More on the Beauty Contest Story

Loyal reader (and occasional brainstorming partner) Mary Stokes of Roubini Global Economics had more to add on the beauty contest theme of this week, which first appeared in a post last weekend and then featured in my weekly Hurriyet column as well as a couple of addenda to the column. The last addendum, by the way, will form the pillar of my Hurriyet column for next week, which will be on the Bank's latest Inflation Report.

Anyway, coming back to Mary's points, first she agrees with my beauty contest idea:

I really liked a number of the points you made in your most recent beauty contest blog post. I completely agree that Turkey's hailed performance of late is the result of the economy being the 'least ugly' compared to its peers. And a related issue that I'm struggling with is that perception can drive reality. Turkey, along with Poland, are arguably the 'least ugly' in the emerging Europe universe and both are seeing a pick-up in capital inflows.

She then goes on to note that the figures do not support a fast recovery for now:

I agree with you that what we are seeing in Turkey thus far does not signal a robust recovery. Much of the strong y/y numbers we're seeing (eg. IP) have to do with the severity of last year's downturn and I can't wait to see the hullabaloo that results when the Q1 print comes in.

As I noted in a Roubini Global Economics post, I held the view that fast recovery was a myth, along with stable politics and loose financial conditions, until last week's public capacity utilization & real sector confidence data, as well as for-my-eyes-only Konda unemployment figures, all for April. In terms of probabilities, I would have gone for the slow recovery scenario 85% a week ago. After Monday's releases, I was down to 70%, and after working with the Konda survey, I am at 51%, a la Nostrada-Mustafa. Anyway, without digressing too much, let's come to Mary's key point/question:

But my question is: could the appearance of strong growth actually help stronger growth come about, at least in the near-term?

I would think, yes... Maybe, that's what's going on with the latest real sector and consumer confidence numbers... Measuring the direction of causality would be a great exercise, which I plan to do in my spare time. For example, one interesting exercise would be to measure how much the relevant subindices of consumer and real sector confidence turn into actual figures (consumption, investment, etc) in the timeframe specified in the surveys...

Mary goes on to make another important point:

In Turkey's case, it looks like portfolio investment has turned positive since November 2009. I wonder how much of that is money looking for a safe place to park and I wonder what will happen to such flows (and how quickly they could reverse) if Greece turns into the next Lehman moment the way some are now suggesting.

The Greece situation turned even sourer after Mary wrote this email several days ago, but EM flows continued to be as robust as ever, according to latest EPFR data, at least. So we'll see....

On Competition (II)- Doing Business in Turkey: A Tale of Two Crises

As you might (or might not) know, I sometimes get commissions for writing, anything from op-eds to academic stuff. I recently wrote a short piece for the Risk Advisory Group for their monthly newsletter on doing business in Turkey. Below is the text, so that my loyal readers can enjoy it and other can accuse me of scaring foreign investors away. It is kind of a continuation of the Hurriyet Daily News piece I wrote back at the end of February.


Economic historians will probably conclude a few decades from now that two crises in the first years of the new millennium had a profound impact on the structure of the Turkish economy.

The 2001 domestic crisis paved the way to the macro reforms of the next five years. Commendable execution of a well-planned IMF program, with an expansionary fiscal contraction and banking reform at its pillars, did wonders for the economy in the ruling Justice and Development Party’s first term in office, leading it to nearly 50 percent of the votes at the 2007 general elections.

It is therefore not very surprising that despite some recent slippage, especially on the fiscal front, the macroeconomics environment came out at the top on American Business Forum in Turkey’s latest annual survey on Business and Investment Climate in Turkey, which was released at the end of February.

The 2008 global crisis, on the other hand, stalled the government’s infant attempts at micro reforms, as Economics Minister Ali Babacan candidly admitted at the IMF-World Bank Annual Meetings in Istanbul back in October. As some countries capitalized on the crisis for pushing forward their reform agenda, Turkey’s World Bank Doing Business ranking fell to 73 from 63 a year earlier.

But the overall rank could be misleading. For example, as a result of the government’s early reform drive, it takes 6 days to start a business, down from 38 in 2004. Other areas of relative strength are registering property, enforcing contracts and protecting investors. On the other hand, closing a business, dealing with construction permits and employing workers are areas where Turkey literally ranks at rock-bottom.

Whereas the Doing Business survey, which depends on objective criteria such as the number, time and cost of procedures, is useful for benchmarking, actual practice can be quite different from what is written on paper. Therefore, it is useful to supplement such surveys with the private sector’s subjective opinions, and by asking 110 U.S. company executives their perceptions on the Turkish business and investment environment, the American Business Forum survey does exactly that.

According to these American executives based in Turkey, the main areas in need of improvement are university-business partnerships, policy transparency, customs, legal system and corruption. Incidentally, these are the same problem areas that came out in the 2007 inaugural survey, confirming that there has not been much reform in the past couple of years. Moreover, the results are strikingly similar to the wider-sample 2006 World Bank Investment Climate Assessment survey, attesting to their robustness.

