Liveblogging @ GES Istanbul

Those of you who follow me on Twitter and Facebook already know this, but I will be blogging live from Global Economic Symposium in Istanbul (http://www.global-economic-symposium.org/) today and tomorrow. I am actually on the ferry, on my way to the meetings.

I also hope to be tweeting as often as I can as well as shoot videos (i.e. do interviews) with a couple of experts and random people on the streets (in case you want to cross paths with me), so we'll see how it goes.

BTW, I am doing this for Bertelsmann Stiftung, a German think-tank and also one of the organizers of the conference. But they told me I could pots my writings here as well. But obviously since my priority is to write on their web site first, you'll need to go to their web site, www.futurechallenges.org (2 minute registration required), for the latest updates. But I'll also try to post here as soon as I can, and my Hurriyet column on Monday is sure to feature my impressions from all this.
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Addendum to Hurriyet column, Basel III and Turkey

There were quite a few issues I could not explain as much as I wanted to in my Hurriyet column about the impact of Basel III rules on Turkey, so addendum is in order:

First, I deliberately avoided naming an explicit figure for costs because I would have essentially made it up:)- that is no easy task, and definitely not a few hours' work. But at least, I can walk you through my reasoning:

As I have identified the external financing as the main channel Turkey would get hit through Basel III, I had better explain why I think the external financing outlook is worsening. And as I always say, a picture is always better than a thousand words:

As you can see in this graph, compliments of my friends at Turkey Data Monitor, external financing has shifted from FDI and corporate borrowing to portfolio flows and banks. The former is usually deemed a less trusted source of external financing. And while banks flows are normally a good way to finance the deficit, we could see a pullback in that channel because of Basel III, as Turkish banks are borrowing from global banks.

You could generalize this point to emerging markets in general: While all would be effected by external financing drying up, those dependent on short-term speculative flows and banks would feel the heat the most. With emerging markets getting record flows following the Fed's Quantitative Easing II, this is not an immediate concern, but certainly one we should keep at the back of our heads' in the next couple of years.

Finally, it is worth mentioning that many details on Basel III have yet to be clarified. For example, if hybrids and other exotic stuff will not be qualified as top-notch capital, then the cost on banks will be much higher. In fact, there are already some reports that the costs on banks, especially investment banking divisions, will be significant. And some regulators, such as the Swiss and the British, are already asking their banks to hold capital in excess of the Basel rules. 

All in all, I would argue that it is too early to ignore Basel III, especially if you are a emerging market like Turkey dependent on bank flows for external deficit.

Weekly Hurriyet Column: Basel III and Turkey

Below is the unedited version of my column for last week (although I am posting it at the publication date for archiving purposes, I am already a week late). 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 title this time around; the title is as boring as they come.

As for the column, I have to say that the Econ. editors at HDN&ER specifically asked me to write on this topic. I was apprehensive at first, but I think it turned about quite a good idea: As I mention in the column, I have not seen anyone else, in the media or econosphere, talk about it.

I have quite a few addenda, enough to warrant a separate post, which I will add in tonight. So on to the column:

The biggest shocker of the crisis, at least according to your friendly neighborhood economist, is how the banks have managed to preserve themselves.

While hedge funds and private equity have lost a lot of blood in the last couple years, banks have more or less remained unscathed. Many of them are still “too big to fail” and still more like a casino, nothing like It’s a Wonderful Life’s Building & Loan - well, maybe nothing except the bank run. Moreover, those Monte Carlo activities are still mixed up with traditional retail banking, and bankers are once again earning huge bonuses.

As the public has more bloodlust against the banks than the spectators in the Coliseum, breaking them up would have been successful public relations for national governments. But I doubt that it would have been the perfect solution. Northern Rock failed not because it was colossal, but because it simply messed up its core business of managing a maturity mismatch. And the woes of the Spanish cajas suggest that a financial system with a lot of small banks is not always safer than one with a few large banks.

Here’s where Basel III comes in. To ensure that banks have enough capital when the next crisis hits, the capital requirement has been lifted to 7 percent of risk-weighted assets. This ratio will comprise of a conservation buffer of 2.5 percent to be drawn in times of stress, to be reached by 2019, in addition to the minimum common-equity target of 4.5 percent of assets, to be in place by 2015.

Even after disregarding the fact that the world will have seen a crisis or two by time the new ratios are in effect, it is debatable whether they will do the trick. Even a simple Turkey economist can see that capital ratios mean nothing if assets are overvalued, the risk agency problem remains at large, and shadow banking is still untackled. In fact, many respected economists, including Martin Wolf, argue that the new capital requirement is way too small. According to them, Basel III is unlikely to deliver a smaller and safer banking system.

