Sunday, January 31, 2010

My biggest take from Davos

There are a lot of interesting Davos news such as the CNBC poll showing more than half Davos delegates seeing government debt as the biggest global risk, but my favorite goes to DSK's comments that the country forecasts submitted to the Fund do not add up.

Apparently, everyone is expecting a external demand-driven growth, which is not possible, unless we start trading for unobtanium with the Na'vi. So some countries will be in for a tough surprise when the Fund reports in April...

Saturday, January 30, 2010

A Tale of Two Auctions

There were two quite interesting sovereign bond auctions last week.

The one that got the world's attention was the Greek bond sale, which started well on Monday, but quickly turned into a tragedy by mid-week. Everyone took her own lessons out of this mess, but I like most the FT overmarketed interpretation: I'll think twice before comparing and jumping to conclusions from bid-to-cover ratios in the future.

Around the same time, Turkey quietly did a 10-year bond, also with pretty good demand. Anecdotal evidence suggests that insurance and private pensions were the big buyers, with banks also in it for hedging mortgage risk. While these are the common buyers of long-term bonds in the US and other developed markets, given the relative shallowness of Turkish markets, I am not sure if that is indeed the case. If anything, the 11.24% yield, with the benchmark around 9%, means a rather flat yield curve. Moreover, it doesn't make much sense that the yield came out to be only 75bp above the ten year cross currency swaps. Something fishy is going on, but I haven't talked to my trader buddies yet, so I have no idea what it is...

The very bearable lightness of being tiny & obscure

A reader recently offered to "promote" me a bit to get me out of obscurity. His generous offer, which I greatly appreciated by the way, reminded me a point I have been meaning to make for some time.

I joking noted, in my column three weeks ago, that writing for a “tiny, obscure paper that no one cares about” relieves me from having to provide rigorous forecasts. However, a bigger advantage, not only for me but for all the columnists and journalists working for the Hurriyet Daily News & Economic Review is that "with obscurity comes freedom".

I hate to get involved in marketing, for myself or anyone else, but truth be told: The paper does enjoy a freedom of speech much higher than the average standards of the sector in Turkey. How come? Not only writing in English protects us from the wrath of the prosecutors, of the legal or illegal variety, but we are also "too small and insignificant to matter".

This line of thought actually belongs to Naom Chomsky, who has often argued that the mass media in the United States serves the interests of the government and large corporations, manufacturing consent. I am not going to go into if this is accurate or not, but when asked in a documentary if he thought the media in any country were free, based on his standards, he simply said "Belgian media" and then went on to explain more or less the reasoning I outlined above.

Hat Tip to David Judson, who likes to tell this story a lot, but he has only mentioned it in public at Ali Kirca's Siyaset Meydani, which aired a couple of months ago. As for me, if you think political pressure and censorship should not matter for an Economics columnist, have a look at my column almost a year ago on the value of political connections a la Turca...

So I find being tiny& obscure very bearable, although I would have liked a free dinner every now and then:)...

Small (but important) clarification on the last Hurriyet column

A few readers asked how I had come up with the magical 5% target growth rate in my most recent Daily News column. Now, I can interpret this question in two ways:

1. How did "I" come up with this number?

2. Why would I be happy with this number, especially given Turkey's historical growth performance, which is less than 5%?

With regards to the first question, the target growth and deficit rates were disclosed by the columnists who met with Babacan last week, I was merely reporting on what they were saying. Incidentally, reading the papers last night, I learned that Babacan/The Treasury had officially asked bank economists to share their written opinions on what the coefficients a and b in my equation should be. So I guess Econ. columnists are deciding on the target deficit and and growth rates, market economists on the coefficients in the fiscal rule equation. That's what I call consensus-building and PPP:)

As for the second question, I am still exchanging a emails with a couple of readers. I will answer that question, while at the same time reflecting their views, once we conclude our cyber-discussion.

Friday, January 29, 2010

Shameless Advertising (again)

In this blog, I am careful not to advertise anyone's product.

I broke that rule over the summer with an exception to Turkey Data Monitor, which I find to be such an essential product that I am using it in the Macro class I am teaching this semester at Ozyegin University.

I decided to break the rule again with Research Turkey, a yahoo group that is basically a sharing ground for foreign research reports about the Turkish economy. I have recommended this group to those starting to know the Turkish economy, especially if they don't speak the language. But now I have a strong reason to recommend it in my blog. I just found out that the group is now requiring a small (no amount specified) donation to the following Turkish charities/NGOs: Açev, Çekül, Eğitim Gönüllüleri Vakfı, Mehmetçik Vakfı or Bedensel Engellilerle Dayanışma Derneği.