It is also important to be aware of regional disparities. For example, U.S. executives are satisfied with their employees who have degrees from top Turkish universities and American graduate schools. But as a recent World Bank study on higher education highlights, this rosy picture darkens quickly once you begin talking to small and medium-sized enterprises in the hinterland, who often complain of not being able to find skilled workers even at significant wage premiums.

Perhaps most worryingly, the government has stopped to listen, as a top-level executive of a multinational firm based in Istanbul recently confided: “I am unaware of any sector that has established a sustained, constructive and forward-looking dialogue with the government on coherent policies and strategies”, she noted.

This is really bad news for a government whose receptiveness to the private sector was one of its defining strengths early on.

My own 15. min. of fame (Part II)

I had mentioned some time ago my induction to the billion-club, Andy Warhol's 15 min. of hall-of-famers. The short interview went OK, and a friend managed to record it for me. I finally managed to get a copy of it, and I am presenting it for your viewing pleasure below. Unfortunately, the interview is in Turkish:



Note that a more complete view of this interview was outlined in two Hurriyet columns, one before the CBT's exit strategy and another after.

Reader Request: Of Politics and IPOs

A reader, who is working for an M&A tracker company, recently asked me the following question:

Can you give me a quote for a piece I'm writing? I need your thoughts on all the upcoming IPOs happening potentially in the middle of a referendum season.

Honestly, I had not given the issue much thought, as I am not into equities, although I knew that there are quite a bit of IPOs coming. But now that I think about it, I don't see this as a big problem at all. My optimism will come as a surprise to my loyal readers who know me as the perennial pessimist, but the major force driving equities in Turkey is foreigners, as the graph below clearly illustrates:

With emerging market flows strong, EEMEA getting a good chunk of the recent flows and within EEMEA Turkey seen as a star performer, as I mentioned in my last Hurriyet column, the mood is definitely Turkey-positive. And as a political analyst whose opinion I value a lot recently noted in a research note, foreigners have yet to grasp that the referendum is a winner-take-all battle for AKP and anti-AKP (CHP-MHP, secular establishment, etc...) And as long as EM->EEMEA->Turkey sentiment continue to stay positive, those IPOs may be over accident-free.

I don't want to misrepresent my thoughts: I do think that sooner or later foreign investors will catch up to the political reality as well. But I do think that it will be later rather than sooner and only after a major event that will be the breaking point of all the pressures building up. But until then, enjoy the ride...

Reader Request: Books on the Turkish Economy

A reader recently asked me on recommendations for books (English or Turkish) on the Turkish economy, which I am more than happy to oblige. Before I present my list below, there are a couple of disclaimers: First, I am only writing about books I have read and am familiar with, so this is in no way a complete list. If you do a book search on Amazon, you can find quite a few titles, ranging from Banking to Customs Union, on the Turkish economy. Second, I wanted to list general books rather than specific titles, so a book on Banking would not be on the list below.

So, here we go:

Ekonomi Politikası / Teori ve Türkiye Uygulaması (Political Economy, Theory and Application to Turkey) by Mahfi Egilmez and Ercan Kumcu: The authors are two well-respected policy economists (with credible academic hats as well), Kumcu was a long-time vice president in the Central Bank of Turkey and Egilmez the undersecretary of the Treasury. What I really like about the book is that it combines macro theory with applications to the post-liberalization (since the mid-80s) Turkish economy. Of course, it does not claim to be a comprehensive expose of macro theory or recent Turkish economic history. But after going through the book, you’ll definitely have a better understanding of macro as well recent economic developments in Turkey.

Makroekonomik Gostergelerin Yorumlanmasi (Interpreting Macroeconomic Indicators) by Omer Faruk Colak and Alaattin Aktas: As the title suggests, the authors go over Turkish macroeconomic indicators. Nothing illuminating if you have worked as a market economist, but could be quite useful if you haven't.

Ekonomik Gostergeler ve Istatistikler Rehberi (Guide to Economics Indicators and Statistics) by Elif Cepni: Similar to the previous book, but not as comprehensive on the Turkish indicators. But it makes up for this some basic economic theory and accounting (i.e. how inflation indices and real interest rates are calculated) as well as some international stuff.

Unfortunately, all the books above are in Turkish, but fortunately, if you don't speak Turkish, I have a couple of recommendations as well:

Financial Programming and Policy: The Case of Turkey by Richard C. Barth and William Hemphill: A nice introduction Financial Programming as well as to the Turkish economy. The only problem is that the book was published in 2001, so the data are from 1990s...

The Turkish Economy: The Real Economy, Corporate Governance and Reform, edited by Sumru Altug and Alpay Filiztekin: Papers on different aspects of the Turkish economy, but the book is quite comprehensive. The ludicrous price is an issue, but according to Amazon, a paperback for USD40 is coming in October.

In addition, if you want to get a comprehensive and (somewhat) up-to-date analysis of the Turkish economy the World Bank CEMs as well as IMF and OECD country reports are always a good source. Obviously, these sources have also working papers and reports on specific Turkey topics, which are way too numerous to list here.

Feel free to add in, either as a comment to this post or an email to me, your recommendations as well, I would be more than happy to incorporate them to the next edition of this post...

Another Amazing Find, which I cannot disclose:)

I spent a good chunk of this week working on the April Konda Barometer survey. Unfortunately, I cannot disclose any of my results, but I can at least tell you what I did.