But a more interesting question, at least from my own lens, is how the new rules will affect my own beloved country. To my dismay, my colleagues and Turkey economists have been dead-quiet on this question, which makes it impossible for me to plagiarize, or at least quote, them. At first glance, their silence makes sense: Not only are the rules implemented slowly, Turkish banks’ capital ratios are already above the buffer, thanks to prudential regulation after the 2001 crisis.

That argument fails to recognize the external financing costs of the new rules. Balance of Payments statistics have been pointing at a marked deterioration in the quality of external financing of late. Reining in the global banking sector would not only have a direct effect on long-term borrowing by Turkish banks, it could also impact, indirectly, foreign direct investment and portfolio flows. As a result, both the quantity and quality of external financing could be affected.

Then, standard textbook macroeconomics dictates that there needs to be either a quantity or price adjustment in the Turkish model of external finance-led growth. Simply put, either the economy would have to contract or the lira would have to depreciate.

You can argue that, with the rules not to be implemented until 2019, I am looking at the very long-run, when we will all be dead anyway. But my gut feeling is that investors are making too much of this long timeline: Market pressure could easily push the banks to the new targets in the next couple of years.

I am aware that this is not the consensus opinion, either for Turkey or the world economy. But it is much easier to make money with contrarian opinions.

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: Use Your Illusion (After the Turkish Referendum) 2

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics 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...

There is also a blog version, which includes an addendum to the Daily News article, but is virtually the same as the Roubini post.

 

 

Roubini Post: Turkey: Use Your Illusion of Growth

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics 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...

There is also a blog version, which includes an addendum to the Daily News article, but is virtually the same as the Roubini post.

Weekly Hurriyet Column: Use your illusion (after the referendum) 2

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. The title is just the continuation of last week's; I thought that I should stick to the original and have two volumes as well:)

As for the column, I have quite a few addenda:

First, to support my point that foreign investors are happy with the going in Turkey for the moment, a Turkish economist had to say the following:

Having come back from a roadshow entailing four European countries where the referendum itself plus post-referendum dynamics were discussed with the investor community, we have to say that the community’s assessment of Turkey is presumably the best it has ever been.

It seems that the referendum and the strong growth print have taken their "toll" on foreign investors immediately. You could then wonder why Turkish assets have not responded strongly. The answer is that, as I discussed in last week's column, not only much of the referendum result and the growth print are already priced in, Turkish assets are also quite expensive, as rates do not have further room to go down and as the currency is already overvalued.

Second, it seems that the expat community in Turkey is starting to get worried about the polarization in the country- see the comments at the bottom of the column.

Third, BDP's call to boycott in schools got some support in the East and Southeast, so the "acts of civil obedience" I mentioned in the column have already started. On the positive side, PKK extended its ceasefire, but I would still not rule out an escalation of terrorist activity in the run-up to the general elections.

Last but definitely not the least, the graph is version two of Turkey Data Monitor, which I have been testing. One big improvement, as loyal readers will notice, is on how the charts appear; they are now much easier to read.

Anyway, after these footnotes, on to the column:

I risk being crucified by die-hard Republican People’s Party, or CHP, supporters for admitting that the big winner of the referendum is undoubtedly the Justice and Development Party, or AKP.

Not only the AKP has confirmed its legitimacy, it seems set to emerge from the upcoming general elections victorious. Even after using most generous estimates from defects from the other parties to the “yes” camp (and most conservative ones for the AKP defectors), the AKP would most likely get over 40 percent of the votes if elections were held today, securing majority in the Parliament.

This last sentence is a sigh of relief for foreign investors. As far as most of them are concerned, the question of political stability has been resolved to their satisfaction, not only in the short-run, but also for the next few years. But it is an illusion!

First of all, the CHP is likely to fight the constitutional reform package tooth and nail. It is unlikely that the AKP will adopt a reconciliatory approach, either. Although the press concentrated on the few reconciliatory remarks in his victory speech, by labeling the 16 million naye-sayers as coup supporters, PM Erdoğan seems to be getting ready to dig up the tomahawk.

The pro-Kurdish Peace and Democracy Party, or BDP, and the PKK, their literal brothers-in-arms, are the hidden winners of the referendum: Their call for a boycott was a success, with more than half of Kurds staying away from the ballots. As a result, they are likely to ask for concessions from the government and resort to acts of civil disobedience or even terrorism if their demands are not satisfied.

Finally, the regional polarization that has emerged from the referendum is not helpful, either, although I do hint in the editorial in today’s South Weekly that some of those results are being misinterpreted.

The economics landscape is likely to be equally illusionary. Turkey economists have been dazzled by last week’s double-digit growth figure for the second quarter. Never mind the fact that the 10.3 percent year-on-year increase follows last year’s 7.7 percent contraction, and is therefore partly reflecting base effects. More recent leading indicators hinting at a considerable slowdown in the pace of recovery are likely to be brushed under the carpet for now.