These are all legit and hughly respected organizations, so you can be sure your cash will be put to good use.

BTW, neither TDM nor Research Turkey asked me for any advertising...

EconNews Roundup

I haven't been that much immersed in Greece since I did some island-hopping back in 2007. So I just need to focus on Turkey a bit:

CBT President Yilmaz goes to Davos: He is on the same page as Babacan on the IMF deal, it seems. So they just have to convince the boss, or Babacan's boss to be exact, as the Central Bank is supposed to be independent.

Turkey ranks in the middle in terms of environment policy. I guess they were on dope when they compiled these rankings. But then again, there are all these weird places who have no environment policy at all.

Tourism statistics going in the right direction. I'll do a bit more analysis on that once I get my bearings straight...

Leave my Ferrari alone...

Thursday, January 28, 2010

Recent Hellenic Developments

Wow, it's been less than a day since my inaugural Forbes column got posted, but it is already way outdated. So I just wanted to summarize the latest developments and let you know what I think:

First, after Monday's successful auction, the Greek debt crisis returned with a vengeance, to quote the Financial Times. Yields jumped after the country denied reports that it had mandated Goldman Sachs to sell debt to China. Now, there is serious talk of a bailout, which the Germans continue to deny strongly. For example, a story in today's Le Monde that the core countries are working on a bailout was denied right away by the German Foreign Ministry. The Germans actually have a point: A bailout would be like inviting moral hazard in unless it was accompanied by an IMF-style austerity program and the accompanying control over the country's fiscal books, which is a distinct possibility. Sure, Washington can go ahead and save the Gubernator, but the key difference there is political union! By the way, I forgot to mention one key point on costs of a Greek default in my column yesterday: About 1/4th of Greek debt is owned by European banks, mostly in Germany. This footprint makes today's news very interesting:) But maybe, it wasn't logical to expect Greeks (or the other PIGS for that matter) to behave like German's as FT's Lex argues today. So it is a matter of spoil the Greeks now or save your banks later for the Germans. Tough choice...

This is all a bit too depressing for a Thursday afternoon, so moving a bit to the lighter side of things, I'll present the top 3 reader comments to my column in the David Letterman style:

3. "Carsi Forbes'a karsi"- this literally means "The Bazaar is against Forbes", but to understand this, you'd have to know a bit about Turkish soccer- or have a look here. [ED: 5/5 for originality, 2/5 for accuracy- actually, I should be against Fortune and Today's Zaman, which are competitors of Forbes or Hurriyet Daily News & Economic Review.

2. This is all good for Turkey- if Greece goes bankrupt, we (Turkey) can buy all those Aegean islands for peanuts from them. [ED: 5/5 for originality, 1/5 for political correctness]

1. The number one spot goes toooooo: subject: forbes'un tirajini 96% artiran turk!
Genc ekonomist emre, forbes'un olaganustu yetenek of 2010 listesine giren iilk turk oldu! Amcasina benzettigi bernanke ile yakin dostluk kuran bu mukemmel insan, (kendisine uncle bernanke der zaten) forbes'ta yazdigi "faiz gulu" isimli yaziyla 65dile cevrilmis bir makaleye imza atan ve forbes'u bestseller yapan ilk turk oldu. [ED: There is no way I can translate this, but when I read it, I almost laughed to death... Even among the Turkish-speakers, there are only a handful of my readers who will get this in its entirety, but if you speak Turkish and want to learn what this is about- jot me an email and I'll send you 3 links in Turkish, which will enlighten this note].

There are also quite a few "serious" comments, to which I will answer either here or in Forbes. But I have to do my jog first...

More on the Forbes column: I make it to the Charts:)

My editor at Forbes let me know a couple of hours ago that my inaugural column had made it to the top 10 most popular articles on their web site:
Hi Emre,

Your story, “Greek Tragedy’s Next Act” is currently one of the Top Ten Most Popular stories on (visible on the Home Page):

* Most Popular

1. How To Hide From Google
2. The World's Billionaires
3. Ranking The World's Most Sustainable Companies
4. Apple iPad: Winners And Losers
5. Google And The iPad
6. Five Reasons iPad Isn't A Kindle Killer
7. Pfizer Whittles Post-Wyeth Pipeline
8. World's Most Powerful Billionaires
9. Apple iPad Gripes And Groans
10. Greek Tragedy's Next Act

Pretty good for a first opinion piece!
I had seen it as one of the most popular in columnists, right above the Great Roubini, not to be confused with the Great Houdini, but I had no idea I had made it to the overall top 10. BTW, I should add that I had no idea he was writing on the same subject; if I knew, I would probably have avoided writing on Greece:)- after all, even if what I wrote made perfect sense, I would look like a complete idiot in my inaugural column if I contradicted what he was saying. Luckily, our columns are so similar that one would think we had a chat before sitting down to write our respective columns. That is not say that I am a better writer or economist than him:)...

