Monday, May 31, 2010

Addendum to previous week's Hurriyet column on credit

In my column on credit developments in Turkey, I noted that credit was growing rather fast. While the statement is true in principle, there is a small problem, which I could not explain due to space constraints (since the column also appears on the hardcopy of Hurriyet Daily News, I need to adhere to a strict 3700-character limit).

FX lending was made easier by a new decree on June 16 of last year. Before that, banks were lending to their Turkish clients from their abroad branches to bypass the regulations. Since foreign branches are not included in credit data, the new decree, to the extent that it induced the banks to lend from their domestic branches, would have somewhat exaggerated credit growth. That is yet another reason we should not make too much out of credit quantity data, as I argue convincingly (I hope) in the column.

Of course, another byproduct of this change was that non-bank external debt rollover automatically fell after the decree. In fact, the CBT has adjusted for this change and found that if the new decree had not been enacted, the corporate external debt rollover would have been 100% (the official figure was a mere 65%) in the first quarter. But this would not have effected banks in any way, so the 50% bank rollover ratio does not need to be revised.

The column also allowed me to notice an important problem in the official credit and deposit statistics. To illustrate the issue at hand, I present the following graph:
As you can see, according to the data, with deposit rates higher than credit rates, traditional banking has been a loss-making activity in Turkey:) What's going on? I talked with a friend who is a retail banking executive, and she told me that the banks have to report the highest deposit rates, and to make guarantee themselves against last-minute surges in rates, they report a much higher rate than they offer.

As for credit, she is not sure what is going on either, as those figures are way too low, just as the deposit numbers are way too high, and to her knowledge, the banks don't report that data... If I am not lazy enough, I will ask one of my CBT friends about this one of these days...

Yet another secretive post

I did my monthly stint with Konda last week, and although I am not allowed to disclose my results, I can tell you what I did:

First, I continued with my calculation of the unemployment rate, but I also had the first chance to compare the Konda unemployment rates to the official survey data. And although the numbers are unsurprisingly different, they are surprisingly consistent. Having said that, I should add that the data is not really consistent with May premilinary indicators from CBT business tendency survey such as capacity utilization and real sector confidence, which were hinting at a slowdown at the pace of recovery.

Second, this month's theme being rule of law, I looked at the determinants of the perceptions of rule of law at the very micro level; for example the relationship with being religious, or Kurdish or Alevite. No surprises there, the results would have been guessed by anyone living in this country for more than a month. 

Finally, as there were a couple of questions on Cyprus on the survey (due to the recent elections there), I looked at the effect of Turkish aid and credit on the Cypriot economy- just basic number crunching, nothing fancy.

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

Economic Impact of the tensions with Israel

That's what a friend asked me today, and to tell you the truth, that's a very complicated question. Part of the answer lies with Turkey's trade with Israel, and to show that, a picture is needed:
As you can see in the graph, trade with Israel is not big in absolute terms. Also Turkish exports to Israel did not increase during the crisis, like to some other countries in the region; in that respect trade with Israel behaved like Turkey's main trading partners...

Weekly Hurriyet Column: Taking the Ankara horse to water

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. No cheesy movie references this time around; as for the title, it is from the interview.

As I mention in the piece, Jeff was kind of to devote more than two hours to our chat, so I have much more very interesting material, which I couldn't fit into my 3700-character limit.  I would like to turn those into an interview piece, sort of like the Lunch with the FT series I admire so much (since the Daily News is much poorer than the FT, it'd have to be sort of "coffee with the Daily News", but still), but I am still waiting to hear from my editor-in-chief for the green light on that.

Economics columnists focusing too much on macroeconomics and finance and not enough on the real economy and sectors are frequently criticized by David Judson, editor-in-chief for the Hürriyet Daily News & Economic Review.

He does have a point. Despite some occasional glitches every now and then, Turkey’s macroeconomic policy is mostly on track thanks to prudential macro management after the 2001 crisis. However, macro reforms have not been followed my micro ones except for a few feeble attempts during the first Justice and Development Part, or AKP, government.

Skimming through my columns for the past year, I was able to find only a few non-macro articles, so I asked Jeffrey Kemprecos, pharmaceutical giant Merck Sharp and Dohme’s (MSD) Executive Director for Public Policy & Corporate Responsibility in Eastern Europe, Middle East & Africa, for an interview.

When he was assigned to Turkey in 2005, Jeff was quite hopeful that Turkey could gain a foothold in the innovative medicines sector due to its advantages such as geography, demographics, enormous domestic market, decent higher education system and scientific/medical diaspora.

Five years later, as he is about to leave Turkey, he is still hopeful that the country will realize its potential. He believes that Turkey could follow in the steps of Singapore and Ireland to become a world-class competitor in the innovative medicines sector. Attracting only 1 percent of the $100 billion innovator companies invest each year would put the sector into the top three in terms of FDI; the country is getting only about $40-$50 million now.