Similar illusions are emerging with respect to fiscal policy. The common logic is that given the strong referendum win, the government will not need too much pork-barreling. However, recently announced policies prove that the spending genie is nevertheless out of the lamp.

While Finance Minister Şimşek is keen to emphasize that the government will stick to the fiscal deficit target of 4.9 percent of gross domestic product, that figure was based on a much lower GDP estimate. If the economy were to grow 6.5 to 7 percent this year, the government would have an extra leeway of 15 billion liras for its spending binge.

In a similar manner, the IMF’s recent recommendations in its Staff Report for Article IV regarding fiscal, monetary and financial sector policies, as well as warnings of loss of external competitiveness, are likely to fall on deaf ears.

If anything, the latter concerns could trigger more pressure from the government on the Central Bank to lower rates to help the over-valued lira, as the government sees the exchange rate as the sole cause of Turkey’s diminishing competitiveness and the interest rate as the only remedy to correct it. I expect pressure to increase considerably once the base effect diminishes and an unfavorable parity compared to last year make exports look worse in the last quarter.

A major political event could be a wake-up call for investors, but they are happy to sleep on Turkey for now.

*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.

Hurriyet South Weekly Editorial: Water Politics: What is so special about being near the water?

The editor at South Monday, Hurriyet Daily News and Economic Review's weekly supplement about the Aegean and Mediterranean coasts, liked my first editorial enough to ask me to write for them an editorial every month. So this is my second editorial for them. It is a light-hearted look at the referendum results.

It is really a shame I am putting this up so late (Monday, October 4), but all this is part of my catch-up process. Better late than ever...

BTW, I agree with the first commentator that the column does not have a lot of facts, but as I said, it is a light-hearted look, not a political analysis. And it is supposed to be an op-ed, so it is supposed to have more opinion than fact:)...

As you already know, the referendum on the constitutional reform package resulted in a somewhat surprisingly strong “yes” win of 58 percent.

But more interesting has been the distribution of votes. The western and southern coastal regions – the shores South Weekly is about – as well as Thrace strongly rejected the package, whereas the rest of the country wholeheartedly embraced it.

It has been argued by politic commentators that the geographical distribution of “yes” and “no” votes shows how politically polarized Turkey has become. It then follows that such a deep divide is barely conducive to forming a consensus on social, political or economic reform.

While the esteemed political commentators who have reached such a shocking conclusion are probably right, they nevertheless do not enlighten us on why the Aegean and Mediterranean coasts were so anti-reform.

There is a consensus explanation once you notice that many people went to the polls Sept. 12 uncertain of what they were voting for despite rigorous campaigning by both sides. Undecideds stood at a whopping 17 percent in a survey a few days before the referendum by polling company KONDA, which was, by the way, the only major outfit that correctly predicted the outcome.

The noted confusion about the reform package, along with opposition parties’ commendable zeal to turn the referendum into a vote of confidence for the government, meant that voting was mainly along party preferences. And given the distaste for the ruling AKP in the south, which PM Erdoğan has reluctantly accepted as well, it was normal that “no” ruled along the coast.

This explanation makes perfect sense, but I still think there is something missing in this picture. For example, once you map party preferences with the referendum results on a provincial basis, the biggest discrepancies happen to be on the southern coast: İzmir has too many aye-sayers, and Muğla too many naysayers, to be explained by party preferences alone.

In fact, monthly KONDA surveys, on which I have worked as an external consultant, had been showing that voters in the south and Thrace were most likely to vote in the referendum beyond party preferences and least likely to be influenced by their partly leaders or family elders. It is also no coincidence that these regions come out as the least politically polarized in the same surveys.

Politics columnist Ahmet Hakan recently noted that he wants to move to İzmir following the city’s strong “no” result. I too want to move to İzmir, but rather for the robust “yes” outturn, even though I personally still think the constitutional reform package is doing more harm than good. Because I know that a good chunk of those ayers, just like their nayer brothers, genuinely believe in the amendments.

And if you are still wondering what is so special about the south, just think about the blue and red regions in the presidential elections of the world’s largest democracy.

Maybe, there is something special about being near the water, after all… 

*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.

My New Toy

I have always been envious of tech writers who get to try new gadgets before everyone else. Well, no more: I got this morning the second version of Turkey Data Monitor, which I will be test-driving for the next few weeks.

I will be holding my review until the software is officially released, but suffice it to say that it is a significant improvement over the first version, which was already quite good to start with.

Weekly Hurriyet Column: Use your illusion of growth

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. The title is just me paying homage to one of the best hard-rock albums of all time. Mind you, this is volume I; for a homage to volume II, you'll have to wait for next week's column.

As for the column, you probably know by now, especially since I am posting it here a few days late, that my projection of 8.5 to 9 percent turned out to be a tad too pessimistic, with second quarter GDP growth coming at 10.3 percent. Here's where that growth came from, compliments of, as usual, Turkey Data Monitor:

The difference between my forecast and the actual outtturn is mainly due to private investment. In addition, both consumption and stock build-up turned out to be somewhat higher than what I was expecting.

