Friday, December 31, 2010

It is almost midnight... least in Turkey. So I just wanted to wish all a Happy New Year!

The Fab. 4 once said money can't buy you love, and economists are still debating whether it can buy happiness, although it is common thing to throw in the utility function, either directly or as consumption (you need money to consume, after all). 
So I am not sure if anyone would say no to yet another drop of money from Helicopter Ben or his ECB counterparts. In fact, it was these two who, with all their liquidity injections, caused an inflow of return-hungry capital to emerging markets like Turkey. But as a result, your friendly neighborhood economist's 2011 projections were all messed up. More importantly, as recently admitted by CBT Governor Durmus Yilmaz especially the latest ECB measures drove Turkey to what I deem as weird and dangerous policy mix

Therefore, there are quite a few people in Turkey who believe money can't buy happiness, but there is still nothing preventing me from wishing a Happy New Year, with or without money...

Just had the brightest idea....

...but not about Economics:)....

I have noticed that I have quite a but of expat readers, and I sometimes get quite interesting emails from them on their experiences in Turkey. Some of them are travails of living in a country with a very different corporate culture. Others are observations that your friendly neighborhood economist, despite having lived in the U.S. for more than a decade, just takes for given because of the pure Turkish blood flowing in his veins.

In addition, I have quite a bit of expat friends, who also share with me sometimes tragic, sometimes comic stories (many times both). They also tell me about their problems, from serious issues like property ownership (or rather lack of), residence difficulties, outright corruption and swindling to not being able to get a turkey in Turkey:)...

However, they often times do not want  make their comments publicly available, sometimes for fear of repercussions, other times just out of privacy concerns. But these are very valuable insights, and I hate to see them told to only a select few.  So I came up with this idea: Why don't I start a blog in Blogger or Wordpress and give access to the expats. who want to contribute. If they wanted to, they could keep their IDs hidden, giving them the needed anonymity. 

I am aware there are forums that serve this purpose, but the idea here is not discussion, just recounting tales. And I am hoping the contributions will be more than a few sentences.... In fact, I just received a long email from a friend about her (her is my default BTW, for PC purposes) horrid experiences at her workplace, which gave me the idea. She definitely does not want her writings to be publicized, but she could have easily posted them anonymously to the blog after XXXing the name of her company and other identifiable "marks"....  

Anyway, my first New Year's resolution is to talk to my expat. friends and see how they feel about this. If I get enough encouragement (and promise they will contribute), we may see this becoming a reality in the first days of 2011.... And if the material is good enough, which I am sure it will, I may as well edit it into a travel book, with the proceeds going to a charity of the authors' choice...

Thursday, December 30, 2010

Another riddle

I think the most interesting thing about today's trade figures is the lower than expected export turnout. I was not surprised at all, as I was expecting exactly 9.4 billion liras. That's because the preliminary export figures, released by Turkish Exporters Association on the first day of the following month, are usually a very good predictor of the official figures released during the last day of the following month. You probably know by now; I believe that a picture is worth more than a thousand words:

But this brought to my mind the couple of episodes on the graph where the relationship has broken down. I am wondering why....

Unlike the previous riddle, I really have no idea this time around, so I won't be posting any answer, unless I have a sudden Eureka episode... But note that other deviations from the relationship tend to group together, and there is another grouping like the current one... And the two groups entail figures from late 2008, early 2009, around and right after the Lehman crash.... Now, I am getting curious:)....

Planning on Next Week's column

If nothing important comes up, or if I don't change my mind at the last minute:), I am planning to go over my 2010 forecasts (how accurate they were) as well as outline my 2011 projections on Monday. I am still struggling with a bunch of Excel sheets and Eviews, running regressions and linking spreadsheets and all that, while at the same time going through the early columns of the year for the 2010 projections. 

As for the 2010 report card, it seems I have a mixed performance: On one hand, I did not expect capital flows to be so strong this year, but I guess no one did. As a result, growth came in much larger than I expected, which also messed up my other projections: The deficit came in lower than expected, mainly on the back of stronger than expected tax revenues, but also smaller than expected expenditures- both lower interest payment and non-interest expenditures- I would have expected pork barrel spending before the elections to have been stronger this year. Similarly, the current account deficit was much larger than expected, an artifact of the strong growth this year. But I was once again right on target with inflation.

On the other hand, I was once again right on target with my policy predictions. I did not mind being in the minority when I claimed the IMF Standby Arrangement and the fiscal rule would not go through. And they didn't. I did not have access to any private information or anything; being a good reader and movie fan, I had read Aziz Nesin's famous satire Zubuk and watched Vizontele, so I immediately noticed the small-town merchant (that is kucuk kasaba tuccari for you Turkish speakers) tactics the government was employing:)...

Then, there is monetary policy, which warrants a separate paragraph: For the first 11 months of the year, the Bank was quite predictable, except for once, when I got under the impression that the Bank would start hiking during the summer, and on live TV at that, prompting the TV host to wonder what I had been smoking- I don't know what I was smoking. But then things got messy in December.

OK, enough reporting; I am getting back to my Excel sheets and Eviews so that I can get the projections done by Sunday...

Book impressions and a small observation on Muslim backwardness

I was meaning to write this post for a long time, but first it took me quite a bit of time to finish it: I started reading Amin Maalouf's The Crusades Through Arab Eyes in Turkish, but then decided to use it to practice my French when I got hold of the original through a friend- that kind of slowed me down:), and then I constantly delayed writing about it, until this morning, when I managed to find half an hour to squeeze it in...

I am not planning on a full-fledged review; Amazon has plenty of that. Neither I want to delve too much into what I learned about reasons behind Islam's falling behind. Some of them, like the differences in bequests in Christian and Muslim societies (the former leaves the lands to the eldest male child, the latter to all the children, resulting in land wars throughout the more than two centuries covered in the book), are very obvious to observe throughout the book. But you'd be much better to read those from Timur Kuran and other academics who have written about it. 

I wouldn't bet I am the first one to see this, but my small insight comes from the way the two societies (Christian and Muslim) have been learning from each other: In the book, you see many many Christians who speak Arabic and know Arabic customs very well.  But the same does not go for Arabs: There are so few Arabs who actually know their enemy well. As a result, most of the learning highway is a one-way street!

I am not even attempting to hypothesize the reasons behind this observation: Maybe, it reflects a general inclination for visitors to adapt, rather than cultural or religious differences. But the impression I got from the book was that this crucial difference played an important role, not only during the crusades, but afterward as well...

Wednesday, December 29, 2010

Another Double Single...

...single meaning in the top 10 most popular and most-read in the Daily News site on Monday:
The pictures above and below are from the Hurriyet Daily News front page on Monday:
By the way, apologies if this seems like one of the Se7en sins to you. I assure you it is not: As I mentioned before, since it has been established that I have an inflated ego, I am just acting like I really have one:)...