The Association of Research-Based Pharmaceutical Companies in Turkey actually produced a vision/roadmap report for 2015, outlining how to reach this goal. With 80-90 policy recommendations scattered throughout, the report can be criticized for looking like a grocery list, and not an action plan based on the binding constraints hampering the sector.

But even as it is, the document and the know-how behind it, which investment-hopefuls like Russia and Israel are more than keen to deploy, is a goldmine for policymakers. So Jeff was bitten by reality when they did not get a single response after they distributed the report in 2008. They finally got invited to the Undersecretariat for Foreign Trade in October, but have not heard from them since.

MSD and the Association’s other efforts to get the policymakers’ attention, such as fact-finding missions to leading sectoral clusters, or even getting the government open up a stand in the sector’s leading convention, BIO, have also been in vain. In Jeff’s words, they have led the horse to water, but they have not been able to make it drink the water.

That’s why Jeff emphasizes regular dialogue with policymakers as his most important policy recommendation, citing Massachusetts as a best case. In fact, he feels that his sector is not unique in this respect. As Vice Chairman of the U.S. Chamber of Commerce, he is unaware of any sector that has established a sustained, constructive and forward-looking dialogue with the government on coherent policies and strategies.

Jeff is also keen to emphasize that he is not asking for money. That makes sense, given that his company’s R&D budget is about 10 times TÜBİTAK’s and nearly twice of Turkey’s total R&D spending of 4.4 billion Turkish Liras (as of 2006). It is also important to note that he mentioned November’s pricing adjustment only once during our two hours of conversation, and not a single policy recommendation in the roadmap involves government subsidies. So it’d be unfair to disregard his outcry as rent-seeking.

But having known the Prime Minister’s temper firsthand, I do hope I did not just cost Jeff his soon-to-be-acquired Turkish citizenship…

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

Inaugural Memoir Post: The PM's Temper

I notified my loyal readers yesterday on my intentions to write short memoirs a la Gungor Uras. To make sure that deed does indeed follow word, I am starting up today. I am referring to this story in today's Hurriyet Daily News column as well, so that was an added incentive to get this done. Enjoy this one and the rest and please note that I operate in the style of a friendly Midwestern diner: Comments are never required, always appreciated, and I always respond to comments... Suggestions on making these memoirs more interesting would be especially appreciated, as it is a totally new writing style for me.

The eve of the 2007 election. I am at Citi as an economist in the Treasury. All the investors have one question in their minds: The result of the 2007 elections. Everyone knows AKP will get the most votes, but what everyone is wondering is the possibility of a coalition. At this time, the two small right-wing parties had decided to merge, and polls were showing that the sum would be more than the parts.

There were various polls floating around,but even with the polls, it was tough to know how many deputies each party would get because of the peculiarities of the Turkish election system. So I and my boss decided to form a simple deputy-distributing model. Making use of a paper by Zafer Yukseler (I could not find it on the web, I think it is an unpublished manuscript), I divided the country into seven provinces based on voting behavior in the past. Then, assuming that the voting behavior would be the same as the past in each province and using the average of the latest polls, I devised a simple Excel sheet that would distribute votes into deputies in each region.

The results were pointing to a coalition. This was only natural, as the new right-wing party was seen as getting 10-15% of the votes. Anyway, right after we published our report, the media got a hold of it, with the business channels headlining it as "Citi predicts coalition government". Actually, we were not predicting anything; we were merely saying that IF the polls were right, a coalition would be inevitable.

The business channels were quick to invite my boss for an interview, but he, not being fond of becoming a media monkey, politely declined, which, in retrospect, turned out to be a bad strategy, as the channels were quick to find others such as economists, political scientists, academics and the like, to discuss a report which many of them had not read.

And most of them were quite critical: One was saying that foreign economists write these reports in the 64th floor of a bank in New York without knowing anything about the country, which drew quite a laugh in the Treasury floor, where I was based. Our bond trader actually suggested that we call our reports "The 64th Floor" from now on. Joking aside, had that gentleman looked at the cover of our report, let alone read it, he would have seen that we were based on the third floor of a skyscraper in Levent rather than the 64th floor of a skyscraper in New York.

Anyway, the excitement died down in a day, I was away cruising the Greek islands (another wonderful story there) during the elections, and I had all but forgotten about all this, until Steve, Citi Istanbul's CEO, came to visit me and my boss one day: "I was in Ankara over the weekend", he said, and then added with a grin: "The PM told me to fire you"...

It turns out Steve had led Citi top brass to Ankara for a visit to the new AKP government, which had, by the way, won the elections in a landslide after the right-wing merger fell at the last minute. So they meet the PM, shake hands, and the first thing the PM says is: "You should fire your analysts". 

The Citi team is in shock, as they are not sure if the guy is serious or just joking, but RTE goes on: "Your analysts are not doing a good job. They were predicting a coalition, but we won with a landslide. So you should fire them." Obviously, the fault was with his advisers for misinforming him on the report, but it was funny he brought it up so abruptly.

The Citi team tactfully switched to another topic, and while we did not get fired, I do not know to this day how serious RTE was...