When I got hold of the survey, I was thinking on doing something on political polarization, but I found out, to my dismay, that Konda liked my take on that in the inaugural survey last month so much that they decided to do it themselves:) With them taking care of that, I had to find myself some other thing to work on.

First, there was a really interesting question on the survey asking about how respondents got to form their opinions on the constitutional amendments (TV, friends, newspapers, party opinions, etc). For an economist, that is a golden opportunity to do some interesting regressions, so I spent a day or so looking at the determinants of opinion formation.

Second, I noticed that it is possible to get unemployment rates from the survey. As the official statistics lag about a quarter, the Konda rates would be very valuable, if they were in line with the official statistics. While such a comparison is impossible at the moment, due to the fact that the latest official statistics are from January and the first Konda Barometer Survey was in March, I nevertheless did calculate TURKSTAT-comparable unemployment rates and used them, along with other recent data, to discuss the speed of the economic recovery and its asset price implications. I plan to do a complete comparison next month between Konda and TURKSTAT statistics.

This is all I can say about my work there, but if you'd like to find out more, feel free to contact them.

Roubini Post: Adddendum to 99 Luftballoons in a Beauty Contest

This post already appeared in my blog on Tuesday; Europe Economonitor is just republishing it, but I just wanted to cross-link it for the readers who might have missed it the first time around...

If you want to read on this issue further, the previous post is somewhat an addendum to this addendum...

In fact, I have yet more to say, but rather than do another addendum to that addendum, I am thinking of devoting next week's Hurriyet column to the possibility of a fast recovery, CBT's stance and asset price implications of those...

Addendum to Tuesday's Roubini post

On Tuesday, I noted, in a blog post (sorry, no hyperlinks because I am on my Bberry, but: http://emredeliveli.blogspot.com/2010/04/roubini-post-no-way-out-for-central.html) that demand pressures might be building up, which could lead the Central Bank to early rate hikes.

The Bank, on the other hand, adopted a rather dovish tone, while at the same time revising its year-end inflation outlook significantly upwards. This leads me to question what the CBT is targeting, after all (inflation, growth, the Prime Minister's happiness, etc), which I will devote some time if I decide to write my weekly Hurriyet column on this issue.

But all this led a friend, who was asking me on Lira's prospects, on what the hell is going on: Well, the Bank is playing the credibility game, which is also known as the James Dean chicken game (Rebel without a Cause- http://en.wikipedia.org/wiki/Chicken_game).

But that game has two pure strategy equilibria, one which the markets cave in, and one which the CBT caves in. As for mixed strategies, I am really getting mixed up now- find a real micro theorist for that:)...

But if you are wondering the opinion of your friendly neighborhood economist, I am getting slightly more inclined towards the Bank swerving from the road...

Coming to more mundane matters, this situation really complicates Lira's prospects. To reflect market sentiment, I'd like to share a small anecdote:

I sometimes get questions from friends on investment strategy. These clueless souls probably don't know that the predictive powers of economists are not very high. Or maybe they do and their strategy is simply doing the opposite of what I tell them.

Anyway, one friend approached me recently to tell he was thinking of selling dollars, while another gtalked me a couple of days later to ask when would be a good time to buy dollars.

Maybe, I should have got them together, getting a nice commission in the process and jump-starting my brokerage house in the process...
Sent by BlackBerry Internet Service from Turkcell

Roubini Post: 99 Luftballoons in a Beauty Contest

This post already appeared in the Hurriyet Daily News on Monday; Europe Economonitor is just republishing it, but I just wanted to cross link for the readers who might have missed it the first time around...

I also did a small (major update) to one of the side points of the paper, the Turkish fast recovery myth, in a post yesterday- in case you missed...

Roubini Post: No Way Out for the Central Bank

This post already appeared in the Hurriyet Daily News last Monday (I forgot to submit it last week); Europe Economonitor is just republishing it, but I just wanted to cross link for the readers who might have missed it the first time around...

One small update to the post is in order. To quote directly from my article, I was arguing that:

On the real sector front, while consumer confidence finally managed to break free from the 78-82 range it had been hovering around for the past six months, contrary to the consensus view, a fast recovery is not in the bag, especially if once you adjust for last year’s low base.

Even with a fast recovery, unemployment is likely to decrease very slowly, as last week’s January release shows. It is maybe this employment outlook or maybe the looming referendum and general elections that are preventing the government to curb non-interest expenditures, but whatever the reason, fiscal policy is not supportive of the Central Bank’s gradual exit strategy.

So far so good. BUT: The first data of April, capacity utilization and real sector confidence, both from the Central Bank's monthly business tendency survey, came in quite strong on Monday, making the case for a fast recovery. As loyal readers would know, I am always in favor of a picture rather than 1,000 words, so here you go, compliments of Turkey Data Monitor:

Kapasite Kullanim is capacity utilization (right axis, blue). I prepared this graph in Turkish last night for the place I am not supposed to talk about (that does sound like Valdermort a bit), so I was kind of lazy to get the same graph in English:)

Moreover, although I can't say how I reach this conclusion, unemployment could be decreasing more than what would be accounted for seasonality, which I present here for your convenience:

Again, this is for the not-to-be-named organization, and therefore in Turkish: The columns are the difference between March and April for unemployment (red) and non-agricultural unemployment. All I am saying is that unemployment tends to decrease by most around 1% from March to April. Not a very sophisticated methodology, but it is way too late for time series:)

WOW! I am used to getting disproved, but usually in a few weeks, if not in months. A week? That's a first, even for me....