A couple of recommendations for Turkish-speakers...

First, it seems Dani & Pinar have started to be heard in Turkey. They had a couple of interviews in CNN-Turk in the last few days, one of which is available online. The interview is more about their experiences rather than actual Ergenekon stuff, so if you are interested in the latter, I would still recommend their book

Also, I discovered a well-hidden gem a couple of days ago. My good friend (or rather abi, i.e. big brother, but rest assured, he does not watch anyone) Atilla Yesilada, who has been quoted by your friendly neighborhood economist a couple of times recently, has this great TV program in Cem TV in the mornings: He basically reads and comments on the news, along with his pretty co-host (nope, I wouldn't want to be interviewed by her, for fear of Atilla Abi; he is the sweetest guy, but I am sure he would kodu mu otutturur if he wanted to (sorry for the Turkish, but I am assuming you already know some Turkish if you are reading this post anyway). Anyway, reading newspaper headlines and commenting is standard morning fare for many Turkish TV and radio stations, but what makes Atilla unique is his extremely sharp and smart commentary. And he is also extremely funny in a satirical kind of way: For example, he recently ended his comments about a bogus-academic, well-connected university president (see how different my style is) with the words: "We respect your academic credentials and follow your research closely":):):) Anyway, he has it every morning (or at least weekdays) 0800-1000 (0100-0200 EST, 0600-0800 GMT), so definitely give it a go: My guess is that if you are reading this blog or my columns, you'll love Atilla!!! And in case I didn't tell you, they have live broadcasts from their web page, so you don't have to be in Turkey, in front of a TV....

Tuesday, December 28, 2010

Addendum to Monday's riddle

Kidneythief/AliG poses another question for Monday's riddle:
One question though: I believe the CBT might have supplied less liquidity on those particular days, which would limit volatility. However it chose not to in order to show the market that it means business. Am I right about this ?
He is right, to some degree. As I always say, a picture is more than a thousand words:
As you can see, there has definitely been that going on December 9th, but not on December 23. But starting December 24th, the Central bank's repo funding has started to retreat strongly. While the graph is only until Friday, the plunge has continued since then, with repo funding currently at around 11 billion liras.

But I think it may just be an end-year effect. Let's wait until next week and see what happens...

Monday, December 27, 2010

A Small Riddle

Have a look at the picture below, where I have graphed the bid and ask rates for the overnight, compliments, as always, of my friends at Turkey Data Monitor:
Can you guess why the overnight has plunged two times? Is there anything particular about those times/dates?

I will be posting the answer as a comment to the post when the hour strikes midnight... Just trying to put a bit of spice to the blog; feel free to post your answer as a comment to the post...

Weekly Hurriyet Column: How the Turk stole Christmas

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News media webeditor since March, you won't see much of a difference between the two. As for the title, I guess it is quite obvious this time around...

As for an addendum, I don't have any real extra info., but have two very important announcements, which I posted at the comments section of the column as well. First, the undercover economist is Tim Harford, not Tim HarTford. I always misspell his name because I did my undergrad. in Connecticut in the U.S., whose capital is Hartford. But sincere apologies to Tim, who is one of my favorite FT columnists.

I also got a couple of email questions on the robustness of my methodology, so a disclaimer is in order: There is definitely more work needed to confirm my quick & dirty take. In that sense, I hope that a real academic, not a knockoff one like your favorite Turkey economist, like my friend Liran or someone else reading this column, will apply a more rigorous methodology- similar to Liran & co.'s paper. The appropriate way to do this would be with a survey or with actual Bayram spending patterns- as more mentions in a newspaper could mean several things. But for now, it does seem, based on my back of the envelope calculations, that there is indeed a "competition effect" going on. And by the way, I did all my comparisons with the previous and following years; comparing mentions in 2000 with 2010 would not make sense because of the way the paper's structure and internet browsing patterns have changed... You could of course include all kinds of time dummies, but I am not sure a regression is the way to with only ten years of data:)....

Anyway, without more delay, on to the column:

Although I am not tired of writing about Turkish monetary policy, I suspect some of my readers could be sick of reading about it, given the attention it has been getting in the papers.

Therefore, while I am referring the interested reader to my blog for the Central Bank’s rabbit-pulling during the past week, I would like to talk about a topic more suited to the spirit of the holidays: How Turks stole Christmas.

Of course, Turks did not really steal Christmas; they just tweaked it around a bit and combined it with New Year’s so that Saint Nick, the presents and the pine tree, the whole nine yards, have all been nearly integrated into New Year’s, which is conveniently close in the calendar.

The integration is so perfect that even your friendly neighborhood economist never fully understood the difference between the two during his secondary school studies at Robert College, an American high school in Istanbul with quite a bit of Christian teachers, until he went on to study in the United States.

While Hürriyet Daily News & Economic Review’s Editor-in-Chief David Judson neatly summarizes the Turkification of Christmas, along with a sweet story, in his latest Southbound, he does not attempt to answer the more interesting questions such as how and why.

The answers to those questions would have been easier if New Year’s had to compete with Christmas. In a recent paper first brought to my attention by the Financial Times’ Undercover Economist Tim Hartford, three economists, one of whom happens to be an old classmate, found that Jews living in the U.S. give more prominence to Hanukkah, a minor Jewish holiday usually celebrated in December, than Israelis.

There is also an intra-country effect: In the U.S., the effect is stronger in Jewish American families living in Gentile neighborhoods and sending their children to Christian schools. Interestingly enough, families with children under 18 celebrate Hanukkah more strongly, hinting that parents are, in Tim Hartford’s words, simply “compelled to fight fire with fire” by creating a substitute Christmas.

Coming back to Turkey, it is plausible that the globalization of Christmas, as part of the globalization of the culture of the only superpower, has made it necessary for everyone to find a surrogate Christmas in a holiday nearby on the calendar. In other words, if my friend Liran & co. were to widen to scope of their study, they would find a Yuletide effect in most holidays close to Christmas.

But whatever the reason for it, the ingenious Turkish solution allows us to test if there is indeed a “competition effect” in Turkey. Despite the careful disguise, New Year’s is a secular holiday not celebrated as much by pious, conservative Turks. Therefore, it would be interesting to see how the Muslim holidays would compete with the Turkish hybrid Christmas-New Year’s.

The moving nature of the Ramadan and Kurban bayram holidays has allowed me to conduct a simple time series analysis, motivated by the budding science of culturomics. Using the online archives of the Daily News’ godfather Hürriyet, I found a surge in words related to the Kurban holiday in 2007, which showed up both right before and after New Year’s that year. There is also a very strong Ramadan effect in 2000, when the holiday was just a couple of days before New Year’s.