Financial Center Dreaming (II)

My favorite daily did a special report on Istanbul's prospects as a financial center about a month ago,  which I finally had a chance to read over the weekend. I am sorry to say that I was disappointed by the report, although it came with the diligent reporting FT is known for. The whole thing simply reeked of advertising.

As friends would know, I do not like (and neither am good at) self-promotion, but reading the report gave me the courage to share what I had written in the Hurriyet Daily News & Economic Review, with a buddy of mine, about this issue after the government disclosed its grand scheme to turn Istanbul into a financial center with great fanfare (but no foreign press presence) at the time of the IMF-World Bank meetings in Istanbul. Alternatively, you can also read it in my blog, along with a short introduction:

Now, you can dismiss me as an Economics columnist with limited exposure to markets, arguing that being a market economist does not count, but my co-author has more than enough market experience to make up for lack of mine as well.

As for the pieces reeking of advertising, I have no idea if the FT did that (and I would be greatly disappointed if my favorite daily did), but my one and a half years of being an Economics columnist has taught me that there is a huge advertising-in-the-news industry in Europe. In the past year, I have met several "journalists" who were preparing such pieces, as they wanted to meet me- obviously, they were not too thrilled in my pessimistic views:)...

Sunday, May 30, 2010

Addendum to previous week's Hurriyet column on the fiscal rule

When posting my Hurriyet column on the fiscal rule into the blog, I mentioned that the most original piece on the fiscal rule among the hundreds that appeared in the papers and research reports was the one by Yapi Kredi Research.

I specifically asked them to put that piece on their web site, and they kindly agreed; you can reach it here. I do not want to give out too many spoilers, and the piece is only two pages long, but they simply come out with time-varying alternative coefficients in the fiscal rule formula, which would ensure a faster convergence to the 1% deficit target (for the deficit part of the formula) as well as facilitate a higher savings rate (from the growth part of the formula). Having argued in my column that the 5% target is not enough for a country with a CSD problem like Turkey (read my column if you would like to know what CSD is), I was very happy to see their formulation...

Saturday, May 29, 2010

A book review and an appealing idea

I just read Milliyet economist columnist Gungor Uras's latest book "Bak, Ben Sana Anlatayim" (Let Me Explain to You), and given my usual distaste for his economic arguments, I found it extremely enjoyable.

My aim is not a full book review; if you'd like that and speak Turkish, there is a review by an Econ. professor here. But what I really found enjoyable was not the economic arguments per se, but the way those arguments were presented. The subtitle of the book, "Olaylarla Alaylar" (Mocking with the Incidents) offers a clue to that: In essence, the book is a collection of short (each a couple of pages at most) memoirs on various Economics-related events in the author's life, including his stint in the 60s in the SPO, 70s in TUSIAD and 80s and beyond as an Economics columnist.

Although my own experiences in Ankara and Istanbul would be dwarfed by Uras's, I had been thinking about doing a similar thing for some time. My only concern was that, not having kept a diary or anything of the sort, I would not be able to record the events in chronological order. Neither does Uras, and his book is even a more enjoyable read for the leaps in time, so I have been encouraged by his book to try a similar thing in this blog. So starting next week, I will jot down the interesting events in my short life as an economist whenever I have the time with the tag "memoir". 
Coming back to Gungor Uras's book, a Turkish Econ. blogger is very critical of Uras's ideas in the book such as opposing black and white TV, the Bosphorus bridge and FDI. While I do not fully agree with Uras on FDI, he is right that Turkey could have benefited from a more active FDI policy; actually, when you think about it, that's what IDAs in Ireland in Singapore do. I mean, no one is going to stop me if I, as Turk, want to set up shop in these countries, but they will probably be (and have been) more sympathetic to Google or Microsoft or MSD than me, right? As for black and white TV, he is right that it would not have made sense to invest so much into the old technology while the world is about to leapfrog into an entirely new one. And I think the same mistake was done recently with Turkey's TV production (they caught the LCD wave way too late). Finally, it is quite plausible that the Bosphorus bridge played an important role in turning Istanbul traffic into the mess it is in now; this is the familiar chicken-or-egg problem. Due to the so many independent variables in the equation, we'll never the answer for sure, but the mysterious thing about empirical Economics is that it spits out inconceivable results from time to time; in fact so much that the word does not mean what we think it means (thanks Inigo Montoya). For example, do you think that the death sentence reduces crime? Think again. 

I am no commie, and neither is Gungor Uras. And neither am I a big fan of his work; on the contrary, I think he has messed up big time with his macro columns quite a few times, to the extent that I stopped reading him, although he does write interesting sectoral stuff on the real economy every now and then. But I think it is just not good manners to dismiss someone as a commie, especially when you haven't read his book. And that's all I have to say about that.

Anyway, I digressed way too much; this post was just to introduce my memoirs, the first of which you'll get soon. And now that I have a great ultraportable I can carry around with ease, I plan to devote all my tiny bits of free time to that, so you should be seeing quite a bit of stuff on that front.

Thursday, May 27, 2010

Roubini Post: Turkish Fiscal Rule: Dead the Day It Was Born

This post already appeared in the Hurriyet Daily News 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..