And it seems that Forbes awards the popular columns with a special link denoting most popular status. But I should not rejoice: For one thing, the difference with this list and the Billboard top 40 is that popularity may not have perfect correlation with likability- you may be read because everyone loves to hate you- there are quite a few columnists that fit into that category in Turkey:).

But nevertheless, as my editor noted, this is not a bad start at all, especially when you consider I had the misfortune of competing with the ipad- just look at the list again if you are not sure what I am talking about. For one thing, the popularity definitely did not come from my few loyal blog readers, as I posted the article in the blog almost a day after it appeared in Forbes (the date is seen as Wednesday in the blog, but I actually pasted it Thursday morning; my avid blog readers know that I always backdate columns at their publication dates even if I have to post them a couple of weeks after they are published- this is just for my own archiving purposes.

BTW, Forbes has a rating system as well as comments section, so if you like the article feel free to rate it; if you hate it, you can email your private rating to me:)! Joking aside, any comments/suggestions, points to add, etc. are never required, but always appreciated, sort of like in a friendly Midwestern diner:) In fact, I would be grateful for a negative rating more, provided it comes with an explanation of why you don't like the article. The painful way is the only way to improve; Greece has yet to notice this, as the latest mayhem hints, but I am more than willing to swallow my own pills:)

Wednesday, January 27, 2010

Inaugurual article for Forbes: Anything but a drachma-tic Ouzo Crisis

Hello, I just wrote my inaugural article for Forbes. The editor who got in touch with me last week told me that he had stumbled upon my blog and liked my previous stuff on Greece (this blog is useful for a change), so he specifically asked me to write something on Greece's fiscal woes. Anyway, as is the case with my Hurriyet columns, the unedited article is below, you can see the edited version at the Forbes website.

But unlike my Hurriyet columns, you'll see that the unedited and final versions are a lot different- that goes for the title as well. Well, that's normal, as it had to go through two different editors. But even though it was a long process, they did a very tedious job, so many thanks to them as well. So, here we go:

The Greek fiscal tragedy playing across the Aegean has turned into a daytime soap opera in the past couple of weeks.

First, a European Commission report condemned the Greek authorities for falsifying budget data. It was then no surprise that the government’s Stability and Growth Program, or SBP, released a couple of days after the EC condemnation, was not taken seriously by markets. The climax was reached last week, as Greek credit-default swaps, which insure against default, hit record levels.

Monday’s first bond issue of the year quelled worries a bit, as investors flocked to the generous yields. The successful auction hints that, contrary to the consensus view, the government may not run into much trouble meeting its financing needs in the short term, but as long as its budget situation continues to hang like the sword of Damocles, the country faces at best a slow death from rising interest rates, as Moody’s rightly concluded in a recent report.

To predict how this drama will conclude, it is necessary to summarize how the Greeks came to this fiscal mess in the first place. Part of Greece’s woes is common to the Euro Zone: A currency union that has tighter monetary policy than the other major economies and a currency that is overvalued. Moreover, peripheral countries have fallen behind in competitiveness, and Greece distinguishes itself from the periphery with a large shadow economy and large public expenditures.

It is these structural problems and the lack of monetary policy or exchange rate devaluation as policy options that have left the Mediterranean quartet of Portugal, Italy, Greece and Spain, the so-called PIGS, and to some extent Ireland, with messy budgets. However, Greece stands out from the crowd by having both a high deficit and a large debt to GDP ratio.

So the ambitious deficit reduction plan of the SBP, which sees the deficit down from 12.7 percent last year to 3 percent in 2012, should have been welcomed. But for one thing, about two thirds of the adjustment is coming from revenue increases and one-off items, which depend on overoptimistic assumptions on growth and registering the shadow economy. Without any support from monetary or fiscal policy unable to devaluate itself out, it is also not clear how the economy could grow 1.5 and 1.9 percent in the next two years.

What if the SBP does not work out? The options then would be a bailout, leaving the Euro Zone and the dreaded d of default/ debt restructuring. An EU bailout has been ruled out by officials, with the German Finance Ministry stating clearly that “Greece must solve its own problems through its own efforts”. Leaving the Euro Zone, on the other hand, would mean complete catastrophe, to paraphrase Nikos Kazantzakis' Zorba, as Greek Central Bank Governor Georege Provopoulos articulates in a recent Financial Times column.