And if you are wondering, I am in this for pure curiosity. I personally prefer Festivus, a holiday for the rest of us. But still, a belated Merry Christmas & Hanukkah, as well as an early Happy New Year to everyone from your favorite Turkish economist.

I know it sounds even cheesier than my cheesy movie-homage titles, but I am going to say it anyway: See you next year!

* Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

Sunday, December 26, 2010

The Sore Loser Monetary Policy Watch, Christmas edition

Quite a few monetary policy developments have taken place during this past week, so a new round of my proprietary TSL MPW is in order.

First, Governor Yilmaz presented the Monetary and Exchange Rate Policy framework on Tuesday. Other than trivial details such as changing of the time of the MPC and FX auctions,  and semi-trivial details such as the CBT would monitor off-balance sheet activities of banks (translation: required reserves on funds through swap operations), I think Citi economists summarize it well when they note the CBT has diluted the inflation framework further: For the better or the worse, the Bank is acting as if it is targeting the current account deficit and/or credit growth!

That theme was even more apparent in Econ czar Babacan's meeting with bank CEOs the next day. The czar had summoned the executives to discuss developments in the Turkish economy and finance sector in 2010 and the 2011 outlook & expectations as well as the latest policies regarding the banks- at least, this is what the press release on the meeting was saying.

It seems that the bankers got some info. on and justification for the current account / credit growth targeting, as well as some numbers on the government's targets- 5.4 percent of GDP current account deficit and 25 percent credit growth. A page from the presentation of Yilmaz, who was present in the meetings as well, to the bankers is especially informative regarding this new framework:
The equation linking current account deficit to credit growth is just a simplification of the capital account, the mirror image of the current account in the Balance of Payments. FYI, here are the main items of the capital account, compliments of friends at Turkey Data Monitor, who have gone to great pains for preparing this table:
While I do not doubt the equation, I have a couple of reservations with this approach: For one thing, just check out the numbers and decide for yourselves if the "other" items are so trivial to group under one item. Besides, there is even a simpler equation, mentioned in the previous slide:
Now, wouldn't it be easier to do something about the public sector savings gap to tackle the deficit? But as I argued before, we are about to enter an election year.

Finally, I have an issue with the credit growth target: Credit grew around 30 percent this year, and with the economy growing at least 8 percent at that! Credit growth of 25 percent would have been quite attainable even without any precautions next year- except unless the CBT/government is projecting very strong capital flows- I would have loved to see their complete projections in Excel...

Anyway, as a general point, I feel that the CBT and the government are creating a lot of uncertainty with regards to their economic goals. I am not saying this as a positive or negative judgment, I felt that the uncertainty created by the Bank back in September and November was more beneficial and than harmful, and it has worked well in many respects, such as the drastic decrease in the share of overnight in total repos and steepening of the yield curve.

But I am not so sure this time around, as many economists are still trying to grasp what exactly the government and the Bank are trying to do. This is because the government/CBT want to react to global events that may have conflicting policy responses and have just too many objectives at the end of the day. This point is elaborated by Atilla Yesilada in a column at his Bilgeekonomist website. He also underlines that although the government and the CBT have identified the symptoms very well, they are not sure about how to treat the illness. I am not sure if Atilla would agree with me, but I think this is really where the confusion is coming from.

BTW, I see more and more often that an understanding between the relationship between different sectors of the economy (real, monetary, BOP, fiscal) is necessary to have a god grasp on what the CBT is doing. Luckily, I have a very good exercise, suited to people who know the basic relationships, on how the different accounts are linked. Try to work through the questions, check your answers and go through the explanations. Of course, if you have nothing better to do on a Sunday night....

Thursday, December 23, 2010

CHP's Economic Policy???

I was going to do a new version of my TSL MPW, i.e. The Sore Loser Monetary Policy Watch, but I need to get something off my chest first.

The main opposition Republican People's Party, or CHP, had an extraordinary convention on Saturday. The media was quick to jump to headlines such as extra coverage of the new members of the Party Council, the purging of the remaining footsoldiers of the ex-Leader and ex-Secretary General of the party, speculation on who would be one of the fifteen members of the Central Administration Committee, etc etc...

The CHP's economics agenda unfortunately did not get the same attention, although Kilicdaroglu devoted a large portion of his speech to it, making concrete promises: His main focus was inequality, the young & the workers and women. Some of his headlines were a minimum guaranteed income to families (not a good idea in terms of incentives), higher pensions (good luck), end to non-tenured, part-time civil service employment (to make sure everyone there slacks off even more), employment guarantee to all through private and state-sector initiatives (typical politician's promise), abolishing special consumption taxes on gas (go ahead, but you have to increase tax compliance first).

And I am only mentioning the main items. If I were to criticize every little detail of his economics agenda, I'd end up with a book soon. For example, his promise abolishing university fees sounds nice to ears, but does not solve the much-bigger problem that many under-privileged youths are not able to attend university in the first place.

The speech itself confirms U.S. Consulate's take:) on the CHP's economic agenda in its recently-Wikileaked cable on the Turkish economy:
Interestingly enough, the main opposition Republican People’s Party has been unable to spell out a coherent economics agenda so far. As in politics, these elitist ankle-biters are suffering from status-quo bias. Moreover, they have serious issues with main free market economics ideas such as privatization and foreign investment, leaving the business community with no viable alternative to the AKP.
Ibrahim Turkmen points at some of the most obvious inconsistencies in the Economics section of Kilicdaroglu's speech in Today's Zaman. Seyfettin Gursel of Radikal seems to share my thoughts (in Turkish) on the CHP's economics policy. Like him, I will stop here rather than present a fuller analysis like Mr. Turkmen, as the longer I dwell on it, the madder I get. Besides, the party is supposed to publish its Economics Program in full in August. While I'll give them the benefit of doubt by waiting for a full critique until then, I have to say I am not very hopeful at all... 

But at least I have the perfect anti-cyclical fiscal policy at hand, thanks to an email from Hans-Peter Geissen to a bunch of journalists/columnists (in response to Mr. Turkmen's column), including your friendly neighborhood economist:
As to the question how to finance the resulting budget deficits, I suggest to introduce a prayer tax, an elegant multi-purpose financial instrument. For instance, it is basically income-independent. So it doesn't matter if income goes up, or down, whether it is a Thank You prayer or a desperate cry for help, or whatsoever. Tax income per prayer remains the same.
Say, the prayer tax is one lira per prayer. Given the enormous and supposedly rising piety in Turkey, impressive sums may be collected (or not actually collected, admittedly, yet still having a book-value).
You might even see a perfect economic copy of the perpetuum mobile. If the economy takes a rapid downturn when K. approaches the office -as can be expected- people will start to pray more and more, and again more. Hence, the prayer-tax earnings will climb to unimaginable heights, so fueling the state-economic upswing K. plans. It will be a real wealth tax.
On the other hand, sober calculators may embrace atheism so as not to pay the tax (or accumulate tax debts), which in turn favors secular lifestyles. To the contrary, most AKP supporters may pay and pay for K.'s success.
You think that nobody can assess the real number of anybody's prayers? But beware! K. knows how to find any sums, somehow.
This way, as Mr. Geissen notes, there will be enough funds if Mr. Kilicdaroglu is in power. I, for one, am sure to pay shitloads (pardon my French) of this tax, given Mr. Kilcidaroglu's recent words of wisdom that the CHP could easily tackle capital flows after taking control of the Central Bank:) I rest my case....