For some extra material, you can have a look at  a blog post summarizing my views on the topic as well as providing links to all my articles/posts on it, or more recently, my response to a reader request.

Monday, May 24, 2010

Weekly Hurriyet Column: Giving credit its due credit

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 just did a small wordplay in the title this time around.

As for the column, I have an important addendum coming up for the column, but that will have to wait until later, as I need to gather some data and do some reading first.

Anyway, on to the column :

One of the most impressive Turkish economics developments this year has been the rapid loan growth.

Corporate, consumer and housing loans have each registered more than 10 percent rises in the year to date. Annualized, this would translate to a growth of around 50 percent. But before you bring out the party gear, it is important to heed a couple of important disclaimers.

First of all, this growth is following a long period of stagnation in the credit market. Therefore, the strong upward trajectory is likely to slow down in the coming months due to pure cyclical reasons, but there are also structural reasons to expect the rise in credit to lose steam.

For one thing, euro area problems could feed into the Turkish banking sector if they result in a permanent international liquidity squeeze. In fact, with the rollover ratio of external debt at almost 50 percent in the first quarter, Turkish banks were finding it difficult to tap into international liquidity even before the latest meltdown. Continued global risk aversion is likely to make things even worse.

With deposit growth stagnant, things are not looking bright on the domestic front, either. In fact, the banking system has been in a permanent liquidity squeeze for some time. One thing going for credit is the decreasing attractiveness of government bonds, after banking on rate cuts came to an end at the end of last year. Although banks have been slow to load off their bond holdings so far, the process is likely to gain pace, which will contribute to credit growth by freeing up liquidity.

But it is important not to render too much meaning to credit developments in any case because despite common wisdom, credit is not a leading indicator of the real economy. In theoretical economics, credit works its way into the real sector as a financial accelerator: Real economy and financial markets mutually reinforce each other, leading to a feedback loop that amplifies both financial conditions and the macroeconomy. In fact, when you actually run simple causality tests for Turkey, you don't see any effect going from credit to the real sector.

Moreover, the quantity of credit does not tell us much unless we can discern the underlying forces of supply and demand: Loan demand falls during an economic contraction, but banks tend to tighten lending standards as well, which reduces loan supply. It is useful to know which effect is recovering faster, and that’s where the often-overlooked Central Bank’s Loan Tendency Survey comes to aid. While results for the first quarter hint at a recovery in demand as well as supply, the former seems to be generally more pronounced. 

In fact, analysts tend to pay too much attention to the quantity of credit and not enough to its price (lending rates), which is a shame, as price lets us to separate supply and demand effects. Doing that with a simple econometric exercise, I find a pick-up in credit demand in the first quarter. More interestingly, the demand strength is continuing unabated in the second quarter even though credit growth has somewhat slowed down as of late. Therefore, kudos should go to the Treasury for managing to keep debt-rollover ratios low so far and thereby channeling dear liquidity into credit.

Interest rates, when benchmarked, can also give important signals about financial markets. For example, as the Central Bank has noted, the difference between loan and deposit rates shows maturity and default risk as well as liquidity constraints. Lending rates relative to bond rates, on the other hand, is an important factor in banks’ credit supply decision.
Tracking credit is very important, but not for the commonly-assumed reasons. It is important to give credit its due credit.

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

Saturday, May 22, 2010

My favorite research outfits for the Turkish economy

A friend recently asked me what research houses I like and read (to follow the Turkish economy). Since this is a question I've got before, I decided to address it here for the benefit of all:) All of the following publish solely in English, except for Fortis, who publish their reports in Turkish as well.

For keeping up-to-date with economic developments, I rely on two outfits: Fortis and Global Source, whose Turkey outfit is run by Istanbul Analytics, an Economics consultancy. Fortis publishes more often and right after all the major data releases, but Global Source is good for looking at the big picture, i.e. the forest itself rather than the trees in it. In addition, I read Yapi Kredi Research and Citi for their excellent occasional research notes on ad hoc topics.

I also skim the non-resident research houses, but not as ardently as I do the domestic ones, for one simple (non-nationalistic) reason: These economists usually cover quite a few countries, so they may not devote a lot of time to Turkey. Nevertheless, reading them is good for cross-comparison purposes and to see how Turkey is doing in the international beauty contest.

As for getting hold of these reports, that's tough: Yapi Kredi publishes its work on the web, but checking it just now, I could not find their latest pieces there. All the rest are intended for clients only, and Global Source is a fee-based service. But a friendly email never hurts (not to me, obviously). Alternatively, you may subscribe to Research Turkey, a yahoo newsgroup for sharing international reports on the Turkish economy- for some reason, Citi fits their classification as an international outfit, whereas Fortis doesn't (I have no idea why, as both are based in Istanbul, run by Turkish economists), so only the former appears there.

Important Disclaimer: I know the economists at Yapi Kredi, Citi and Global Source, so you may claim I am being biased, but I really have no idea if it is chicken or the egg. Besides, I have never met the Fortis team...