Even if Greece were to leave the Euro Zone or bailed out by the EU or the IMF, it would eventually have to face fiscal consolidation or resort to the dreaded d. In fact, all the options other than fiscal consolidation would bear huge costs not only for Greece, but also on the Euro Zone and the Emerging Europe.

First, there will be direct damage to countries with strong trade linkages with Greece and where Greek banks have large operations, such as Bulgaria and Serbia. Countries with similar fiscal woes, such as the other PIGS as well as Hungary and Latvia, are likely to be affected as well. But most importantly, it is the Euro Zone’s reputation and stability, which is at stake.

At the end of the day, these costs are so great that a return to the national currency drachma is very unlikely. So is the possibility that Greece will initiate an Ouzo Crisis in the Euro Zone and Emerging Europe, similar to the Latin American tequila crisis of the mid-nineties. The most likely outcome is that the Greek government will have to swallow the pills one way or the other and put its books to order, at the expense of large expenditure cuts and a deep recession.

To offer some comfort to my Greek readers, I should add that there are other countries suffering from the familiar Mediterranean disease of relying too much on overoptimistic revenues and not daring to undertake the essential expenditure cuts. For example, Portugal, which I identified as a risky country off the markets’ radar more than a month ago, is now vying for the spotlight.

Turkey is a country that has been forgotten in this Euro Zone melee. Its fiscal accounts are obviously nowhere as wretched as Greece’s, especially if you do simple number comparisons at the expense of ignoring country specifics.

But it is another Mediterranean country suffering from the same Mediterranean disease and treading rough fiscal waters, with largely underpriced risks.

Monday, January 25, 2010

Weekly Hurriyet Column: Ruled by an Unruly Fiscal Rule

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Let's start with the cheesy references, as there are plenty this week: As you already know, I use the phrases "friendly neighborhood economist" and "spider senses", and obviously they are one of my favorite superheros- Clark Kent is another, as he is a journalist:). I owe "we are not amused" to Queen Victoria. And last but definitely not the least, "it's not you, it's me" is used often, but I had in mind in Seinfeld's George Constanza, who claims to have invented it:)

Coming to more serious matters, there is a recent IMF paper that more or less tells everything you need to know about fiscal rules. The impression I got from reading the paper is that the Fund is leaning a bit towards marketing fiscal rules as the new "fad policy tool", just as inflation targeting was in the last two decades. But the paper does acknowledge that a fiscal rule is neither a necessary nor a sufficient condition for a strong fiscal hand. I think a good comparison could be made with inflation targeting, as I had written at the end of September. Like inflation targeting, it is the institutional set-up, credibility and reputation that come along with the fiscal rule that actually do the magic. BTW, one of the reasons there isn't much research on fiscal rules was the lack of a comprehensive database on fiscal rules. The same IMF paper also introduces a new comprehensive Fund database on fiscal rules, so we should be seeing some interesting empirical work on soon.

Coming back to Turkey, the losses emanating from messing up the fiscal rule would be much greater than messing up with inflation targeting, especially since we are in a year of rough fiscal waters, as I have argued many times in my columns. That's what I was intending to say at the end of my column... So, here we go:

Economics Minister Ali Babacan held one of his occasional dinner discussion sessions with about a dozen columnists last Wednesday, to which your friendly neighborhood economist was again not invited.

I am not sure whether the fault lies with the Daily News or me, but my spider sense is whispering the “it isn’t you, it is me”. If that is the case, I would be tempted to say that we are not amused, but the perennial optimist in me is hoping that being an avid reader of columns, the Minister did not need me present to know what I am thinking. Then, it is my civic duty to share my views on the discussion topics, based on the columns of my more esteemed colleagues present in the dinner.

I have to say that I do not share the Minister’s optimism on the economic outlook. Although he is jubilant on the recent higher-than-expected revenues, I prefer to remain worried on the non-interest expenditures, which are on the way to spiraling out of control. As for his overoptimistic growth projections for the last quarter of 2009 and this year, the latest economic indicators unfortunately do not vindicate his views.

Coming to the IMF agreement, it is relaxing to see that Babacan and I are on the same page regarding the need and benefits for a Stand-by, so the only question is whether he will be able to convince his boss. Surprisingly, almost all the columnists were against an agreement, so I am hoping they did not manage to talk him out of it.

The most interesting part of the discussion, and in fact the only new hat, was more details on the fiscal rule, which first surfaced in the Medium-term Economic Program in September. As outlined there, rather than targeting government debt directly, the rule will spit out the planned change in the budget deficit based on a debt sustainability formula. Now, it seems that the inclination is towards adopting a target deficit to GDP ratio of 1 percent and growth rate of 5 percent, which are conservative enough even for my tastes.

