Monday, April 5, 2010

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.

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