Friday, May 21, 2010

Roubini Post: Rebel with a Cause

This post already appeared in the Hurriyet Daily News at the beginning of the month; 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..

For some extra material, you can have a look at the blog post on the column and an addendum, both from early in the month.

Another brief interruption about to end...

I was away from blogging for almost two weeks; first because of the never-ending moving and then due to a never-ending cold.

I feel better now, at least enough to clean the several hundred emails that have amassed over the course of the last few days, and as soon as I am done with that, I will return to blogging. First step will be archiving my Hurriyet columns. I should be in full blogging mode by Monday, but until then, I am in construction mode:

Upps, that's the wrong sign, but who cares:)....

Monday, May 17, 2010

Weekly Hurriyet Column: Fiscal Rule: Dead the day it was born

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 sticking to movies again, but it is not a classic this time around (see the text for the hyperlink).

As for the column, Yapi Kredi Research came up with the most original piece on the fiscal rule, coming up with a more efficient formula. Although they have a web site, I could not find the paper there. I will ask them to put it on the web, and if they agree, I will link to it as an addendum to the column.

BTW, loyal readers would know that the fiscal rule has got my attention since it first surfaced back in September. A blog post summarizes my views on the topic as well as providing links to all my articles/posts on it. More recently, I responded to a reader request, and was spectacularly proven wrong, claiming that given the political agenda, it'd be tough for the government to get the fiscal rule on the table by the end of June. Uppssss.......

Anyway, on to the column :

I was watching a Richard Gere movie last week, where one of the villains had a tattoo on his forehead in Cyrillic that read “I was dead the day I was born.

The expression seemed to ring some bells. First, I thought it was from a Beckett play, but I had given up on existentialism long ago. It all made sense a couple of days later when Economics tsar Ali Babacan unveiled the much-awaited fiscal rule, establishing that I had experienced some kind of premonition.

As Cornelius Tacitus once noted, viewed from a distance, everything is beautiful, and the Fiscal Rule is no exception. I was pleasantly surprised to learn that the rule will cover the general government, which includes social security institutions, local governments and extra-budgetary funds. The actual formula looks very appealing to the eye as well, especially after Babacan’s comments that the tightest formula had been chosen and that the adjustment coefficients ensured a three-year convergence period. Most of my esteemed colleagues rushed to hail the formula as too rigid.

I would argue that the growth side of the formula, with 5 percent penciled in as the long-term growth rate, is not cautious enough. You could counter me by pointing at Turkish growth performance after the 2001 crisis, which was, by the way, supported by extremely loose global financial conditions and arguably the best world growth spurt in history. A simple Excel exercise reveals that even with a respectable growth rate of 4-5 percent over the next few years, debt declines very slowly.

As for the three-year convergence, the coefficient of one-third means that the deficit will simply be reduced by one-third of the gap between current and targeted deficit, not that the target of 1 percent will be reached in three years. Plugging in my 2010 deficit-to-GDP and growth projections of 4.5 and 6 percent to the same Excel sheet and fixing growth at the neutral rate of 5 percent thereafter, I find that it takes almost a decade to reach the deficit target. I doubt such a modest trajectory is the right path for a country that suffers from CSD, or chronic savings deficiency.

But my biggest objections are on the rule’s implementation. A useful analogy could be made with inflation targeting: Having inflation targeting or even attaining the targets does not make a central bank credible; it is the institutions that come along that do. Similarly, without an independent and authoritative budget monitor or fiscal council, the fiscal rule is not likely to gain much ground. The Court of Accounts, the designated auditor, simply doesn’t have the know-how, political independence or sanctions power.

Similarly, without having been hammered into the Constitution, there will always be the risk that the rule will share the destiny of the ill-fated borrowing limits in the fiscal control law of 2003, being cropped or even nullified with subsequent laws. I find it extremely suspicious that in some places, the rule just looks like a repackaging of that law, which makes me wonder, “If it didn’t work last time, how come it’ll work this time?”

Last but not the least, experts have pointed at lack of full transparency and shenanigans in the general government accounts, which do not bode well for the implementation of a fiscal rule, where reporting will be done by the Ministry of Finance. Combine this with an in-house audit, and you have the recipe for disaster.

Despite last week’s display of prophecy, I am not sure whether I have sixth sense or not. I am definitely not seeing any dead people, but I think I may have just seen a dead fiscal rule.

I also know that with all the over-jubilation, I’ll probably suffer the fate of Cassandra, at least in the short-run.

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

Monday, May 10, 2010

Weekly Hurriyet Column: Hot money blows emerging markets balloon

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 couldn't get any this time around:(

Everyone has got her own take on what caused last week’s wild ride.

For some, it was fears of euro area sovereign risk contagion. For others, it was China’s tighter monetary policy. Yet others tied the sharp falls to intraday selling by electronic trading systems.

I am more interested in consequences, but at first glance, this seems like an almost trivial exercise. In periods of contagion, investors become risk-averse and flock to safe-haven assets such as gold and U.S. Treasuries.