But I am not sure a numerical policy rule makes sense for a country with a poor fiscal track record like Turkey if it is not accompanied by procedural rules such as a cap on non-interest expenditures. Moreover, I will not be convinced of its implementation unless the rule is hammered into the constitution and ensured with an independent and authoritative budget monitor or fiscal council. Using the existing institutional set-up, as suggested by Babacan, makes it only more likely to fail.

Then, there should be clear costs of breaking the rule, even though I have full confidence in the stick of the markets. Last but definitely not the least, the government would also have to address concerns over lack of full transparency and shenanigans in public accounts.

Interestingly enough, all this talk brought sweet memories. Stopping at Harvard’s Kennedy School of Government during his inaugural road show back in 2003, the Minister had evoked a well-known debt sustainability formula, only for the Venezuelan economist Ricardo Hausmann to note in return that Turkey would need to grow more than the 15 percent real interest rate to bring down debt levels.

Both the Turkish economy and Babacan have come a long way since then. If anything, with the interest rates of 2003, even suggesting a fiscal rule would have been deemed outright crazy. In fact, being at a point where a fiscal rule is debated as a viable possibility is a success story in itself.

But what if the government makes the fiscal story linger on for much longer like the IMF saga? Or falls into an institutional set-up trap? Or messes up the implementation?

Then, the risk is that they will regret having mentioned those two words in the first place.

Sunday, January 24, 2010

EconNews Roundup

She loves me, she loves me not: That's what the IMF saga has turned into.

Trouble across the Aegean, which, by the way, is the topic of my inaugural Forbes column- more on that later.

More trouble across the Aegean.

It seems that unlike the PM, CBT President Yilmaz is not done with Davos after all.

EBRD raises its growth estimates for Turkey. The 4.7% figure for this year is definitely plausible, especially since it will be coming after a contraction on the order of at least 6%. What comes down must come up, in other words:)...

Tourist arrivals continues to recover.

First Barca, now MoneyU. Soon, in the Champions League, it will be "Turkish Airlines always wins!", sort of an extension on "The House always wins":)...

Saturday, January 23, 2010

More on this week's column

Slyvia, one of my Hurriyet readers, asked the following questions in a comment to last week's column:
One thing I did not understand however: you write: "This recent lira frenzy, intriguingly, has not really been balanced by locals’ foreign currency retail buying, one of the big trends of last year" Where did the locals get the foreign currency from? Do you mean minor sums such like tips to the touristic workers, or larger ones - obtained how? Because activites with foreign companies wouldin any case go through banks and therewould be no foreign currency to spend in retail - or do I incur into a "thinking error"?
To which, I replied:
the locals get the foreign currency from banks/exchange bureaus and then deposit them at the bank. This shows up in the statistics as foreign currency deposits held by local residents, also in the same press bulletin. A trend in Turkey is that whenever the lira weakens against the dollar and euro, residents sell foreign currency, meaning that they convert some of their FX deposits into lira, and this acts as a buffer to further lira weakening. This is one of the rare advantages of being a dollarized economy. Of course, the opposite is true as well, meaning that when the lira strengthens, these guys buy dollars. Or rather "was true": As I mentioned in my column, this pattern has not been continuing recently. The interesting question is why? I will dwell on this issue a bit more in my blog and provide a nice graph showing the relationship between FX deposits and USDTRY(dollar lira exchange rate), so check there in a couple of days.
Well, it is time to keep my promise:

Boy, that's what I call a mirror image:)...

BTW, the exchange rate basket is just what it is: A basket of EURTRY and USDTRY, weighed equally. In these things, I usually use the basket to make sure my results are not affected by EURUSD moves.

There is also an interesting between EUR and USD deposits, as a friend who is a senior retail banker noted some time ago. This analysis obviously does not deal with such intra-FX shifts, the modeling of which is a long-time dream of mine...

Friday, January 22, 2010

Yet another weird pricing riddle?

Just as I thought I had shelved the weird pricing topic for good, it pops up again(thanks Mustafa):

If this is not a joke, I have no idea what is going on. BTW, the prices are before we got rid of six zeros from the lira, saving ourselves from the mockery of Howard Stern, so the photo should be a few years old.

Thursday, January 21, 2010

We are not amused:)

Another dinner invitation by the Econ. tsar for Econ. columnists, to which yours truly is not invited again. Obviously, not all columnists can be granted an audience with his highness, so only those with an academic background are considered. Now, I am thinking of the possibilities:
  1. Hurriyet Daily News & Economics Review is not taken for a newspaper by the Minister.
  2. Ozyegin University, where I am teaching this semester, is not considered as a university of good repute.
  3. I am not considered as an Economics columnist of good repute.
I am not going to ponder on this question any more and leave to next week's Hurriyet column...

