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.

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