With the yield on 10-year bonds hitting below 3.3 percent, the lowest level since late last year, and gold surging above $1,200 an ounce amid Thursday’s turmoil, last week proved to be no exception. Then, it was no surprise that emerging market currencies suffered, but it was the different levels of misery that was most intriguing.

If you really try, you could tie the pressures on the Hungarian forint, the Polish zloty and the Czech koruna to fundamentals: In all three countries, policy-makers had recently voiced worries on the over-appreciation of their currencies and were willing to keep rates lower for longer- considerably more dovish, in other words, than the Central Bank of Turkey. There is also political uncertainty in the Czech Republic and Poland, with elections looming, and policy uncertainty in Hungary, as the new government intends to loosen fiscal policy.

But none of these changes the fact that Poland’s economy is essentially healthy. Neither can fundamentals explain the fact that these three currencies underperformed even relative to the beleaguered euro. Things get even trickier once you adopt a more global perspective. Other underperformers of last week were the Mexican peso, the Brazilian real, the Indonesian rupiah and the Korean won. Don’t waste your time trying to find similarities between these economies; I already did, to no avail - or at least until I looked into portfolio flows and discovered an almost perfect negative correlation with currency depreciation.

Countries that have received the most portfolio inflows in the last year seem to have experienced the largest selloffs last week. Poland, having received over $25 billion over the past year, is a case-in-point. Turkey, with less than $5 billion of inflows, is the other side of the coin. In the latter’s case, foreigners had actually significantly reduced their positions during the political crisis of 2008 and the Lehman collapse, but then never really got back in. With foreign presence so light, it was no surprise that lira tremors were less than peers.

This is not to say that fundamentals did not work in Turkey’s favor: The Central Bank’s relatively more hawkish stance compared to its peers, the large foreign currency resident deposits, the positive recovery outlook, and the country’s less ugly stature in the investors’ beauty contest I discussed a couple of weeks ago all helped to keep the lira relatively stable. But I would argue that they were merely talented supporting actors in a drama crowned by hot money.

Before you congratulate me for having written something useful for a change and go long-lira, note that other fundamentals such as external financing or the fair value of the lira do not justify more real appreciation no matter how hard you try. In other words, Economics is definitely not as lira-supportive as most analysts are fervently arguing.

But irrespective of your feelings for the lira, last week has provided, if anything, lots of lessons for students of finance as well as tremendous buying opportunities in the international currency arena.

Just remember that as John Maynard Keynes noted, markets can remain irrational a lot longer than you and I can remain solvent.

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

Saturday, May 8, 2010

Yet more on the fiscal rule

Reader "age" wrote the following comment on an end-March post on the fiscal rule:
Dear Sir, I am firmly convinced that a fiscal rule can be a very effective tool for fiscal discipline. As you mention in your note, the institutional setup is key to its success. Switzerland had a constitutional (!) borrowing constrained that was never applied. A better designed new fiscal rule changed everything, however. What changed was a binding annual ceiling for (cyclically adjusted) spending (based on cyclically adjusted revenue). There was not the possibility anymore of temporising. The rule also has a defined sanction mechanism which quickly enforces sanctions if deviations occur. A Swiss type rule (with some modifications) might be successful in Turkey too.
I honestly did not know anything about Switzerland's fiscal rule, but I had a quick look at it this morning. And as the reader notes, a rule based on spending, rather than the government deficit, could have worked better for Turkey, as I have argued before.

BTW, at the press conference for the Inflation Report a couple of weeks ago, CBT President Durmus Yilmaz noted that he expected the government's new fiscal rule to be agreed by the end of June 2010, and this timetable seems to be consistent with the Treasury's timetable. With fiscal worries high on the investors' agenda, even an ill-designed fiscal rule would be a boost, at least in the short-term, to Turkish assets. But I am not sure if the government will be able to deliver, especially since we are in May and the government is a political mess that will go all the way to a Referendum and Constitutional Court (if CHP keeps its promise to battle the AKP on all grounds).

EconNews Roundup

Lira as safe haven according to some analysts: Well well well... When the lira depreciated 5% in a couple of days, this piece sounds kinda funny, but don't forget that lira has performed better than peers in CEE since the beginning of the year. And there are are some compelling reasons for the lira to be a safe haven, or at least not be hurt as much as most of its peers. Actually, the article would have been more informative if it spent more time explaining those reasons, some of which are mentioned at the end. But before you go long-lira, note that fundamentals such as external financing or the fair value if the lira do not justify more real appreciation no matter how hard you try. Also remember that a lot of analysts are simply (and implicitly) assuming mean reversion when they are bullish on the lira: Since lira has underperformed in the recovery, it will perform better from now on. While the events of the last few days have justified them so far, lira's unique characteristics, such as huge FX deposit base, may mean that the Turkish currency has simply less volatile than its peers- keep in mind that I am just thinking aloud, it is way too late to look at Sharpe ratios or implied volatility without a Bloomberg terminal.

Notes from the IPO Turkey Summit: I think it'd be a good idea to discuss why IPOs are so low in Turkey (hint: demand and supply factors both play role). And if you want to get confused on the eternal chicken-or-the-egg dilemma, see here.