But to render unto Caesar what is Caesar's, I did mention at the column that "a strong stock build-up, along with a robust consumption outturn, could easily take us just shy of double-digit territory". While both turned out to be the case, I honestly did not expect such a strong private investment reading, as I would not expect the private sector to undertake so much capex when capacity utilization is so low. In a similar vein, I am not sure why stock build-up did not turn out to be even stronger if companies are so confident of the future...

There is another enigma at the production side: While home sales have plummeted in the first half, construction activity is buoyant. Such a strong construction turnout in the second quarter was not in the permit and license data, which came in earlier than the GDP print, making all  this even more intriguing. But more interestingly, it naturally takes time for permits to turn into apartment complexes and houses, so we should see more of the same pattern in the second half of the year. Then, the natural question is: What would happen to the real estate market once these licenses and permits start to turn into residences and office spaces? Dunya columnist Alattin Aktas recently took on this issue at his column at Dunya- have a look there if you can read Turkish.

These are just a couple of footnotes of your friendly neighborhood economists and are in no way meant to be a full-fledged take of the data. For that, see any of the analyst reports out there or have a look at RGE's take, which summarizes several reports.

Anyway, on to the column:

Now that the referendum is over, it is time turn our focus back to the economy, and tomorrow’s second quarter gross domestic product, or GDP, release offers plenty of opportunity for that. I am aware that offering my growth forecast a day before is not very valuable, but my bottom-up approach could at least provide some educational value.

Argentinean economist Guillermo Calvo once said that we don’t know much about economics other than accounting identities. The accounting identity I will utilize is the national income accounts, or NIA, one: GDP is equal to domestic plus foreign demand. Domestic demand is, in turn, made up of consumption, investment and government spending. I will go over each to come up with an aggregate figure.

Consumption seems to have been surprisingly strong. Leading indicators such as consumption goods imports volume, domestic consumption taxes and CNBC-e consumption index are all hinting that consumption growth might have accelerated on a year-on-year, or YoY, basis. While none of these is a perfect gauge of consumption in the NIA by itself, credit demand and consumer confidence look stronger in the second quarter than the first quarter as well.

As for investment, machinery and equipment production usually does a pretty good job in predicting the direction of investment, and it is showing growth at a comparable pace as the first quarter. Similar signs are coming from capital and intermediate goods imports, capacity utilization and real sector confidence. All in all, it seems that private domestic demand was the deciding factor of growth in the second quarter.

The weak links will probably be the government and external demand sides. As there was some fiscal adjustment going on in the second quarter, the contribution of government expenditure to growth could even be negative. The same could be said of foreign demand, as is the case in Turkish growth episodes. But since export volumes were able to keep up with import volumes, the negative print there is likely to be moderate.

When I add all these up, I come up with a YoY growth of 8.5 to 9 percent. The deciding factor will be inventories, which are difficult to predict, and a strong stock build-up, along with a robust consumption outturn, could easily take us just shy of double-digit territory. At first sight, it seems that Turkey is doing well, but that would be highly illusionary.

For one thing, the second quarter growth figures are still reflecting base effects. A case-in-point is last week’s July industrial production, where the stronger-than-expected outturn resulted in premature jubilation in the media, although the monthly increase was a mere 0.3 percent after adjusting for seasonality and working days.

In fact, leading indicators such as purchasing managers as well as Central Bank’s real sector confidence and composite leading indicator indices are pointing to a considerable slowdown in the pace of recovery in the second half. While no one has voiced it yet, it is even possible for the output gap to widen again.

The Central Bank has outlined how it would respond to such a scenario in its latest Inflation Report. According to the Bank, an outcome whereby global economic problems intensify and contribute to a contraction of domestic economic activity may trigger a new easing cycle.

However, I think we are still far away from that scenario, not that I am optimistic on the global or domestic outlook, but because, as I have argued before, I believe there is not as much slack in employment as commonly assumed.

But I have been scratching my head since July, trying to figure out how the Bank would respond if the economic recovery lost steam, and inflation got stuck around 6 percent.

*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.

Yet another addendum to an addendum

This is another addendum to my recent post on the referendum. Kursat left the following comment to that post, which definitely deserves a reply:

I've been curious for a long time about how the votes of undecideds are distributed. I know most of the cases it's distributed according to relative frequencies which I don't find quite right since I am suspicious about randomness of the respondents of the survey. I just wonder whether KONDA has any statistical tool/model on that or they just religiously believe the respondents are random.

I personally believe if they are using relative frequencies to distribute, this will have a downward pressure on YES causing YES voters to be seem less than its actual value given my religiously belief of the data is nonrandom.