But joking aside, the Minister did make some interesting comments on the IMF program, the country's economic prospects and the fiscal rule, at least according to my more illustrious colleagues who were lucky enough to get invited, so I might have to postpone going over my 2010 predictions for one more week. And it is already the end of January. The perils of writing once a week:(...

Wednesday, January 20, 2010

Temperature Disutility

My buddy Hakan recently posted on Facebook:
Hakan Tarakci 's "Temperature Disutility Function" can be given by y(T) = (T-23)^2 + 8*max(0,T-28)^3. Here, T is the temperature in degrees Celcius. To convert to Fahrenheit, use 73 instead of 23 in the first term and 82 instead of 28 in the second term. Obviously, the lower the disutilization value, the happier I am which implies t...hat 23 degrees Celcius is my ideal temperature. I also prefer 0 degrees to 32 degrees.
This is one of the most, if not the most, illustration of the concept of utility I've ever seen, so I asked Hakan to email me a graph of his temperature disutility function, which he gladly did:

Now, that is what I call Economics for the Everyday Man. And Hakan should be awarded an honorary Econ. PhD although I am not sure if he'd want one...

Tuesday, January 19, 2010

Some weird pricing (concluded)

Some time ago, I had noted the weird pricing of chicken pieces at KFC Turkey and even enlisted the Undercover Economist to solve the riddle.

As you can see in the picture below, KFC has now corrected the mistake (see the top left part, where they list the prices of chicken pieces):

I had not been to KFC for a long time, so I am not sure when they changed the weird pricing scheme. But if my post had anything to do with it, it is yet another evidence that the dismal science can actually make the world a better place:)

Monday, January 18, 2010

Weekly Hurriyet Column: The Complete Idiot’s Guide to the Turkish Economy

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. No cheesy movie reference this week, but there is a reference nonetheless. But I did save the cheesy movie reference to the very last sentence of the column. As for the column itself, if you are wondering about the Central Bank balance sheet guy, he practices boxing, so I can only reveal that he writes for the Turkish daily Aksam. And if you are wondering about the Rigobon article, it is this one. Note that I had used the same methodology back in summer and found put that lack of demand was as responsible as lack of supply for the pullback in credit. I will have more to say on the retail FX behavior I outlined, along with a nice figure, in a couple of days in this blog, so keep checking back (and ballooning my google analytics statistics) if you are interested in that.

The provocative title begs me to start with a disclaimer: I have no intention of alienating my few loyal readers by calling them idiots.

But since I haven’t been able to finalize my 2010 forecasts and the week has been rather quiet on the domestic data front, I wanted to use this gap to introduce a simple and often-ignored way of getting a lot of insight about the Turkish economy. This exercise will also hopefully satisfy my teaching appetite, which has surged while preparing for the class I will be teaching at Ozyegin University this coming semester.

The Central Bank releases its weekly press bulletin every Thursday afternoon. Despite the unfortunate name, which sounds like an assortment of boring official announcements, the document is actually an economist’s goldmine, providing timely and detailed data on financial sector balance sheets and various market developments.

I know a guy who made quite a lucrative consulting career marketing himself as an expert on “analyzing the Central Bank balance sheet”, but I am not in for the money, and he already beat me to it by a couple of decades. Besides, although you could have a made a name last year by analyzing the Fed’s balance sheet, our Central Bank’s is not nearly as important as it was twenty or even ten years ago. So, I will skip that for now.

But commercial bank balance sheet scrutiny, an important exercise in bank-based financial systems like Turkey, has recently been even more relevant due to the uncertainty surrounding the economy’s pace of recovery. As real sector data are released with a considerable lag (more than a month for Industrial Production, don’t even ask about GDP and employment) and the different indicators have recently started to become more and more contradictory, tracking credit can give a good impression on the real sector.

For example, one can easily spot the recent stall in automobile loans and credit cards, whereas housing and consumer loans continue with their moderate recovery, although the latter actually registered a small week-on-week decline during the week to January 8.

Numbers don’t tell about demand and supply shifts, but it is possible to separate those with a small econometric exercise owing to a methodology developed by Roberto Rigobon of MIT, which your friendly neighborhood economist is happy to provide pro-bono: Updating my exercise from mid-summer reveals a notable pick-up in credit demand for the last couple of weeks. Whether or not this trend will continue has also important implications on the degree of crowding out if the Treasury cannot bring debt-rollover ratios down.

It is also possible to track portfolio flows from the bulletin if you don’t feel like waiting for the official statistics, which also lag more than a month. To illustrate, in the week to January 8, there were $1.1 billion of debt and $175 million of equity flows. While the former can be attributed to IMF rumors, the latter is more interesting, as Turkey has been attracting steady equity flows for a long time now. If a bubble is to form in Turkish assets, as I will outline next week, it will most probably be in equities, so this is another trend to follow.