Wednesday, December 22, 2010

Roubini Post: ‘Confuzzled’ by the Central Bank of Turkey

This post already appeared in Hurriyet Daily News this week; Roubini Global Economics Emerging Markets EconoMonitor is just republishing it, but I just wanted to cross-link for the readers who might have missed it the first time around...

There is also an addendum in the blog. Although I do not say anything new, I provide a neat summary of, as well as hyperlinks to, my previous writings (and a related article on RGE) on the CBT's latest rabbit-pulling out of its monetary policy.

BTW, I will have a real addendum on yesterday's Monetary and FX Strategy later tonight in the blog, which I may submit to RGE as well. As a spoiler: I believe the CBT is now in implicit-non inflation targeting or implicit current account targeting mode... Bad, very very bad, as Babuuuuuuuuu would say.

Tuesday, December 21, 2010

My Double Single

Since I cannot seem to convince one of my readers that I do not have an inflated ego, I had better act like I have one:
This is the front page of the Hurriyet Daily News & Economic Review late last night. As you can see from the list of most popular articles (news or columns) at the lower right corner, your friendly neighborhood economist took home the gold yet again. Moreover, the column managed to get into to top ten most-commented as well, allowing me my first single-double:
Joking aside, I am much more happy about the latter, as I really enjoy the active comments section. So thanks again to everyone who has commented to my columns....

Where the Exhange Rate is going

As I always say, a picture is worth more than a thousand words:
If you were to believe the owners of Fortuna Restaurant in Marmaris, who are renowned for their excellent doner, we'll see real parity (EURUSD=1), as well as USDTRY=1. Naturally, that would mean EURUSD=1 as well...

P.S. It is a common custom in down South to offer tourists favorable exchange rates, but honestly I had never seen such an extreme.

Joking aside, this bring me to rationality: I wonder who actually pays the bill in Euros:) I mean you could be too lazy to walk to the nearest change office or the change office might be closed, but there is always the credit card. But maybe there are indeed some things money can't buy, like the Mastercard ad says- like rationality...

Turkish Housing Bubble (Again)

The part that caught the Turkish media's attention most of the IMF's Second Post-Program Monitoring Discussions, Preliminary Conclusions for Turkey was the warnings about housing bubble, even though the Fund obviously did not use that word. Here's what they had to say:
In the context of dynamic housing construction, rapid growth of housing loans (including withdrawal of equity), and credit concentration to both developers and end-buyers for the same property pose risks if unchecked. We welcome the BRSA’s decision to establish legal ceilings on loan-to-value for residential and all other real estate loans no higher than required for securitized mortgages. In addition, raising the Resource Utilization Support Fund levy on new housing credits to the level applicable to other loans, and eliminating preferential tax treatment of real estate investment companies would help.
Nothing mysterious here, but it was enough to enrage the Association of Real Estate Investment Companies, or GYODER, who had talked very positive about the Fund's visit to them a couple of weeks ago, and for the Daily News, as well as most other Turkish papers, to run stories about the Turkish housing bubble.

Part of this is semantics, it depends on what you mean by bubble, but by going from prices, there is hardly a bubble. Rent inflation from TurksStat's official CPI figures has been tame for a long while, and Garanti house price statistics show that house prices, barring a few regional exceptions, have barely moved in the past year.
On the other hand, the Fund is also right that housing loan looks strong, despite coming from a very low base (housing loans still make up only 5% of GDP):
How come such strong housing loans have not spilled over to housing and rent prices? The answer lies in, IMHO, the real housing problem of Turkey, which I spelled out at the end of November in my HDNER column and than over at Roubini Global Economics a couple of weeks later: Despite robust demand, the even-stronger supply has kept a wedge between supply and demand. And based on the latest statistics, this wedge is unlikely to go away: On the contrary, it is likely to grow over the course of the next couple of years.

When you combine this with the fact that household leveraging is still very low in Turkey and the fact that the BRSA and the Central Bank are already taking precautions about strong housing loan growth, it is clear that we are not faced with a U.S. type housing bubble. If you'd have to pick a country, the Turkish case is more similar to Spain's boom and bust episode.

But what makes the Turkish case likely to fold into a drama as (if) it unfolds is the fact that, as the Fund notes as well, the same bank lends both to the developer and end-buyer. That's kind of like putting all your eggs in one basket....

Monday, December 20, 2010

Weekly Hurriyet Column: ‘Confuzzled’ by the Central Bank

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News media webeditor since March, you won't see much of a difference between the two. As for the title, it is a quote from a great movie I watched recently

As for an addendum, I don't have much to say for a change, except that interested readers can refer to my recent Roubini Global Economics contribution, where I elaborate in detail on some of the points I make here. But I need to recommend a must-read compliment to my writings: I mention several times, explicitly or implicitly, that hiking the reserve requirement is likely to increase the credit interest rate marginally and could even increase the quantity of liquidity. The reasoning for the former is that banks could pass over the hikes to deposit rates or just live with lower profits, if depositors are able to wield their power. As for the latter, the idea is that the Central Bank, by lowering the policy rate, guarantees providing liquidity at this rate; if it doesn't the market rate will go up. I just found out that blogger and economist Chevelle expands on this compact explanation at her blog Models & Agents. Since the editors at RGE brought the piece to my attention, I am duly linking it to the RGE Economonitor version of this excellent piece.

Without more delay, on to the column:

The Central Bank of Turkey, or CBT, did not surprise at all on Thursday when it cut the policy rate from 7 to 6.5 percent. Friday’s reserve requirement hikes were in line with expectations as well.

At first, markets did not take the hints at the Bank’s Financial Stability Report on Dec. 7 seriously. That’s when Deputy Governor Erdem Başçı, calling in a last-minute weekend meeting at the Turkish Economic Association, clearly spelled out the Bank’s new policy strategy. It is necessary to explain the rationale behind the measures before discussing whether they will work.

The Bank is reacting to liquidity emanating from the quantitative easing of the developed world finding its way to Turkey in the form of short-term capital flows. As the other side of the same coin, the current account deficit is growing from two distinct channels: First, because of the cheap and abundant borrowing, credit, domestic demand and imports are rising. In addition, imports are shooting up because of the real appreciation of the lira.