As I explained in the first addendum, KONDA tries very hard to ensure random sampling (they have a program that does random sampling at the street level and then go to the selected addresses even if they are in the middle of nowhere- all interviews are face-to-face by the way). Because of that, they distribute undecideds according to relative frequencies, as you guessed. However, even if the data is random, there is a strong argument that undecideds should not be distributed according to relative frequencies. My friends at Istanbul Analytics/ GlobalSource summarize the issues at stake at their report just before the referendum:

It is reasonable to conjecture that the undecideds will be distributed along a bell curve on Sunday, meaning that apportioning them (as is the current custom in the industry) pro-rata to YES and NO votes would not bias the results. There are two caveats. The first is an event that would significantly change the perception of the undecided voters. In our past comments on the referendum, we cited several such events. Of these, the most noteworthy is the backpedaling by the PKK-BDP-Ocalan Axis, which switched from impartiality to boycott. We assume that in large Kurdish cities poll security will be provided adequately, allowing the voter to express her preference freely in the ballot box. But, in rural areas and townships, the PKK/BDP pressure could work to the advantage of rejection. We make this conjecture, because poll data suggest that no-shows would have likely voted to ratify.

The second caveat is the observation, made by very reliable pollsters that the polarization of the nation and the mutual threats of retribution from the respective camps, coming on top of the growing fear of being wiretapped, have made many voters very conscious about expressing their views freely. These voters may be represented more than proportionally among the “undecideds” classification. We can’t estimate the magnitude of this effect, but would speculate that it works in favor of NO votes.

You could also argue that more potential "no" voters than "yes" voters decided not to go to the polls, as the so-called white Turks were still on vacation or preferred their Sunday brunch to their civic duty. Your friendly neighborhood economist, who was recently called a "grey" Turk by the editor-in-chief at the Daily News, did not even bother to look up where he was supposed to vote, as he is totally fed up with the small-town-merchant (kucuk kasaba tuccari in Turkish) mentality of the AKP and an opposition leader who is not even able to vote.

But at the end of the day, KONDA was right on target, so I guess  distributing according to relative frequencies was not such a bad idea after all. Maybe, the GlobalSource and white Turk effects canceled out:)

You could potentially come up with a statistical model of undecideds, but you'd have to ask specific questions on the survey towards that goal. Some food for thought for me until the general elections, as I am their Econ. consultant... 

As a side point, I am really not sure how KONDA managed to be so off-the-mark at the 2009 local elections. My only explanation is that they ended with a black swan in their sampling.

An addendum to an addendum...

... and so soon- this is an addendum to my most recent post on the referendum.

Right after I submitted my post for to Roubini Global Economics, RGE economist Mary Stokes wrote back to me with the following interesting observation:

Very interesting how Konda expects a relatively high margin of victory for the ‘yes’ vote. I guess this will be a defining moment for whichever polling firm comes closest to getting it right. Now we just need to wait for Sunday.

, to which I responded:

History can't be any guide, as KONDA was right on target at the 2007 general elections, but was completely off the mark at the 2009 local elections. I can personally vouch that they do a lot of things right (proper random sampling, face-face-face interviews, checks to make sure interviewers do not fill out the forms themselves), but still you never know....

I really think KONDA is being very tedious with their interviews, and their sampling allows for a maximum error of 2.5-3%, but it is still the undecideds who will decide this referendum. BTW, with two polling opportunities in less than a year (the general election is scheduled for July, 2011), we might finally have a clear winner from the war of the polling firms.

Speaking of quotes, the award for best quote goes to a loyal reader (I am not disclosing her name, as I don't have her permission), who explains her belief of a narrow "yes" victory:

the music playing from the AKP election van is better and you know that saying 'the Devil has the best music

Hmmm, I am not sure the AKP would love to be called the devil...

Addendum to The Day After the Referendum

There have been quite a few developments since I wrote my take on the market implications of Sunday's referendum last week, which I will try to summarize here.

First, mimicking the polarization in the country, the polls have bifurcated, as my friends at Istanbul Analytics/GlobalSource coin it: About half of the polls are expecting a narrow "yes" or "no", with the rest predicting an easy "yes" victory. KONDA, the company I do monthly consulting work for, is in the second camp. In fact, their prediction of 57% "yes" votes puts them at the head of that pack. Even PM Erdogan said recently that a 50% +1 vote would enough- that's a far cry from the confident speeches he was giving merely a week ago. Note that with so many undecideds (KONDA is leading that pack with 17% as well), anything is still possible.

In line with these recent polls, foreign economists seem to have finally woken up; the most recent research reports no longer see a "yes" victory as in the bag, as I had noted in my column. Now, most seem to expect a "yes" triumph in the 50-55% range.

Consequently, my perception of the market-neutral, i.e. priced-in territory has somewhat shifted down. I now think that a "yes" win of more than 55% would be market-positive. To my knowledge, only the KONDA poll results fit in that category comfortably.