Joking aside, despite Monday's data have lifted the hopes of even a perennial pessimist like me, it is still kind of early to say for sure that the economy is on-track for a fast recovery; after all, this is one month's data. But just think of of the consequences, for Central Bank tightening and consequently for the interest rates and the lira if the speedy gonzalez recovery does materialize.

Weekly Hurriyet Column: 99 Luftballoons in a beauty contest

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 website since March, you won't see much of a difference between the two. As for cheesy references, I wanted to go for music this time around.

As for the column, it is a continuation of my thinking (or rather writing) aloud over the weekend, so the credit column got dumped yet again:( The perils of writing once a week...

It is becoming increasingly difficult to ignore, even for a perennial pessimist like me, the plethora of Turkey-positive stories in the foreign media and research houses.

This difference of opinion between my own views of the Turkish economy and (almost) everyone else’s has led me recently to a soul-searching trip all the way to Inferno, where I have questioned my economic sanity.

It is easier to explain the mood in the foreign media: As a seasoned expat journalist living in Turkey once noted, foreign journalists covering Turkey hang out in the same places and invariably talk to the same people, so they have a consistent but biased view of the country.

A friend whose opinion I highly value goes further by accusing a leading newsmagazine for publishing articles by people who decide how the country is doing by visiting the most expensive clubs on the Bosphorus and collecting information during dinner chats with businessmen who are probably buddies. While I do hate generalizations, I have recently seen quite a few pieces that fit this description.

The same is true for foreign investors to some degree. As a former bank economist who used to shuttle hedgies around town in enlightenment trips, I can confirm that not only these guys talk to a few people over dinner at Reina, they also invariably talk to the same guys, ending up with a single view of the economy.

It is also easy to dismiss the arguments of a journalist who claims that the shrinking current account deficit is a sign of strength of the economy as divine comedy. But market economists are (usually) a tad more careful with their reports, which are (usually) based on sound economic analysis.

That should not be much of a surprise: Turkey does look much sounder than many of its peers, especially in the region, even after you account for popular illusions I have been trying to debunk in my columns such as stable politics, strong economic recovery and loose financial conditions. That's not because Turkey is an economics wunderkind, as the government often claims, but rather because the region had really messed up in the run-up to the financial crisis.

For example, even the country’s traditional Achilles heel of Balance of Payments does not look that bad compared to the likes of Poland, Czech Republic and Hungary. There is also quite a bit of economics illusion: It is true that the IMF’s revised forecast of 5.2 percent growth for this year would put the country at the top of the pack, but the 4.7 percent contraction of last year means that GDP would still be more or less where it left off before the crisis.

There is also the Keynesian beauty contest going on, which the one and only Maestro introduced in Chapter 12 of his General Theory of Employment Interest and Money: If you need to guess who will win a beauty contest, you should choose who you think the jury will select, not who you think the most beautiful of all is. Keynes made a lot of money in the stock market, so he probably knows what he is talking about.

The jury in this case is the investment community. According to Emerging Portfolio Fund Research, which collects data on fund flows, Turkey’s region has been outperforming the rest of the emerging market universe. With a solid carry over regional peers and a Central Bank getting ready to tighten, the recent sell-side long-lira recommendations are then not much of a surprise.

But returning to the Master, he was more into men than women, so he might not have known so much about beauty contests after all. Maybe, he was not aware of cases where the beauty queen is stripped of her title.

What I am worried about is that Turkey will be dumped once those plastic balloons explode.

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 http://emredeliveli.blogspot.com.

Explaining 99 Luftballoons with a Beauty Contest

I am supposed to be archiving my columns, but as you know, I am a big-time slacker, so I can't help but think about Monday's Hurriyet column, which I will write tomorrow morning, as I always do.

I had promised some time ago to write on explaining how to make use of credit data, so that's an option. I could also talk about some of the recent Turkey articles in the foreign media, which make me wonder if it is really the same country I am writing about.

I had mentioned one of those articles back in July, along with a potential explanation on these biased Turkey stories. But now that I am thinking about this issue more, although the main arguments of these articles do not make sense economically, there is a reason for their Luftballoons: Turkey does look much sounder macroeconomically than many of its peers, especially in the region. That's not because Turkey is an economic wonder, but rather because the region had really messed up to the financial crisis.

There is also the famous Keynes beauty contest example going on: If you try to guess who will win a beauty contest, you need to decide not who the most beautiful girl is, but who you think the jury will think the most beautiful girl is.

Anyway, maybe I am just thinking (or rather writing) aloud at this stage, but I may write on this for this week's Hurriyet column.