The Bank argues that increasing the policy rate, while reducing the current account deficit from the first channel, would have the opposite effect from the second channel: Higher interest rates would bring in more hot money and appreciate the lira even further. Therefore, it is tightening non-interest tools, like reserves, to curb credit growth, while at the same time decreasing the policy rate to limit currency appreciation.

When explained in this way, it looks quite plausible that the measures will actually work. But the devil is in the details, and when I look at the details, I can see many reasons to be confuzzled, i.e. confused and puzzled.

For one thing, one of the main objectives of the Bank’s new measures is to extend maturities of domestic and foreign borrowing and deposits. The CBT’s earlier measures have already been successful to some degree towards that goal. For example, the share of overnight in repos has decreased from one half to one third in the past month.

But the average maturity of deposits is only a couple of months, with 40 percent of total deposits concentrated in 30,000 accounts over 1 million liras. Given depositors’ power, the measures could be ineffective, or even reduce the marginal propensity to save rather than push deposits to longer maturities, as the Bank is hoping, worsen the country's private savings problem and widen the current account deficit further.

Besides, new lending is only partly financed by repos or domestic liquidity. So it is not all that clear how effective these measures targeting onshore liquidity will be as long as offshore liquidity continues to pour on.

That’s where the rate cut is supposed to help, but as the IMF is underlining in a recent note, expectations that interest rates will remain low would encourage financial and real sectors to lengthen their duration mismatches. That’s why the Bank has made no explicit reference to the future trajectory of policy rates on Thursday, but I doubt it will be enough.

Similarly, the Bank’s liquidity management is contradicting its new framework as well. For example, the CBT is not addressing base money growth through open-market operations, or fully sterilizing its foreign exchange interventions, as it knows doing so would create upward pressures on interest rates.

All this conpuzzlement could have easily been avoided: As the Fund emphasizes, “a tighter fiscal policy [would] lessen demand for resources, decrease pressure on prices and imports, and by raising government deposits, support the CBT’s efforts to absorb liquidity”.

Unfortunately, that is ruled out by the general elections, leaving us with risky policies with uncertain consequences.

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

Presentation mystery solved (and on CBT communication)

After getting confuzzled (have a look my latest Hurriyet column to see what this word means) by Erdem Basci's missing presentation, I emailed a few economist/journalist friends on what they thought was going on.

An economist friend found the presentation under Remarks/Remarks by Deputy Governors. I have no idea why it was moved there just after one day in the "new items" on the main page. The only explanation, which another economist friend gave, is that they might have wanted to emphasize the Governor's presentation over the weekend. But whatever the reason, this does not bode well for good communication.

And I think this is a general point: I was thinking, until the last couple of weeks, that the Bank was doing an outstanding job in the communications department, especially during their implementation of the exit strategy as well as their more recent efforts in fighting capital flows/lira appreciation, which included pretty novel ideas.

And those efforts worked, partly due to the cleverness of the good policies, but also due to good communication: For example, in the month and a half, the yield curve steepened and the share of overnight in total repos tumbled from one half to one third.

But then, I think they really blew it with the announcement of the new policy strategy, which they hinted first in the Financial Stability Report on December 7. Markets did not heed the hints simply because the FSR is not place for such drastic policy change announcements. Then, the Bank probably got worried because of the market indifference, as the Bank was planning to implement the measures next week at the MPC meeting, so what do they do? Deputy Governor Erdem Baci scheduled a weekend presentation at the Turkish Economic Association, where he spelled out the new strategy.

Let me cut down to the chase: This is not the way to communicate major policy change. That belongs to a large, carefully-written policy strategy document, or at least a well-planned speech by the Governor. I cannot grasp why the Central Bank chose not to wait until tomorrow's 2011 Monetary and Exchange Rate Policy meeting. It is true that they would have missed Thursday's MPC meeting, but then you could have gone ahead and uses something similar to Governor Yilmaz's weekend presentation in Konya, which is much more detailed and explanatory than the Basci presentations.

Unfortunately, I see the same trend in the MPC one-pager: There is a very important rationale for not making markets complacent about low policy rates, which I spell out in my latest column. In this respect, I feel that "It should be emphasized that any new data or information may lead the
Committee to revise its stance." is just not strong enough (the Turkish version is a bit stronger, but still...).

Finally, from my conversations / email exchanges with economists and finance professionals, I can assure you I am not in the minority opinion this time around!...

Sunday, December 19, 2010

Non-economics book by economists

By Dani Rodrik and Pinar Dogan:
If you don't know Turkish or the background, Dani and his wife Pinar have written about the inconsistencies in the Ergenekon case, for which Pinar's father Cetin Dogan, a retired army general, is being tried.

I intend to devote this blog to matters of Economics only, so I will not share my valued! thoughts on the matter. But let me say one thing: When I mention to people about their blog, where they have been sharing their findings for some time, the most common complaint I get is that it is impossible for them to be objective on this matter. Why I do agree with the reservations, anyone who has followed their blog regularly can confirm that they carry on their scientific objectivity. I know this did sound like President Abdullah Gul vouching for the Kayseri mayor accused of corruption a day after saying that he is impartial and cannot comment on such matters, but still.... Have a look at the blog and decide for yourselves; there are quite a few posts in English.

BTW, I plan to read the book once it is published in the next few days, and I am thinking about writing a review then. And there goes my "economics-only policy" down the garbage drain:)- so much for being resolute and principled:):):)

BTWW, there is more info about the book on the publisher's web site. And if you want to buy it, they have contact info. on their web site as well.

Saturday, December 18, 2010

New Kid on the Block

I just found out that Haluk Burumcekci, chief economist of Fortis Turkey and ex-Referans columnist, has joined the short (but hopefully of high-caliber) list of Hurriyet Daily News & Economics Review economicsa columnists.

I kind of knew that he was getting on board; just didn't know when, but I am glad it is sooner than later, although he beat me to the 2011 forecasts- I probably will not be able to write mine for another 3 weeks or so. Anyway, he will be writing Fridays. With me on Monday, academic Erdogan Alkin on Tuesday and market economist Haluk Burumcekci on Friday, I believe we have quite a good mix. If it were up to me, I would have guest columnists for the remaining two days, and we would be all set....

BTW, if you speak Turkish, Haluk Burumcekci has an Economics blog in Turkish...

Friday, December 17, 2010

TSL MPW: The Sore Loser Monetary Policy Watch

A friend commented on my remark in my last Roubini Global Economics Economonitor contribution, that markets had made fool of central banks all the way from the United States to China: He duly noted that CBT had made a fool of the market including all the big names, or those big only in names, throughout the last two years in Turkey, concluding that such remarks under heavy losses would amount to being a sore loser.