But as I have argued on Monday, market reaction would be asymmetric, with the negative reaction to a "no" victory being greater than the positive reaction of a "comfortable yes" result. This is not only because the former would be a bigger surprise, but also because Turkish assets are already quite expensive. For example, unless the Central Bank hints of another easing cycle at this week's MPC meeting, the benchmark does not have much more room to go (down) and there is already a case for a weaker lira going forward.

But in effect, a lot will depend on emerging market sentiment Monday morning which will be magnified for Turkish assets as a result of the referendum results. The same can be true in the short-run.

Second, if you are thinking all will be quiet on the Turkish front even with a comfortable "yes" victory Monday morning, you should think again. Even a "narrow yes" would mean political and economic uncertainty going forward, with the opposition questioning AKP's legitimacy, and a wide-margin "yes" win could lead AKP to early elections in the hope of securing another four years. Therefore, we could see Turkish assets diverging from general emerging market sentiment in the long-run, not because of the referendum results per se, but because of the AKP's and the opposition's reaction to them.

Third, and directly following the previous point, whatever the result of the referendum, the fiscal genie is finally out of the lamp for sure: At an interview Tuesday night, PM Erdogan, explaining why he had opposed the fiscal rule, likened it to the IMF inside us, reminding me Turkish football manager Mustafa Denizli's famous phrase, the Irish inside us- yes I managed to squeeze in some football again:)

Coming back to serious matters, the PM also noted that even when some ministers (could he be talking about the Economy tzar Babacan and Finance Minister Simsek?), have a different opinion, the PM says the final word and that's it! No wonder Babacan declared he would not talk about the fiscal rule for a while a couple of weeks ago...

While I commend the PM for his honesty, his comments are a harbinger of what is to come in terms of the fiscal stance. You should see the most recent referendum bribes, such as the wage increase to government employees twice the expected rate of inflation, tax and social security restructurings and interest rate reductions by state bank Halkbank, reminiscent of the horror days before the 2001 crisis, where such duty losses were common, under this lens.

In fact, as if on cue, the IMF voiced my fiscal worries in the Staff Report for the Article IV, which was released right after the PM's interview. Here's Reuters' take of it, courtesy of IMF's own daily press email briefing:

IMF:Turkey should pass fiscal reform without delay


Turkey should urgently pass fiscal reforms intended to govern spending and reduce the budget deficit and debt-to-GDP ratio, the IMF said in a report today, otherwise the government risks weakening its fiscal credibility. Turkey has postponed the "fiscal rule" legislation, which investors had expected to be introduced in time for the 2011 budget, and rating agencies have warned it may result in deficit reduction plans being diluted.


The Fund's comments had little impact on Turkish financial markets which were closing early today for a 2-1/2 day public holiday. The IMF said in its Article IV Consultation report on Turkey that the fiscal rule, postponed by the government last month until after the 2011 election, would introduce needed enhancements to transparency and public financial management. "Staff consider that the fiscal rule is considerably superior to the 2009 medium-term plan and urge passage of the draft rule without further delay," the IMF report said. "Failure to pass the rule quickly may forfeit the window of opportunity that could close ahead of the approaching election cycle, and risk weakening the credibility of the authorities' commitment to fiscal discipline," it said. (Reuters)

Fourth, as a Turkey economist whose opinion I highly value was pointing to my attention on Monday, there is a really important byproduct of the referendum that is being ignored by even the most experienced Turkish politics commentators: The referendum will be the litmus test of how much real control Kurdish party BDP and their brothers-in-arms (literally) PKK have on the Kurds of Turkey. According to KONDA polls, they do not. As I mentioned in earlier columns, Kurds are more likely to vote "yes" than any other self-described ethnic group, even after after controlling for party affiliation and view of the package.

 

Last but not the least, some shameless advertising is in order: I will be interpreting the referendum results as well as their political, economics and markets implications for Forbes.com Monday morning- it should be up on their site Tuesday the latest. It will also be up at Roubini Global Economics shortly after.

Roubini Post: Turkey: The Day After the Referendum

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics 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...

There is also a blog version, but it does not add anything new to the Hurriyet Daily News article. But I am working (actually, I am at the brainstorming stage at the moment) on an extended addendum to the article, where I will update my views on the developments since I wrote my column, including the most recent polls. It should be up sometime today.

EconNews Roundup

Yet more exchange rate BSing...

FYI, Istanbul is hosting a couple of interesting conferences at the end of the month.

Instead of importing lower prices, Turkey seems to be exporting higher meat prices with its recent meat imports.

Zaman's take on the July Industrial Production: I thank them for presenting a perfect case for the overoptimistic growth feeling the latest figures are presenting- one of the key arguments in my upcoming Hurriyet column.