As for Turkey overtaking Germany, it reminds me Ozal's claim in the 80s that Turkey would overtake Germany by the new millennium, so I'll simply repeat Emin Colasan's response to him in his book Turgut Nereden Kosuyor, Where is Turgut Running From: Nah geceriz!- If you don't speak Turkish, I am sorry, but I have no idea on how to translate this expression.

Work In Progress (again)

I have been a slacker again and ignored this blog for a while. For my defense, I am still involved with the neverending moving saga...

But, what a better use for the weekend than some home improvement:

I will start by updating my Hurriyet, Forbes and RGE columns to the blog, using the dates they were originally published at, as is the norm, or at least my norm. I should be back to regular blogging early next week, after I am done with the archiving. In the meantime, sorry for the temporary disturbance I may be causing, although it is nothing compared to the permanent damage to sanity the F3n3vasyon is causing:

I am aware that most of my loyal readers are subscribed to the blog email list, so to make sure that they are not to swamped with the articles, in case they did not have a chance to read them before at the relevant sites, I will do the updating piecewise, throughout today and tomorrow.

Weekly Hurriyet Column: No way out for 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 website since March, you won't see much of a difference between the two. As for cheesy references, I am loosely referring to the 1987 thriller with a young, slim and non-balding Kevin Costner, before he danced with wolves and way before he danced with Turkish Airlines. Speaking of that, I am not sure what to make of all the Hollywood stars (or protostars/ black dwarves for that matter- and no, I am not being racist!) starting to appear on Turkish ads. It somewhat brings to mind the image of Japan, but I can't decide whether that is a good thing:).

As for the column, I don't have much to add, except to remind you that I explained the banking system's liquidity bind recently...

I now know that the Central Bank of Turkey, or CBT, has a completely different notion of a strategy document than mine. While I was not expecting a daily timetable in the Bank’s much-anticipated exit strategy document, I was disappointed by the lack of specificity and the laundry list nature of measures to be removed.

With foreign currency liquidity profuse, hiking the reserve requirement will not have a market impact. The same goes for other measures like reducing depo facilities, which have been redundant for several months anyway. As for Turkish Lira liquidity, it is what the Bank is not doing that matters. With liquidity shortage having become a structural phenomenon, it would not have made sense for the CBT to unwind the three-month repo facility and increase the required reserves on deposits, and the Bank has noted that it does not intend to scrap those measures for now.

The CBT has also mapped out the technical rate adjustment as a three-stage process. It would start by gradually funding the markets’ liquidity needs less aggressively and inducing interbank lending, which has become an important drag on liquidity, as I explained last week.

Then would come the technical rate cut, with the one-week repo rate, set 0.50 percent above the overnight borrowing rate, becoming the new policy rate. With that rate hovering around 6.85 percent of late, that would mean a small rate hike. Banks would bid the amount they want to borrow at this rate, with the CBT effectively rationing credit by deciding on how much to fund banks at this rate. Finally, the Bank would widen the band between its borrowing and lending rates and the one-week repo rate.

But I myself learned more about the constraints facing the CBT’s exit strategy from the releases of the data-heavy last week. On the real sector front, while consumer confidence finally managed to break free from the 78-82 range it had been hovering around for the past six months, contrary to the consensus view, a fast recovery is not in the bag, especially if once you adjust for last year’s low base.

Even with a fast recovery, unemployment is likely to decrease very slowly, as last week’s January release shows. It is maybe this employment outlook or maybe the looming referendum and general elections that are preventing the government to curb non-interest expenditures, but whatever the reason, fiscal policy is not supportive of the Central Bank’s gradual exit strategy.

As was the case in previous releases, March budget data is deceivingly strong on the surface. But once you decide to look under the tip of the iceberg, it is hard to overlook the real increase in current transfers and personnel expenses. Most of the improvement in the budget has come so far from revenue increases on the back of the economic recovery, but a look at past data suggests that there is not much room to go on that front. Moreover, the government’s strategy of covering up holes in the budget with indirect-tax patches is not sustainable in the medium-run.

To make matters worse, February’s Balance of Payments does not paint a rosy picture, with the stall in exports and the artificial support of the current account deficit from net errors & omissions becoming hard to ignore. And I am beginning to suspect that the low private sector rollover ratio, a major drag on financing, is a demand problem as much as supply. Whatever the reason, such fragile capital flows could be preventing the Central Bank from stepping up foreign currency purchases, which would be an easy temporary fix to liquidity problems.

With the economy not really supportive of its exit strategy, I am afraid that the Bank could soon find itself in a bind if the inflationary outlook becomes worse.

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 http://emredeliveli.blogspot.com.

Roubini Post: Ignorance Is Strength

This post already appeared in the Hurriyet Daily News on Monday; Europe Economonitor is just republishing it, but I just wanted to cross link for the readers who might have missed it the first time around...

But while I am at it, I wanted to illustrate what I mean by saying all banks are equal, but some are more equal than others. As always, a picture is worth more than a hundred words:

Int this graph, compliments of Turkey Data Monitor, OMO is a net figure, made up of funding and mop-up.

BTW, I have a message to my readers at the Central Bank: It'd be great if the separate mop-up and funding figures appeared in the Weekly Press Bulletin; it is kind of a hassle to get this data from the Central Bank database (EVDS). If CBT's exit strategies go as planned, the data will not ne relevant in a few months, but until then...