While he is a good friend, he is known not to mince his words, but still, I don't think think he was shooting at me, especially because you are I am the messenger and the implicit rule is that you just don't shoot the messenger... Besides, I am not a big name at all; if anything, I am a no-name (another pointless hyperlink, but God, I miss that place and the Greek philosopher-waiter working there). Anyway, he concludes by noting that we are all fallible, and better to act as such, and I have been quite at ease with admitting to being made a fool by the Central Bank of Turkey several times...

Nor do I think that he was aiming at Atilla Yesilada, from whom I was quoting... I think his arrows were rather pointing at the overconfident, dark-suited dudes seemingly spending a lot of dough on styling gel, who happen to crowd the country's main business channels (yep, I am jealous, it is the cat and the liver deal- I only appeared in Atilla's program at CemTv once, although I would prefer his program any day, unless getting laid with the anchor-chicks is included in the others; maybe I should just call up and ask about that to one of the slick-hair dudes). 

But his comments gave me the idea for the title of my just-inaugurated Monetary Policy Watch: The Sore Loser Central Bank of Turkey Monetary Policy Watch, or TSL MPW... If anything, it should indeed be a reminder that we are all indeed fallible, especially against a Central Bank that has huge advantages against tactless market economists like me commenting on its policies, both in terms of available data and human capital (research power)...

And without further chit-chat, allow me to directly jump in:

As I noted yesterday, there wasn't much of a surprise in yesterday's rate decision, with the policy rate cut 50 basis points, as expected. The Bank also widened the band between its overnight borrowing and lending rates, making more room for the market rates to wonder around. The move is also geared towards the Bank's long-term goal of smoothing financial intermediation by encouraging banks to deal with each other rather than with each other.

And this morning came the expected reserve requirement hike, and it is, again as expected, maturity-dependent: Before, it was a flat-out 6 percent for all maturities. Now, it  is 8 percent for deposits with maturities up to one month, 7 percent for deposits with maturities of three to six months, 6 percent for deposits with maturities of six to twelve months and 5 percent for longer-maturity deposits. With nearly one half of deposits at a maturity of less than there months (and almost all less than six months), a static weighted average calculation, without considering the maturity implications of the hikes, means the the effective required reserve hike is about 1.5 percent. The Bank is also closing loopholes in the balance sheet by making retail repos liable to reserve requirements as well.

One interesting implication of these reserve hikes will be on base money: While the measures are expected to decrease liquidity about 7.6 billion liras & 200 million dollars, without a decline on Bank's liquidity injections, base money will go up (this is not economic theory, just balance sheet accounting). Why is this a problem? With so much money around, the reserve hikes are likely to be passed on to deposit rather than loan rates, which would beat the purpose of the hikes. Note that if it chose to, the CBT could very easily cut liquidity to prevent base money growth, especially since the banks will be much more dependent on the Central Bank's one-week repo funding from now on. But doing so, as I noted in the last Roubini piece, would create upward pressures on interest rates. The same old dilemma reemerging....

Finally, one important lesson of the previous week was to never ignore Central Bank presentations, especially those by Erdem Basci. So I immediately had a look at his Wednesday presentation at the ECB High-Level Policy Workshop on Macroprudential Policy when it was posted on the Bank's web site this morning. It is in English, so feel free to have a look, but let me go over what I deem important:
  • Slide 9: Using the wedge between the Bank's overnight lending and borrowing rates, i.e. the corridor, has been mentioned as early as the Bank's exit strategy report.
  • Slides 13-16: Nice summary of the Bank's policy tools.
  • Slide 21 Communications: I would still argue such important strategy change does not belong in Inflation and Financial Stability reports. It is also interesting, but not the least surprising that Mr. Basci's last-minute presentation at the Turkish Economy Association is not listed: I would not call that effective communication at all.
P.S. The presentation has mysteriously disappeared from the Central Bank's main web site. It is still accessible when you click on it, but for some reason, it is not where new stuff is placed. I became suspicious and went over the presentation again, and surely, there is nothing that should be kept from the public eye at all. I have no idea what's going on, but this definitely is not good communication:)...

Thursday, December 16, 2010

Roubini Post: Turkey: To Cut or Not to Cut

This post already appeared in the blog yesterday; Roubini Global Economics Emerging Markets EconoMonitor is just republishing it, but I just wanted to cross-link for the readers who might have missed it the first time around...

There is an addendum in the blog as well, if you are interested. And if you haven't heard already, no surprises in the CBT rate decision (English version not available yet), as far as I can see: The Bank cut the policy rate 50bp, from 7 to 6.50 percent, as expected. And it also increased the gap between its overnight borrowing and lending rates, by cutting the former from 1.75 to 1.50 percent, and the latter from 8.75 to 9 percent. This is in line with the Bank's goal of ending its dual presence as a lender and borrower, i.e. increase intrabank lending...

BTW,  I just saw, when I checked thee CBT web site for the English version of the MPC one-pager, I saw that the English translation of the famous Basci presentation is now available. So here's the English version of the slide I explain in the piece:
I think I already said what I would like to say about the rate cut, so I don't think I will have another addendum. But I'll just wait and see the probable reserve requirement hike and the market reaction tomorrow before I scribble anything...

Yet another addendum to an addendum:)

I wrote this in the morning, but things came in the way before I had a chance to post it. But it is still up-to-date, or at least for the next 15 minutes, until the rate decision...

I need to say add a couple of things to my yesterday's take on the CBT's new policy strategy, which also appeared in Roubini Global Economics.

First, I have read several reports taking yesterday's November budget release as supportive of policy rate cuts. On the face of it, with a surplus of 4.6 billion liras in the central government budget, compared to November 2009's deficit of 1.2 billion, the figures do look strong. Even after you account for last year's VAT collection of 2 billion that spilled over to the following month as well as this year's 1 billion interest revenue, this is still a significant improvement over last year. Honestly, I would have expected the government to open up the coffers a bit in the final two months of the year. Overall, revenue and expenditure performance has been commendable so far:
Given this year's strong growth, revenue performance is not a big shocker, but expenditures have been reined in (my editor friend doesn't like this word, I think it is one of the many abuses of Shakesperian by economists, but what the hell) so far.

But this is mostly cyclical performance: You would need a reduction in the structural deficit for the sort of fiscal support I was asking for yesterday.

At this point, I am really wondering how fiscally responsible the government will perform in the first half of year, and honestly, I am starting to be hopeful. But then again, as I explained in yesterday's piece, if the government would not open up the coffers, then the CBT would not have to sail in uncharted waters with its policy rate easing/non-policy tools tightening strategy. Yet another dilemma.... Go figure....