A better way to create jobs (than force firms to hire workers, a la RTE)

The foreign interest in malls seems to have died down, but the sector is yet recovering.

Friday, May 7, 2010

Good Morning in Uskudar:)

Foreign media, after having been impervious to Turkey's political risks for eternity, seem to have finally woken up.

Perhaps even more interestingly, the single-minded reporting of the prosecutor's prosecution as a step towards democracy is being questioned by a well-written WSJ article.

As I have been extremely critical of foreign media's coverage of Turkey in the past, I bow down and congratulate Reuters and WSJ- and hope that my favorite daily will soon follow suit rather than publish pieces reeking of advertising (more on that later).

BTW, HT to Atilla Yesilada for both articles; I am not an avid follower of Reuters or WSJ were it not for him... BTW, he has a summary of the Reuters article in Turkish.

Thursday, May 6, 2010

Commercial Break

Loyal readers would know that I do advertising rarely, and only when it's worth it. The upcoming training seminar from Deloitte Academy, Understanding and Interpreting Economic Variables, would definitely fit this category. And as an added bonus, it will be run by one of the few people who your friendly neighborhood economist would easily label as having a much better grasp of Turkish economic data than himself...

The only downside is that the training will be in Turkish, I presume...

EconNews Roundup

US investment in Turlkey may recover next year: I am just linking this to remind everyone of ABFT's excellent report on the Turkish reform agenda.

Speaking of reform, urge on reforms from ex IMF rep: The points he raises, such as labor reform, are very similar to mine when I decided to tackle Turkey's stagnating reform agenda, first for the Daily News, then for Risk Advisory Group. As I have repeated many times, Turkey's priority reform agenda is well-known; the problem is finding someone to implement it.

Greece's defense spending: So are they saying that, like the end of the Cold War, did Turkey have Greece spend their way into bankruptcy?:):):)

IPOs on the horizon: Note that there is an argument that these IPOs could be hit by the political tensions. While I don't subscribe to that argument in full, contrary to what some claim, politics has been a driving force on Turkish assets in the last couple of years, but only when tension has risen significantly. Moreover, the international climate has increased the chances of a road accident.

Moody's downgrades Finansbank: The importance of being Greek...

Wednesday, May 5, 2010

A very late addendum...

... to last week's Hurriyet column: In case you are wondering, the title was a reference to one of the popular songs of the early 80s. I was watching Music & Lyrics when I realized that my young readers may not be as verse in the early 80s, 1983 to be specific, when this song was a big hit and the eziks won the FA Cup for the last time.

I am stuck at home with a really bad cold, so you should see quite a few posts from me in the next couple of days. BTW, a couple of friends are sick as well, so I am wondering if there is another flu epidemic in Istanbul- weird for this time of the year...

Tuesday, May 4, 2010

EconNews Roundup

Bureaucracy lacks equal gender representation: Fair point, but I wish that were the only problem of women's labor.

Dervis tells Turkey to increase savings for sustainable growth: I wish he also told how to do that.

For the lack of a better word, the weekly column of my time-sharer in Hurriyet Daily News & Economic Review: I agree with all he is saying, and I was going to link you to the paper I wrote with Adres Velasco on the Fund, but I couldn't find it on the net, so you'll just have to email me if you are interested.

Addendum to this week's Hurriyet column

Tarik left a comment to a previous post, where I was forming the ideas of yesterday's Hurriyet column:
why do you think the cbt is swerwing off the road?because cbt is not sticking to its policies to reduce the inflation?if so why is not doing so? the economy is on its way to recover,so i guess the inflation should be increasing a little bit,what is expected to cbt is to bring the inflation under control if it gets out of control? can you explain why the credibility of cbt is questioned?
Tarik wrote this comment before he was able to read my column, so he should be OK with the swerving off the road, but it just means that the CBT will give in before markets in the chicken game. But in the latest Cnbc-e survey of policy rate expectations, now more economists and Treasury officials are expecting the first hikes in September and October, so first round to the CBT...

As for what would be expected for the Central Bank, raising rates would be one... There is also another argument for rate hikes, which I did not have enough space to explain in the Hurriyet column: All the Central Banks around the world, especially Turkey's peers, are either raising rates or getting ready to do so. One could example is Brazil, where the rate difference between the two countries, especially in real terms, is starting to get a bit too conspicuous. I wonder if this could start affecting portfolio flows and have negative consequences for the lira, but the Central Bank obviously does not think so.

As for Tarik's last question, the credibility gap is the difference between market's and CBT's inflation expectations. As the Bank just revised its year-end target to 8.4% from 6.9% and with year-end expectations at 8.2% (see graph below), there is no credibility gap on that front. But 12 and 12-month ahead expectations are still hovering around 7%, significantly above the Bank's targets for 2011 and 2012, presented below by Turkey Data Monitor:

By the way, Statistics continue to support the view that we may be seeing more of a base effect, with yesterday's consumer confidence and PMI releases being cases in point. The former brings home Mary's point on perceptions driving reality, which I really should look into one of these days...