Last, but not the least, your friendly neighborhood economist wrote on the market impact of the referendum this week. Hurriyet Daily News takes on the same topic. I don't want to give too much of a scoop for my upcoming post, but Hurriyet is right to note that after the most recent polls, the price-in territory might have decreased a bit.

Weekly Hurriyet Column: The day after the referendum

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. The title is again a movie reference.

As for the column, I have an detailed addendum, but since it is quite long, I will post it separately. I plan to do that in the next couple of days. Besides, I want to wait until Turkish markets close on Wednesday to see how the mood is to update my views on a possible market reaction.

 

Anyway, on to the column:

 

 

With less than a week to go, Turkish political analysts are fixated on the referendum, but for economists, Sept. 13 is at least as important as Sept. 12.

I have been flooded with questions from like-minded readers in the last few days, who are wondering whether a “no” in the referendum would adversely affect Turkish assets. The answer to this question, at least in the short run, depends on what is being priced in, and it is impossible to be 100 percent certain on that. We can only make some assumptions and guesstimates.

Let's start with the obvious. A "no" victory is definitely not priced in. Almost all the polls are pointing to a "yes" win, although the ayes and nayes are very close in some. Moreover, most of the analyst reports I have received recently see a "yes" victory as in the bag.

Hot money flows confirm the confidence in Turkish assets. Although weekly Central Bank data show some sell-off in bonds and equities by foreigners in the last week of August, monthly inflows actually increased in the former and managed to stay the same in the latter. Even when normalized with data from EPFR Global, a company that tracks fund flows, inflows into Turkish assets look healthy.

All this means that the short-term adverse impact of a "no" win on markets would be rather bad, especially because a “no” victory would question not only the legitimacy of the market-friendly AKP government, but also the sustainability of the single-party rule, a rarity in Turkish politics. Do not count a black Monday in Turkish assets out in this scenario.

A similar argument could be made for a narrow "yes" triumph, especially if voter turnout is low, giving the opposition the chance to question the legitimacy of the AKP. By the same token, a very strong "yes” win would affect markets positively in the short term. I would define market-neutral, i.e. priced-in, territory in the 54 to 58 percent range.

In any case, the relative expensiveness of Turkish assets means that there is limited upwards potential even in the case of a strong “yes” victory. The recent flattening of the yield curve would, however, mean that its long end could be hit the most in case of a market-unfriendly outcome. And regardless of your view on the outcome of the referendum, the low implied volatilities in euro and dollar options, near pre-Lehman levels, means that it is easy to hedge referendum risk in the foreign currency market.

But more interesting is the long-term consequences of the referendum, as it will be business as usual in Turkish assets after a couple of days. And that depends on the reaction function of the AKP. In layman's terms, in case of a narrow "yes" or "no" victory, will the AKP throw off fiscal prudence (what is left of it) completely aside and open the coffers for all-out pork barrel spending?

Here, I beg to differ from the mainstream opinion, as I think that the AKP will go on a pre-election spending binge even in a strong “yes” victory. The longer-term consequences of such a policy would be disastrous, not only for the country's fiscal stance but also for inflation and monetary policy, as the new government is sure to lean on taxes and administered good price hikes. Such knockoff measures are the most common temporary patches to the budget in Turkey.

Whatever happens on Sept. 12, markets will correct after the initial reaction in the first couple of days. Some people will make money at the expense of others; c’est la vie, as the French say. Given there is not too much political noise in the aftermath of the referendum, quite an assumption in itself, markets will revert back to normal soon.

But messing up the country’s fiscal stance will leave longer-lasting scars.

*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.

No Recep Ivedik index, but still OK column for tomorrow

Being the ultimate procrastinator, I usually write my weekly Hurriyet columns Sunday mornings, emailing them to the Econ. editors at the Daily News minute before my noon deadline.

However, since I am heading to the beach today (I am leaving right after I post this), I managed to bring myself to write the column last night. I just proofread and emailed it to the editors.

As loyal readers would know, I was planning to write on my Recep Ivedik index , but I learned yesterday that those particular questions were for a particular client request (Konda allows each of their customers three questions, provided they fit the broad theme of the survey), and therefore that I was not allowed to reveal those results, let alone speak of the questions- upsssss... Dommage big time:( 

Therefore, I was left sans topic yesterday, but since I received several questions during the week on the economic/market impact of the referendum, I decided to write on that. Note that I had briefly addressed the issue in a recent post. While tomorrow's column is based on that post, it is much more extended.

To give loyal readers a bit of scoop, I have the next few weeks planned out as well: Next Monday will be on the GDP figures to be released on September 14- I plan to do a scoop on that later during the week. On September 20, I plan to write on something that will specifically allow me to make fun of our trouncing of the eziks the night before. I am hoping the Ministry of Culture and Tourism will release the August tourism statistics that week (they seem to official release dates as flexible), so I plan to write something on the tourism statistics the following Monday, sort of an extended version of my recent editorial for the Daily News South Monday.

