN my view, USD70 too high for oil. USD 100 next year will have same impact next year as USD 145 last year.
Q: what would happen to USD?
A: this is long-run; will be gradual process if us does not fix econ and fiscal, if uses inflation tax to fix debt problem. But a gradual fall of dollar is necessary. Most of usd adjustment can not be EUR YEN. Others, and this is necessary and beneficial.
Taylan: Q: are you concerned it will be business as usual now assets have rallied?
A: definitely. Agency problems, etc. G20 list has to be immediate sooner than later. More liq, more cap, less lev, imposing higher cap charger in sys important fin inst, broader cooperation in regulation. If you are too large and interconnected you have to be supervised. G20 agreed we'll see if implemented. Definitely risk of complacency.
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DSK remarks: is worried about unemployment a lot. 1.We have to make sure exit strategy is too early. He is happy fin. Min. Arer aware of this. 2. We have to make sure financial sector fixed. 3. We have had econ. cooperation in the last few months. In Pittsburgh, we got very firm will form economic cooperation.
3 principles which I will elaborate later in the day:
1. We need sustained econ. Cooperation., same with all IMF members as in Pittsburg.
2. We absolutely ned to improve financial stability- means better supervision and regulation.
3. IMF itself: we need stable financial mon. System for IMF to be lender of lasr resort. Imbalances come from reserves- very costly- which was at the founders of IMF (ED: this is related to FCL). How can we provide credibility and legitimacy to IMF for being lender of last resort? This was in the minds of the institution.
This is necessary for peace and democracy!!!
This won't be solved in a couple of days, but this meeting will be the starting point of new IMF- you can tell your grandchildren one day.
Q: what about Tobin tax?
A: very old idea. I don't think it will work for technical reasons- difficult to implement.But we will prepare a report on some modified version. Lipsky: we need to look more broadly than deposit insurance.
Q: IMF has been unable to discipline largest member.
A: 65 years you are right, 65 days no. It was possible because we were right. If what we say is true, we can the convince. That's what happened with stimulus.
Q: you said IMF will be machinery for Implementing G-20. How will you deal with FX?
A: 2 points. 1.cooperation is also about imbalances. I was impressed by collective problem solving. We need to solve q together.2. G-2O understands that connections between countries is complicated.
A: we no longer advocate same program everywhere. We need to adapt programs. But fiscal deficits is a common factor in all countries.
Meeting comes at very important point after G-20- to make sure poor countries are heard this is G-186!
It is important G-20 support developing countries.
Q. Are you getting money from rich countries? What is money runs out?
A: For IBRD, we came to crisis well-capitalized.
Q. Biggest challenge for global, Turkish economy.
Global: fall into complacency. Referred to IMF WEO. Cycle of recovery: stimulus spending in us comes in 2009 2010- will there be spillover from public to private sector. There will be differences: china will face challenge because high credit growth. You are getting signs of inf. In east asia. If they wait for us, inflation risk, if they don't, will have capital rushing in. Trade and protectionism risk as well.
Turkey: MTEP loolks sound to us. Issue with jobs and employment. We reposnded by focusing on SMEs.
A:Trade: opportunities for south south trade.
How can we help trade facilitation?- we work on that.
Q: U is growing. What is WB point of view?
A: I agree. U will continue to go up, slow in down. We got lessons from 97 crisis that it is important to focus on safety net support.
As an unofficial kickoff to the IMF-World Bank Annual Meetings in Istanbul, the IMF disclosed the main chapters of its Global Financial Stability Report (GFSR) and World Economic Outlook (WEO) on Wednesday and Thursday.
Main takes from the GFSR…
First, the Fund notes that credit supply has been retracting faster than demand, leading to credit constraints. While this mechanism is likely to play out somewhat differently in Turkey, with the credit demand expected to increase as the economy recovers, the result will be similar, as the private sector is likely to hit credit constraints in 2010.
In the Turkish context, with the private sector lending crowded out by banks' appetite for Treasuries, a consequence of the high rollover ratios, it remains to be seen if the Central Bank will start buying Treasuries to unclog credit markets directly, as rate cuts have had limited impact on market rates so far. While the Fund recommends continued support from Central Banks to alleviate credit constraints, I wonder how they would feel about quantitative easing a la Turca, as the risk that such policy will be perceived as fiscal accommodation or debt monetization hangs like a sword of Damocles.
Second, IMF analysis suggests that there is a risk that the high fiscal deficits could lead to a rise in long-term interest rates. As Turkish Treasuries are more responsive than usually believed to core market long-term rates, such a bear steepener would create upward pressure on Turkish rates, forcing the Central Bank to abandon its on-hold policy earlier than expected, in effect changing the lead-lag relationship between the benchmark and the policy rate.
Third, the report notes that Turkey's largest risk is in external debt refinancing needs, with the bulk coming from corporate rollovers. The Fund’s analysis of contributions to changes in emerging market (EM) sovereign external spreads is also worth a look: Increased risk appetite accounts for most of the decline in spreads in the second quarter. I doubt the picture has changed much since then, and it is safe to claim that a retraction in risk appetite is probably the single largest risk to EM assets at the moment.
And the WEO…
IMF Chief Economist Olivier Blanchard’s take on the so-called recovery was one of the most sound sum-ups of the current situation I have heard. While he did not say it in exactly this manner, Blanchard highlighted the difference between rates and levels, whether it be debt or GDP: While consumers are deleveraging and banks getting rids of toxic assets, levels are still too high to support a quick recovery.
And a very slow recovery it will be, if history could be any guide. According to the Fund’s estimates in the analytical chapters of the WEO, GDP/capita declines by about 10 percent of its pre-crisis trend after a crisis, failing to rebound seven years after the crisis.
As is the norm with such meetings, where carefully-prepared texts are read without changing a single punctuation mark, the most interesting insights came in the Q&A session that followed. For example, Blanchard remarked that a fiscal rule, without the necessary structural reforms to accompany, would not amount to much. His comments should ring bells in those introducing black-box fiscal rules, while at the same time fiercely resisting much-needed reforms.
As for the Turkey forecasts, the Fund’s projection of 6.5 percent contraction this year and a recovery of 3.7 percent in the next are almost identical to my own estimates. More interesting is the Fund’s take on the Great Turkish Contraction: Jörg Decressin, chief of the World Economic Studies Division, surprised me by attributing the large decline in Turkish growth in the first half of the year to the larger cyclicality of the economy, due to the greater share of manufacturing in GDP.
While this is a valid point, I doubt it would be enough to explain the large contraction. I maintain my view that with its healthy & unleveraged financial sector and growth not led by exports, Turkey was in a position to be one of the countries that the crisis could really pass tangent to, but ended up as one of the worst effected, mainly due to bad policy management.
Perhaps most interestingly, the Central Bank’s credibility problem has now spread to the IMF: While the Fund’s average inflation projection of 6.2 percent is line with the Bank’s end-year forecast, the Fund sees inflation heading north next year, in contrast to the Bank’s expectation of lower inflation.