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.

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