This recent lira frenzy, intriguingly, has not really been balanced by locals’ foreign currency retail buying, one of the big trends of last year. If this is a permanent shift of behavior, it could lead to much stronger appreciation pressure on the lira. Do I need to tell you that this too can be followed from the same bulletin?

So if you have time for only one document to track the Turkish economy, have a look at the Central Bank press release every Thursday afternoon.

But if you can afford two pieces, you can also read my columns.

Monday, January 11, 2010

Weekly Hurriyet Column: My 2009 Report Card

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. No cheesy movie reference this week, I am not that creative:)... As for the column, the budget deficit did indeed come a good 7.5 billion liras below my estimates, but as Muslum Baba would say, hatasiz kul olmaz:)... On to the column, then:

Celebrated Turkish Economics columnists tend to devote the year’s first column to evaluating their forecasts for the past year.

Having been with this paper since November 2008, it is time for me to take the same route in the hopes that I will be able to follow in the footsteps of my more illustrated colleagues.

Writing for a tiny, obscure paper that no one cares about, and free from the shackles of being a market economist, I did not feel obliged to provide forecasts for all the Economic variables out there.

But since this tiny, obscure paper that no one cares about just happens to produce one of the best Economics sections east of the Financial Times and west of Nikkei, at least in my humble opinion, I felt pressured to provide something. In the end, I chose growth, budget deficit and inflation as well as policy rates and, naturally, asset prices.

I pride myself with having been one of the first to notice the great Turkish contraction, predicting as early as January a 5.5 percent contraction, which I revised to 6.5 percent at the end of May while updating my projections.

While we have to wait until end-March to see how I fared, I might have overshot the contraction a bit. However, GDP is likely to have decreased more than the consensus 5.5-6 percent. A slightly positive fourth quarter reading, in conjunction with a downward revision to the third quarter, necessary to bring it in line with Industrial Production, and you are looking at a figure only slightly lower than mine. A fourth quarter revision halfway down 2010 could even prove me right.

If my growth forecast was OK, my inflation projection turned out to be bull’s eye. During the same end-May revisions, I came up with a forecast of 6.5 percent, to which I pretty much stuck to during late-summer and early-fall, when inflation had hit a nearly all-time low of 5.1 percent and eager beavers were claiming that Turkey had entered a new era of low inflation. Not so fast, my friend!

My budget deficit forecast, on the other hand, turned out to be a bit off-the-mark, to say the least. I was tricked by the sharp deterioration in the budget early in the first half of the year and predicted a yearly deficit of 60 billion liras. The official figure is set to come a good 10 billion liras under that when the December numbers are released in a couple of weeks.

But my biggest flop is having missed out on the great Central Bank easing. My early prediction of a large output gap should have convinced me that price pressures and exchange rate pass-through would be much weaker than before, but given the tail risks of too much and too fast easing, I did not expect the Bank to be so bold. I did notice the Bank’s intention to take rates into single-digit territory in February, but then it was already too late.

To my credit, I did not hop on the negative real interest rate bandwagon in the fall, when the low-inflation environment had convinced some that the Bank should (and would) cut the policy rate to 5 percent, i.e. well into negative real interest rate territory. Incidentally, the compounded real policy rate is almost negative now, but because of deteriorating inflation expectations.

As for assets, having missed out on the great policy easing meant that I also could not capitalize much on the great bond rally that enabled the nation’s banks literally bank on rate cuts. But I did resist the lira hype several times during the year and turned out to be right. The lira ended the year more or less where it began against the euro and the dollar.

So, what’s the verdict: Pretty good forecaster and a lousy money-maker, a typical Economist’s fate. Just keep this in mind when I go over my 2010 forecasts next week.

Wednesday, January 6, 2010

I rule:)....

TURKSTAT released December inflation on Monday, and with the higher-than-expected turnout of 0.53%, 2009 inflation turned out to be 6.53%.

This means that I was right on target back in June, when I updated my forecasts.

I have to admit I was expecting 2009 inflation to come out a bit lower than that when I evaluated my forecasts at the end of August. At the time, I was not bold enough to supply a point estimate, offering a projection of 6-6.5% instead. To be perfectly honest, I was seeing December inflation at around 0.4%, which would brought yearly inflation inside this range, but food prices turned out to be even higher than my out-of-consensus projection.

But still, compared to all the "wiseguys" seeing year-end inflation at 5-5% percent, I have done quiet well. But would someone following these forecasts have made any money out of them? Probably not, as the differential between expectations and realizations was not that high.