My own 15 min. of fame

I finally get my Andy Warhol style 15 min. of fame: I will be doing a short phone interview to CemTV (Digiturk Channel 47) at 16.45 Turkish time on today's MPC meeting and the tomorrow's disclosure of the CBT's exit measures. Incidentally, this is what I wrote about in yesterday's Hurriyet column: I still have not been able to post it in the blog -I tried to do it last night, but laptop crashed in the middle of it and I did not have today-, but it is here:

http://www.hurriyetdailynews.com/n.php?n=ignorance-is-strength-2010-04-11

I was hoping to do a live show so that I could get to meet some hot TV chicks, but understandably, the presenter did not want to scare the viewers away (yes, I am that hideous, especially with my eagle tattoo)...

Anyway, the interview will be in Turkish, and I will try to post it here if I can. I'll also post the Hurriyet column later tonight.
Sent by BlackBerry Internet Service from Turkcell

Weekly Hurriyet Column: Ignorance is strength

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 website since March, you won't see much of a difference between the two. As for cheesy references, I am continuing with the seventh art with silver screen adaptations of George Orwell's two most famous works.

As for the column itself, I will illustrate what I mean by saying all banks are equal, but some are more equal than others when I post the Roubini Global Economics version of the column.

One of the maxims of Oceania, George Orwell’s fictional super-state in 1984, is ignorance is strength. That definitely seems to be true for analyzing the Turkish economy.

For example, it is often assumed that there is a one-to-one relationship between inflation, the output gap, which is simply how far away the economy is from potential output, and Central Bank, or CBT, policy rates. As a result, a stronger-than-expected growth outturn, like the GDP readings from the last quarter of 2009 released at the end of March, can cause some to pencil out their inflation and policy rate forecasts for higher numbers.

There are many problems with that hastiness. For one thing, it is the composition of growth that matters, and on that front, as I discussed last week, the data simply do not point to a robust recovery. It also does not make much sense to base one’s forecast on lagging statistics. You could argue that more recent figures such as Industrial Production and Purchasing Managers Index look quite strong, but these volatile indices paint a mixed picture at best after making the necessary seasonal or working day adjustments.

At a more basic level, assuming a direct relationship between the output gap and inflation comes down to assuming that inflation is mainly a demand-pull phenomenon. But inflation is also influenced by cost-push factors such as energy prices and the exchange rate as well as expectations, and these do not warrant a rate hike for now- and I am not even going to get into monetarism. I do think the CBT will have to start raising rates earlier than market expectations of the third quarter; it is just that we are not there yet, so Tuesday’s Monetary Policy Meeting should bring in more cautionary tone but no rate hike.

Similarly, liquidity and interest rate policy are often confused. That’s why the Central Bank’s announcement that it would disclose its exit strategy on Wednesday caused a big stir. Rather than an uncalled-for rate hike, the Bank is likely to disclose the timetable for pulling back some of the liquidity measures it had enacted through the crisis.

Most of the measures were actually for foreign currency liquidity; annulling those measures would do more harm than good at this point. Of the two lira-based measures, the 1 percent decrease in the reserve requirement was a quantity measure, which provided more than 3 billion Turkish Liras of liquidity, whereas the three-month repo auctions were more of a price one, as lengthening the maturity of repos brought down banks’ costs.

Both could be scrapped soon, but more importantly, with the CBT providing liquidity of around 20 billion liras through open market operations for some time now, it seems that liquidity shortage has become a structural phenomenon, exactly of the sort that would induce the Bank to alter its liquidity framework, as outlined in its Monetary and Exchange Rate Policy for 2010.

Moreover, a look at the composition of open market operations reveals that all banks are equal, but some are more equal than others: Open market operations is a net figure, including Central Bank mopping up liquidity as well as funding it, and the Bank has been draining around 10 billions. In other words, some banks have been preferring to lend to the CBT rather than to their compatriots.

Canceling the three-month repos would induce banks to lend to each other to some degree. But the much-talked about technical rate cut would be a huge help, as the Central Bank’s borrowing rates would be set at least a full percentage point below the one-week repo rate, which would be the new policy rate.

Big Brother was right: As much as a little knowledge is worse than no knowledge, ignorance is strength.

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 http://emredeliveli.blogspot.com.

EconNews Roundup

February Industrial Production comes out higher than expected: But I maintain my stance that signs on the speed of recovery are mixed and high growth this year can not be taken for granted.

Having said that, I should also warn you that there are many who disagree with me. But let me be clear: The March Industrial Production and 1st quarter GDP will come out high on year on year basis because of a base effect- the economy contracted 14.5% yoy in 1Q09!

Rising steel prices worry carmakers: I'll admit, I have a pet project of doing sectoral leading indicators for autos and a few other sectors involving TAYSAD and other associations, so including this news serves as a self-reminder.