That takes me all the way to October. I am planning to travel to D.C. to cover the Annual IMF-World Bank meetings for the Daily News, just as I did last year in Istanbul, so it will probably be daily columns for the first ten days of October, a truly taxing but at the same time exciting gig, which will probably leave me exhausted and a severe cold just like last year...

Roubini Post: What Lies Beneath Turkey’s Stellar Tourism Statistics?

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics 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...

There is also a blog version, but it does not add anything new to the Hurriyet Daily News article. One small footnote I forgot to add is on the title: As loyal readers know, I love cheesy movie references, and this time was no exception...

Yet more vanity

EconNews Roundup

Just wanted to use the 15 min. I have until breakfast to revive my Econnews Roundup:

As a followup to my post on the referendum, Daily News claims there is a tight race going on. As I argued yesterday, even a tight "yes" victory will be market-negative in the short-term (and in the long-term as well if the AKP decides to open up the coffers).

FinMin praises economic recovery. I find it funny that his comments just came after the latest statistics, such as PMIs, capacity utilization and real sector confidence, confirmed the slowdown in the pace of recovery. And Turkey is supposed to make a difference by reducing its debt, according to him. I wonder if discarding the fiscal rule is the right way to go about doing that...

TEA, which has been gracing my columns of late, releases August preliminary export data. Here's an interesting take on the data, making comments on the current account without waiting for any indicators on the imports. Really, hasn't anyone told these guys that Turkey's CAD widens during periods of growth (I am not implying any causality here, just a statistical fact). Maybe, they should just stick to reporting and leave economic analysis to the big boys:)...

Last but hopefully not the least, I am sure you noticed it already, but your friendly neighborhood economist wrote two columns for Hurriyet Daily News this week, one being his first ever editorial.

OK, enough morning fun- off to breakfast.

Market Impact of the Referendum

A loyal reader asked me a couple of days ago whether tattoos and central banks really mix in a financial blog... Given my latest Hurriyet column, they obviously do:), but her real question was whether a NO vote in the Referendum would adversely affect the markets here?

It all depends on what is being priced in, and it is impossible to be 100% certain on that. We can only make some assumptions and guesstimates.

Let's start with the obvious. A "no" is definitely not priced in. Almost all the surveys are pointing to a "yes", although some are very close. Moreover, June BOP data or more recent flow data from EPFR hint that bond and equity flows to Turkey are going strong, meaning that foreigners have just shrugged off political risk. Moreover, almost all the analyst reports I have received lately see a "yes" victory as in the bag. All this means that the short-term adverse impact of a "no" on markets would be quiet bad, especially because it would question not only the legitimacy of the market-friendly AKP government, but also the sustainability of the single-party government.

A similar argument can be made for a narrow "yes" victory, especially if voter turnout is low, giving the opposition the chance to question the legitimacy of the AKP.  By the same token, a very strong "yes", in excess of 60%, would effect markets positively in the short-term. I would define the market-neutral, i.e. priced-in, territory in the 54%-58% range- don't ask me why, I have no econometrics to support that, I am just using my spider senses, as I am your friendly neighborhood economist.

But more interesting would be the long-term consequences of the referendum, as markets will revert to business as usual after a couple of days. And that depends on the reaction function of the AKP. In layman's terms, in case of a narrow "yes" or "no" victory, will the AKP throw off fiscal prudence (whatever is left of it) totally aside and open the coffers for all-out pork-and-barrel spending? The longer-term consequences of such a pre-election spending binge policy would be disastrous, not only for the country's fiscal stance but also inflation and monetary policy, as I have been continously warning in my Hurriyet columns.

My guess: Let me first give the important disclaimer that I am not solely depending on my work with KONDA, but all the surveys floating out there: "Yes" wins 55-45, not much market impact, business as usual... But the AKP opens up the coffers nevertheless...

Roubini Post: Foot Massage in a Turkish Bath

This post already appeared in the Hurriyet Daily News this 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...

There is also a blog version, with some extra comments, with the able folks at Roubini Global Economics have squeezed at the bottom of the article as an addendum.

Addendum to Hurriyet column

While posting my latest Hurriyet column to the blog, I had criticized the Bank for staying quiet on the recent fiscal fiasco. I should have waited a while longer.

In the summary of the latest MPC meeting, which went unnoticed by the major research houses I get emails from, the Bank does indeed raise its concerns over fiscal policy in general and the fiscal rule in particular- here's the news piece from business daily Referans if you do speak Turkish.

But good friend (or rather abi), who also happens to be an economist I have great respect for, Atilla Yesilada was making the point that the warnings do not really matter in practice because the CBT basically would not have the guts to raise rates before the elections. Point well taken, but I still think that having said something is better than having said nothing:)....