Moreover, the Central Bank managed to steer expectations quite well in the past couple of months, warning on "temporary" increase in inflation late in the year. BTW, the Bank is still using the same strategy, but their job will get more difficult with each inflation release in the next 3-4 months, as I argued a couple of weeks ago.

Finally, you can make the best forecasts, but something unexpected could always mess things up, as a friend who is Head of Research of a portfolio management company recently recounted: They actually managed to forecast inflation at exactly 0.53%, i.e. bull's eye, a marksmanship even your friendly neighborhood economist has been bestowed with only a couple if times. Usually, when you are so out-of-consensus, you would tread water lightly. But they did put their money where their forecasts were, selling bonds on December 29. It would have been a wise decision, except that the very same night, IMF rumors, which will probably prove to be unfounded once again, caused a huge bond rally. Upppss......

As a side point, all these references and flashbacks have made me aware of yet another advantage of blogging. If you blog, your occasional "I told you so" becomes much more credible once you link to the posts when you had actually told so:)

As another side point, all this shows that forecasting is a really messy business. Inflation was the one way out-of-consensus and the least likely to be realized from my number of the beast forecasts. It turned out to be on target, whereas my more traditional growth and budget deficit forecasts will likely be a bit off-the-mark. But you never know. I might get LUCKY again:)....

Monday, January 4, 2010

Weekly Hurriyet Column: Fool some sometimes you can

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I had to make up for last week's sans-cheesy movie reference column, so now not one, not two, not three, but four cheesy movie references... As for the column, rumors of an IMF deal have been going on unabated since I wrote the article on Friday, but I stand firm in my conviction that we are being fooled once again. I am one stubborn b----rd:)...

But fool all the people all the time you never can, venerable Jedi Master Yoda used to say. It was probably his old-age confidence in the age-old maxim that prevented him from seeing Palpatine’s sinister plot.

It seems wisdom knows no bounds of time and distance: What happened a long time ago, in a galaxy far away has been going on in Turkey for the past couple of years, as markets have time and again been fooled by false hopes of an IMF deal.

Following Economics tsar Babacan's comments during a televised interview that the Fund and Turkey were close to agreement, rumors spread that PM Erdogan had heralded the Fund’s acceptance of Turkey’s terms at the internal AKP Central Executive Committee meeting. The tax hikes announced on the last day of the year only spiced things up, as they were seen as the government's last-minute efforts to bring the fiscal books agreeable to the Fund.

So is the never-ending story finally coming to an end, and a happy one at that? At least, the markets thought so: Turkish assets surged, with the benchmark bond rallying 75 basis points in the course of a day before retreating somewhat and closing the year just below 9 percent.

But when you look at the details of what Babacan and Erdogan have said, the only new piece of information is that the Stand-by Arrangement would be for two years rather than three. As for the tax increases, as I argued in my last column, the 2010 budget figures clearly implied that tax hikes were already in the pipeline.

In fact, it is more likely that the Na’vi, the indigenous population of Avatar’s Pandora, will be bought off with blue jeans and light beer than the Fund will be coaxed by a couple of knockoff fiscal measures without seeing some concrete evidence of progress on structural issues such as independent revenue administration, limitations on transfers to municipalities and the fiscal rule.

Moreover, followers of the never-ending IMF-Turkey saga have seen this exact ploy play out at least a dozen times in the past couple of years, especially when Turkish assets are not performing well. I don't want throw baseless accusations and am well aware that correlation is not causation, but there is a curious relationship between rumors of an IMF deal and preceding negative Turkish asset performance.

Out of the eight market-moving Stand-by rumors over the past two years, five came right after a week of weak bond performance and only one after a rally. Extending the analysis into stocks yields slightly weaker results. The relationship seems to disappear if you look at the lira’s performance, but is back in full force once you consider its volatility.

On the other hand, if there is indeed a deal this time around, I will be more than happy to eat my words. A Stand-by would help the country bypass the year of tough external financing and tight liquidity in my way-out of consensus baseline scenario. In fact, during the same interview, Babacan also disclosed that the Fund’s funds would be disbursed to the Central Bank as reserves, which would in turn be used by the Treasury to lower the rollover ratio.

A back-of-the-envelope calculation reveals what I call a Tintin scenario: Ten billion dollars of IMF funds would get Treasury’s rollover ratio down by around ten percent, which would in turn translate into a ten percent increase in private lending, and ergo relief in crowding out.

As developments over the course of the last two days of the past year did not contribute much new to our information sphere regarding the IMF-Turkey saga, I remain as skeptical as ever on a deal.

But I have also taken the party gear out just in case, so I’ll be the first out on the street celebrating if there is one.