I don't want to blame the Daily News too much, as they made the same mistake (as all the other 666 media outlets) of ignoring the most vital part of Econ. tsar Babacan's Haberturk interview: That municipalities will be part of the fiscal rule as well. That addresses one of my key criticisms to the fiscal rule, but Babacan did not confirm that the famous formula will involve consolidated government deficit, not just the central government. But even then, I have some other doubts on the fiscal rule, such as whether the coefficients in the formula are conservative enough, or whether this is the right rule for Turkey (I would prefer an expenditures cap). Then, I have some serious doubt on the implementation as well. Contrary to what many think, this is not Turkey's first attempt at a fiscal rule: You could think of the ill-fated borrowing limits in the fiscal control law, which were being cropped or even nullified with subsequent laws, as a fiscal rule. So the same fate awaits the NEW fiscal rule unless it is hammered into the constitution and credibilized (I know there is no such word) with an independent and authoritative fiscal monitor or budget council. Anyway, you can see a sum-up of my thoughts and writings on the fiscal rule in a recent blog post. By the way, David always likes to humble himself as an ignorant agricultural reporter, but I thought the Daily News editorial on the fiscal rule was quite good.

TSKB REIT comes to ISE: Again, a personal post, as I used to go there a lot when I was a little kid, when my mom used to work there. They had to keep my away from the computers (mind you, this is late 70s, so the computer I am talking about is about the size of a room) by saying that they would snap my fingers, so I used to call them the finger-snapping machines. Leaving this personal anecdote aside, the growth of REITs in Turkey is a interesting development that needs to be followed up.

Roubini Post: The Turkish Rainbow Tour

This post already appeared in the Hurriyet Daily News on Monday; Europe Economonitor is just republishing it, but I just wanted to cross link for the readers who might have missed it the first time around...

But while I am at it, I wanted to address a comment to a recent addendum to Monday's column. A reader wrote in the comments section of that post:

what is the underlying economic weakness in Turkey at the moment?

Luckily, this isn't a question I've been trying to avoid. Let me list them, in no particular order of importance.

First, it is fiscal. On that front, we are getting mixed signals. On the one hand, fiscal figures have been coming in quite strong as of late, despite the disclaimers I have highlighted at a recent column. It is also a positive development that as Econ. tsar Babacan disclosed in a recent interview, municipalities will be a part of the fiscal rule, but since he stopped short of saying that the magic formula will be on the consolidated (rather than central) government balance, I am not sure how this will work. In fact, I see a poorly-executed fiscal rule a big danger for the economy. Also, I am not sure that with elections looming, the government will be able to maintain a tight fiscal policy. Then, there would be spillover effects to the private sector, as Treasury borrowing would crowd out private lending. By the way, the Treasury has done a very good job in keeping the rollover ratio down so far, but there is only so much it can do if government spending goes out of control.

Then, there is the speed of recovery. While the latest Industrial Production data (February) was stronger than expected, there are still conflicting signs on the speed of the recovery. And even if Turkey did indeed recover speedily, it is unlikely that growth will be enough to bring unemployment down significantly.

Last but not the least, there is inflation: Turkey is one of the few countries, and the only one in EEMEA to my knowledge, where there are significant upwards pressures on inflation, meaning that the Central Bank will have to do something about it soon, as I have been arguing for a long time. While the exact details will be divulged at next week's MPC meeting and the CBT exit strategy document to be released right after, Turkey economists finally got wind of this challenging outlook and revised their policy rate projections upwards significantly. These developments are positive for the lira's prospects, but not quite so for stocks and bonds.

By the way, the inflation outlook, the speed of recovery and Central Bank policy rate outlook are not perfectly correlated, as I often read in market research reports. Let me elaborate a bit: Most economists base their policy rate projections on their inflation outlook, which is in turn tied to their growth forecasts for this year. While this makes sense in principle, the relationship is far more complicated than this Econ. 101 framework, as inflation could have many faces (demand, supply, money, expectations, FX, global). Similarly, liquidity and rate tightening are often confused: It is assumed that if the Central Bank decides to fight inflation, it will drain liquidity and raise rates at the same time because it is assumed that inflation is a monetary phenomenon. It is possible to get tight liquidity, inflation and moderate recovery at the same time, which would guarantee interesting actions by the Central Bank. But I am digressing too much; this will have to turn into a proper column in the next few weeks.

By the way, unlike some, I don't see external financing a big issue for this year, although the current account deficit will rise significantly with economic recovery. The reason is that as the name suggests, the balance of payments always balances. The question is at what price for the lira, but the Central Bank tightening all but ensures that the lira is unlikely to face significant depreciation pressures.

The reader just asked about economic risks, but the main risks in Turkey are political at the moment, in my humble opinion. In that respect, the Princip or 2001 crisis examples in the previous post do not really fit perfectly. But all I was trying to argue is that these ignored economic risks could suddenly come to the investors' radar as political risk rises.

More on this week's Hurriyet column

A loyal reader asked my opinion on the last sentence of this week's Hurriyet column:

The real question is how much longer the global investment community will continue to turn a blind eye to the risks in Turkey.

Now, that's a trillion dollar question I was purposefully trying to avoid, as it is a very difficult question. But my one sentence answer is: "For a long time". But I am sure the political risks will sooner or later reveal the underlying economic weaknesses as well.