Monday, May 3, 2010

Weekly Hurriyet Column: Rebel with a cause

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 sticking to movies with an oldie but goldie. All the other references are embedded as hyperlinks in the text, as I have started doing since I got the web-editing power of my columns, but I forgot the read my lips reference at the very end- the hyperlink has even an actual recording. By the way, the column it is a continuation of a Thursday post, so the credit column got dumped yet again:( The perils of writing once a week...

As for the column, an important point I had to leave out because of space constraints was the analysis of when the CBT should raise rates. Using a Taylor rule, I tried to justify the 4Q rate hikes with all the different parameters, and I couldn't, even with quite high output gaps. In most cases, I found that the Bank should have already started tightening in the last couple of months. But, this exercise is kind of pointless because as I explain in the column, the CBT sees inflation as temporary, so its actual inflation is not the inflation we are seeing. Of course, another explanation would be that the Bank has a third factor in its interest-setting equation, such as elections or the smile on the PM's face. Now, we are getting into dangerous territory:)...

Anyway, on to the column and by the way, apologies to Korean readers for my little pun, but it wasn't me who invented "come to Seoul to shake up your soul" or "Seoul, the soul of Asia"...

I always felt bad for being the sole soul outside Seoul confused by the Central Bank of Turkey, or CBT.

But for once, I feel comfort in the company of strangers: With more or less equally divided between labeling the Bank’s latest Inflation Report as hawkish or dovish, economists seem to be as baffled.

In fact, the Report has elements of both: While the Bank’s upwards revision of its year-end inflation forecast to 8.4 percent from 6.9 percent and its discussion of risks to its baseline inflation and policy outlook are definitely on the hawkish side of things, its commitment to hold rates until the last quarter and engage in limited hikes thereafter are definitely signs of dovishness.

The Bank has also been kind enough to share with us what led to the upward revision in this year’s inflation forecast: Higher energy and food prices (0.15 and 0.55 percent), larger-than-expected impact from the January tax measures and a narrower output gap (both 0.4 percent).

The latter reveals that a fast recovery is not in the Bank’s baseline scenario. And I would have concurred, were it not for recent data: April capacity utilization and real sector confidence, both from the CBT's monthly business tendency survey, came in quite strong last Monday. Although these figures have lifted the hopes of even a perennial pessimist like me, one month’s data is hardly enough to reach a firm conclusion.

But my work with Konda for their Barometer surveys, which I am not allowed to disclose, has led me to question one of the Central Bank’s key assumptions that, with unemployment expected to remain high, the recovery is not expected to be inflationary.

The contributions also build the case that the rise in inflation is due to temporary factors and therefore temporary. That’s how the Bank can justify its dovish policy rate stance and low inflation forecasts for the next two years: 5.4 and 5 percent for end-2011 and 2012 respectively, conveniently just below the Bank’s targets for both years.

Again, I am puzzled: With the output gap bound to close in that timeframe, the lira unlikely to appreciate in real terms significantly much more and barring any positive surprises on the supply-side, I cannot see how inflation will suddenly fall 3 percent next year rather than get stuck in the 7-8 percent range.

On the other hand, I am crystal clear on the Bank’s stance: With inflation expectations still untamed, the Bank has been forced to play the James Dean chicken game with the markets. As any student of Economics would know, that game has two pure strategy Nash equilibria, one which the markets cave in, and one which the CBT yields.

There is a also a mixed equilibrium, but it is way too early on Sunday, and without my morning cup of coffee, I am likely to get mixed up. As I am too lazy to open my favorite game theory book, you should consult the nearest theorist, but if you just are wondering the opinion of your friendly neighborhood economist, I am getting slightly more inclined towards the Bank swerving from the road.

As for the Bank’s attention to factors that could lead to earlier rate hikes, such as the rise in inflation expectations leading to deteriorating price-setting behavior, sharper-than-expected pick-up in global demand or commodity prices and loose fiscal policy, the CBT is simply executing deterrence theory, an artifact of the Cold War. Deterrence theory might have worked, but we could have easily ended up in the Dr. Strangelove world as well.

Turning to more recent history, my friends at Global Source titled their take on the Inflation Report “Read my lips: No Hikes until the fourth quarter”. I don’t know if it’s just me, but I suddenly remembered Papa-Bush talking about tax hikes.

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

EconNews Roundup

Inflation at 17-month high: Despite the headline, the figure was lower-than-expected. But that's no reason to rejoice, for two reasons. First, core inflation is on the rise. Second, there was a sharp fall in communication, which is, according to TURKSTAT (as reported from Global Source, who asked them about it) is a methodological adjustment.

More energy investment in Turkey....

...And we get a new energy index.

Turkey ranks 16th in PPP-adjusted GDP: I said 17th when I was quarreling with my uncle, who firmly believes Turkey is a agricultural society, so thanks to Zaman for the update.

Exports continue to bounce back strongly, according to preliminary figures from TEA.

Yet another confidence index on the rise.