But speaking of the budget, VAT imports allow me to have a vague idea about where imports are heading- the relationship used to be quite good, but it has kind of broken down of late, see for yourself:
Anyway, while I will not attempt a formal imports projection, a significant positive surprise in imports does not seem very likely...

Finally, to get back to the matter at hand, I read a couple of comments supportive of CBT's policy at this morning's Radikal, one by none other an ex-CBT Vice Governor nonetheless. One of the arguments is that the Central Bank is now pursuing a two policy goals (price and financial stability)m and for that it would need two policy tools, a principle first noted by Tinbergen, the first winner of Economics Nobel Prize.

I would not counter this rule, but just to the statement that the CBT is pursuing two policy goals.On the face of it, the CBT's two main goals are controlling inflation and hot money flows. The exchange rate, the current account and domestic lending could all be put under hot money. But then what about growth? In fact, I was doing another round of email exchanges with my usual gang this morning, and one of the team summarized the Bank's new direction as "curbing hot money without hindering growth"?

Anyway, I know I can be confusing at times- that's because I am confused by all this as well:) But a recent note by the Turkey economists of Citi illustrates all my reservations.
To close, have since it is already past market-close time, have a look at how the markets reacted today:
We have about 15 minutes or so to the rate decision, so I'd better post this, before it becomes totally worthless:)...

Wednesday, December 15, 2010

Addendum to Roubini/Hurriyet columns: To cut or not to cut

Although I claimed it would be unwise to do so at the end of my latest Roubini Global Economics contribution (updated version of this week's Hurriyet column, although the updating only changes one word, "credible" to "wise" in the last sentence, as the weekend presentation has made it credible all right), it looks likely that the CBT will be cutting the policy rate tomorrow: Vice Governor Erdem Basci, noted as the most likely successor to Governor Yilmaz in a U.S. Istanbul Consulate WikiLeaked cable,  in an emergency presentation at the Turkish Economic Association, clearly spelled out that a policy rate cut would be on the agenda at tomorrow's MPC meeting.

The overheating argument I spelled out in the Hurriyet/Roubini columns is only a part of the picture. To see what is going on, it is important to understand the Central Bank's rationale before getting into a discussion on whether this will work and the potential Turkish asset price consequences.

What is the Bank's rationale:

In one sentence, to deter capital flows and address the current account deficit & loan growth. Note that a casual look at the latest Balance of Payments, or BOP, statistics tells you that these two issues are intertwined: The most significant contribution to the October capital account, i.e. financing of the current account deficit, was from short-term bank borrowing. Turkish banks borrowed net $2.1 billion in short-term loans from abroad in October, roughly the same amount as in September and a  record-number. Those figures look really nice when graphed alongside loan growth:
So you know where the banks' loan growth is coming from...

Note that cutting the policy rate is only part of the picture: In his presentation, Mr. Basci is hinting at a two-tier strategy: The idea is that short-term lira rates could be decreased to deter lira appreciation, while at the same time hiking reserve requirements for banks in order to rein in credit creation.

And what's the rationale for their action? To (liberally) translate slide 5 of the presentation: "Increasing the policy rate, while it would reduce the current account deficit from the credit channel, it would have the opposite effect from the currency channel. It is not possible to halt the widening current account deficit via short-term rates, the basic policy tool of the Central Bank, alone. Therefore, tightening non-interest tools to curb credit growth, while at the same time decreasing the policy rate in a controlled fashion to limit currency appreciation, has emerged as the ideal policy response to the widening current account deficit." (footnote to my perennial spammer: you win! Once again, I have no analysis, just quotes)

Mr. Basci's presentation contains more details: As their goals, he notes that they would like to lengthen the maturity of both deposits and capital flows as well as a steeper curve in deposits and swaps. In addition, he is explicitly saying they would want to make short-term swap rates more volatile than long-term swap rates, to discourage carry-traders, just as they had done when they cut the overnight borrowing rate.

Will it work?

It is possible, but I personally don't buy it. First, it is unlikely that the hot money flows will be too much affected by a 50 or 100 basis points cut in the policy rate, even though the rising U.S. Treasury rates are working in the Bank's favor of late (sorry for the double axis, but it makes my point much clearer):
On the contrary, it is equally likely that that the falling rates will cause a rally in Treasuries and equities, attracting even more hot money.  And the other details of the Bank's great current account reduction scheme are not without problems, either. For example, with the average maturity of deposits only a couple of months, it is also equally likely that the rate cut would reduce the marginal propensity to save rather than channel deposits to longer maturities, as the Bank is hoping, worsen the country's private savings problem and widen the current account deficit further as a result.

But let's give the Bank the benefit of the doubt and assume that it managed to discourage short-term capital flows and weakened the lira, with the current account deficit getting under control. It is not given that credit growth will automatically dampen, or that the Bank's measures towards that goal will work.

My skepticism arises mainly form my firm belief that to reduce the quantity consumed of any good, its price will ultimately have to go up. In our case, to curb credit growth, its price, the interest rate, will have to go up. Reducing the policy rate, even with the accompanied reserve requirement hikes, could easily feed its way to consumer confidence, more consumption and eventually to the current account deficit.

The Central Bank's proposed actions also create an interesting dilemma of tightening the quantity of money and reducing its price at the same time. If the Bank cuts downs the one-week repo rate but does not provide enough liquidity at the repo auctions, then market rates will go up. And if it will, then the extra liquidity will find its way to credit. Of course, that's the idea behind simultaneously hiking the reserve requirements, but still...

But speaking of money and liquidity brings me to a related dilemma: I am not going to get into whether inflation is mainly a monetary phenomenon or not, but the rapid growth in the Turkish monetary base does not need to be debated. This arises from two factors: 1. The growing role of net foreign assets, i.e. capital flows; this is the Central Bank balance sheet way of seeing the capital flows working their way into domestic credit, as I discussed above. 2. The Central Bank's reluctance to lower its liquidity support and fully sterilize FX interventions, as the picture below shows:
Why is the Central Bank not doing so? Simple: If they did, they would create an upward pressure on interest rates. But then this would be inconsistent with the policy strategy outlined in Erdem Basci's presentation. But then again you are essentially easing financial conditions with this excessive liquidity support. See the dilemma?

Enough of dilemmas... Just for the sake of argument, let's go one step further: Let's assume that the Bank's policy strategy manages to curb credit growth as well so that there isn't a lot of pressure in inflation from that front. But what about the the effect on inflation because of the now-depreciated lira and sticky expectations? As economist Atilla Yesilada notes at his Turkish economics analysis website Bilgeekonomist (i.e. the wise economist, highly recommended if you speak Turkish), there could easily be ripple effects such as negative deposit rates, booming consumption, double-digit bond rates and higher interest expenditures.