Think about the 2001 crisis: Was it really about a President throwing the Constitution at a PM- by the way, I wonder how he would have managed to do that if the country in question had been the US; made a paper plane out of the Constitution and thrown it off, I guess:)

Or think about the political crisis spanning from March to July of 2008. To help you with the thinking, let me provide a neat graph:

Or if you are a history buff, think whether it was Princip (BTW, look at the picture, the guy looks like a F3n3v fan just coming out of a Besiktas game) who caused WWI. I guess you see my point...

EconNews Roundup

Locals wary of investing in ISE:

Taxes responsible for rise in core inflation: According to the CBT, at least. I'd disagree, but the vital part of the piece is the CBT exit strategy, to be announced a week from today. Interestingly, a couple of foreign banks are expecting a policy rate hike this month.

Passenger car sales drop: Sales were quite high last March, so don't make too much out of this, but it is still another evidence for a more muted recovery than the government and most economists claim.

Weekly Hurriyet Column: The Turkish Rainbow Tour

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 website since March, you won't see much of a difference between the two. As for cheesy references, I noticed I had been away from the seventh art for too long, and what a better way to make up with a reference to a very good silver screen adaptation of one of favorite musicals.

Speaking of Eva Peron, there is a little-known story involving her, Turkey and football: When it became known that she was terminally ill, prayers were held at a mosque in Istanbul for her. When Evita heard about this, she had a cup organized in her honor, where Boca, Saibesaray and Ezikbahce competed. At the final, it was F7 against Boca, and F3n3v managed to beat Boca for the title. It is listed on the Eziks Honors page (I had no idea Eziks had any honor in the first place) as "Eva Peron Cup, 1952"; standing tall in the very few tournament cups the Eziks have won (the last one was in 1983). Anyway, I have digressed way too much already, so on to the column:

People of Earth, I present you the Turkish success story:

The latest growth data has shut out skeptics like me for good and proven that the Prime Minister was right after all; the crisis has really passed tangent to Turkey. Never mind that other than the stronger-than-expected private consumption, which caused economists’ forecasts to undershoot, the growth figures of the last quarter of 2009 are more or less in line with expectations.

For example, the 2.5 percent contribution from change in stocks reflects firms building inventories, a natural part of recovery. In fact, that inventory build-up, the surge in government expenditure and recovery from a weak base are responsible for the strong-to-the-eye (but weak-to-the-heart) 6 percent yearly growth figure. Interestingly, industrial production has continued to puzzle, again coming out much better than the industrial production index. While part of the discrepancy is methodological, my spider senses are warning me of a revision ahead.

Now, I don’t like to spoil a wonderful story, but the news from the recovery front isn’t quite as good. It is true that the real sector confidence index has been doing well for the past couple of months. Similarly, the March turnout of 55 in the Turkish Purchasing Managers Index, or PMI, caused some economists to decree a fast recovery.

But despite these surveys, the latest hard data are painting a mixed picture at best. Industrial production, capacity utilization and consumption indices do point to a strong recovery in terms of year-on-year growth, but that is just the base effect working its magic: The contraction early last year was so deep that data will continue to look very strong in yearly terms, but that is just cosmetics.

Once you look at monthly changes after a seasonal adjustment, i.e. by wiping off all the make-up, the recovery is anything but strong. In a similar fashion, economists are making much ado about nothing on the recent pick-up in credit. I don’t want to spoil next week’s column, but the role of public banks in loan growth and the recent stall in base money growth are raising questions about the sustainability of a credit recovery.

It also does not make a lot of sense to devote so much attention to credit, at least its quantity, as it is not really a leading indicator, but an accelerator on the underlying trends of the economy. The price of credit, i.e. the interest rate, is a much better gauge of banks’ willingness to lend and liquidity. While I will indulge you in all the details next week, interest rates are hinting at tight liquidity and slow recovery.

Still more important are political risks, which are stubbornly being ignored by the markets. While a simple decision tree to map out the prospects of the constitutional reform package quickly branches out in all directions, due to the mutually inclusive and endogenous nature of the different possibilities, two facts emerge:

First, Turkey is entering a time of political uncertainty. Second, the governing AKP’s chances of emerging from the battles ahead unscathed are rather slim, although it has been victorious in the past. It is this track record, along with the innocent packaging of the package and the complexity of the process, which is keeping foreigners calm at the moment.

The trillion-dollar question is whether Turkey will win through in the end. Despite the reality of politics and economics as well as spoilsports like your friendly neighborhood economist, Turkey can do what she likes, it doesn’t matter much. But if you are prettier than Greece or other PIGS, that’s not hard.

The real question is how much longer the global investment community will continue to turn a blind eye to the risks in Turkey.

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 http://emredeliveli.blogspot.com.

Doing Business in Turkey

A reader recently asked me my take on "Doing Business in Turkey".

While the subject is way to general to cover in a few sentences, let me try to do exactly that:)

First, note that I had touched upon the topic in a recent Hurriyet column.

The reports I mention in that article, such as the World Bank’s 2006 Investment Climate Assessment survey and 2005-2007 Labor Sector studies as well as American Business Forum in Turkey’s annual survey on Business and Investment Climate in Turkey are good places to start.

In addition, you can check out the WorldBank's Doing Business, which has comparative data on countries, so it is useful for benchmarking and cross-country work.