Now, you probably see why I am worried about the Bank's new course: It depends on too many "if"s... In essence, the Bank is behaving more like an ardinal (adrenaline a la Turca)-junkie trader rather than a conservative Central Bank. But then again Yapi Kredi Chief Economist Cevdet Akcay, one of the few supporters of the Bank's new strategy, argues in his latest weekly that these are extraordinary times, and extraordinary times call for extraordinary measures. He may be right, but again: Such risk-taking should not be a Central Bank's cup of tea, especially as markets have made fool of central banks all the way from the United States to China, as Mr. Yesilada notes in the same piece mentioned above.

An important side point

While it does further explain the Central Bank's rationale as well, this side point is also a  discussion of the overheating argument of my most recent Hurriyet/Roubini columns and is a bit technical, at least conceptually. But feel free to skip it if it is not your cup of tea.

Note that an important point of the Central Bank's argument, which I have ignored until now, is that the economy is not overheated. In fact, they have the following nice chart, from the summary of the Financial Stability Report (also in Mr. Basci's presentation), to illustrate their point:
Unfortunately, there is no English version, so let me summarize what it means: The x-axis is financial stability, with quadrants of slowing and rising credit growth. The y-axis is price stability, where the quadrants are slowing and rising inflation. For example, the Southeast quadrant illustrates an economy where credit is growing, but inflation is slowing down. The Bank thinks we are in the originating bold oval, i.e. it sees credit growth faster than desired and inflation about where the Bank wants it to be. Originally, the Bank was seeing the economy move towards the Base Scenario, towards the Northeast, but now it sees the economy moving towards Scenario I. Whereas the Basis Scenario would require tightening both the policy rate and other tools, Scenario I calls for tightening other tools, while at the same time, cutting the policy rate.

As I explained in my latest column, I am already seeing signs of overheating in the economy, and so would argue we are a bit to the North of where the Bank says we are. And I would also argue we are heading to the northeast, i.e. more inflation and credit growth, i.e. the Bank's Basis Scenario.

The key problem here is with the difficulty of measuring the degree of overheating in the economy. In fact, Cevdet Akcay and his team just published an excellent, albeit slightly technical, note explaining exactly the same point. In an email exchange, Eren Ocakverdi, one of the authors of the report, noted in an email exchange that using multivariate filters, like the ones your friendly neighborhood economist loves to use, to calculate Turkish potential output is problematic. Therefore, he argues that, without a reliable supply-side indicator, output gap estimates based on potential output, like my projections!, are not reliable. He further emphasizes that their note was written to illustrate this fact rather than claim that their preferred filter is superior to the commonly used H-P. I see his point, but just the fact that I have tried three slightly different different methodologies so far and always come up with similar results (almost-closed output gap) should mean something -and not only that I am econometrically-challenged, more than that:)...

What would I have done?

According to your favorite Turkey economist, the ideal response would have been minor monetary tightening, major fiscal tightening, some macroprudential measures like higher provisional requirements for new loans and the sterilized FX interventions I have discussed above. As I have argued before, I would expect these measures not only to curb credit growth, but also bring down nominal interest rates and slow down hot money this way. If that doesn't work, a Tobin tax (or the like) could be the next step.

Note that it is very easy to fire away from the sidelines. Just as Turkey has 60-odd million football (that's soccer for all the Yanks) managers, who love to play the role their favorite team's manager every week, the country also supports quite a few economists (or economist wannabes), whose favorite pastime is second-life Central Banking:) 

First of all, anyone with a few economics courses under her belt would have come with my prescription, but theory and practice are very different animals: For one thing, the macroprudential measures I am mentioning are at the reign of the banking regulator, i.e. BRSA. As for fiscal restraint right before elections: Forget about it... So maybe, as Murat Ucer of Turkey Data Monitor was noting a couple of days ago, since the Bank knows there is no way it is getting support from the government (fiscal) and BRSA (remember the BRSA's row with the Bank right after the latter's capital punishment on the banks), it is merely implementing a second-best policy response. And crossing fingers, praying and hoping for the best...

Also note that the Bank is acting very Machiavellian: With Turkey's risk premium very low at the moment and inflation to fall to as low as 5 percent in the next three months, mainly because of base effects, if the Bank is to cut the policy rate, this may be the best time. In fact, if U.S. interest rates continue to remain elevated, the Bank may see its actions bear fruit on the capital flows front sooner than expected. My only worry about the timing is that it is the end of the year: With traders down in Switzerland for Christmas skiing, markets will be thin, so we may see sharp moves in either direction... 

Implications for Turkish assets:

Again, first the executive summary for the time-constrained: Weaker lira and a steeper yield curve, exactly what the Central Bank is shooting at. And that's what we got in the first half of the week:
With stocks, it is a bit more complicated: First, banks are the dynamos of the Turkish stock market, and they are to be faced with two opposing effects: The rate cut (+) and reserve requirement hikes (-). So at the end of the day, the size of these measures will matter. Moreover, there are many unknowns to the equation, such as the response of the yield curve, the response of credit demand and volatility in the lira going forward, and last but not the least the path of global interest rates (and what it means for the global economy- Martin Wolf has an insightful piece on this).

A word on communication:

Mr. Basci's last slide is titled stability and communication. I am not sure what he explained there, as I was not at the presentation, but the slide refers to the Bank's periodic communication tools, i.e. the Inflation and Financial Stability reports, as well as a couple of recent speeches by Governor Yilmaz.

While I totally agree with Mr. Basci on the relationship between stability and good communication, I don't think those reports or a last-minute weekend gathering would exactly classify for good communication. It seems that the Bank decided on the weekend presentation when its rate-cut signals did not go down as much as it had hoped to and wanted to relay the message straight this time around. But the message did not get through the first time exactly because it was going through the wrong medium! MPC meetings/ summaries and scheduled (i.e. pre-announced) speeches should be the medium for that. In that respect, I am looking forward to the scheduled speech by Governor Yilmaz in Konya this Friday.

There is quite a bit of gossip in the media and markets that all this is as much about the race for the Central Bank governorship as actual policy direction. The current governor Durmus Yilmaz's term ends in April, and he has indicated he will retire. One of the strongest candidates, if not the strongest, for the post, is current Vice Governor Erdem Basci, the hero of the weekend presentation. It is claimed that, given that the Governor will be assigned by the government, and that PM Erdogan's inclination towards lower interest rates is well-known, Basci positioned himself well for the position with his weekend presentation. In other words, the presentation was as much about the man as the ideas.

Hurriyet Daily News, as well as many Turkish newspapers, published a piece on Monday touching the same angle. I find it hard to believe this theory, but then again, I have never been good at office politics, internal strife and the like. But one thing is for sure: If there is some truth to it and word gets out that the MPC is divided on such an important policy change, it would hurt the Bank's credibility real bad...

Then, the hero of the story might find out that he really needs to be saved  (listen to the lyrics) after all...