Monday, October 25, 2010

Weekly Hurriyet Column: Missing deeds and Eastern promises

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 media webeditor since March, you won't see much of a difference between the two.
As for the title, I have not one but two cheesy movie references: One refers to a cheesy Adam Sandler movie, the other a highly-acclaimed one. I kind of though about paying homage to the recent excellent book by Rogoff and Reinhart, as I am criticizing the same "this time is different mentality" my movie buffness prevailed at the end.
Jumping right to more serious matters, I have two important topics worthy of an addendum:
First, the timing of the announcement of the MTP coincided with the release of strong September budget figures, but I think this was no coincidence. If nothing else, I have to accept that this government is expert at playing to the tune of the market and managing expectations. I mean, these guys managed to keep hopes of an IMF Stand-by afloat for several months.
In a similar vein, anyone familiar with the September budget turnout is probably wondering what  the hell I had been smoking while writing my column: The MoF-defined primary surplus was almost four times higher on a year-on-year basis. So the combination of the MTP and the September figures were enough to convince markets of the government's fiscal resolve.

Interestingly enough, the government has now around 80 billions liras of primary spending left for the last quarter of the year. Naive guys like me would just spend it all, but I believe the government will not go for the whole nine yards- just to impress markets further.

Secondly, as I mentioned before, fiscal policy is better suited to deal with capital inflows, so it would be a real pity if the government did not keep with its promise of fiscal moderation. That would make the CBT's job very difficult as well, as it would not be able to get support from fiscal policy.

Anyway, on to the column:

The life of a Turkish economist never gets boring.

First, the government started working on a fiscal rule, which, despite the enthusiasm from the academedia (my acronym for academics and the media) and analysts, your friendly neighborhood economist did not find conservative enough.

But even in its current form, and disregarding weaknesses in its institutional set-up such as the lack of an independent monitor, the fiscal rule meant that the government would have to enact some fiscal restraint in an election year. Then, it was only natural that Prime Minister Recep Tayyip Erdoğan shelved it in September, settling once and for all that he had the last say in these matters.

So imagine the surprise when the deficit figure for next year, which was announced in the Medium Term Program, or MTP, a couple of weeks ago, was around 5 billion Turkish Liras (roughly 0.4 percent of gross domestic product, or GDP) lower than what would have been implied by the fiscal rule.

Unsurprisingly, the market reaction was very positive, supported by emerging market euphoria on the back of the Fed’s imminent new round of quantitative easing. Equally ecstatic were analysts, all racing to be the first to praise the government’s commitment to fiscal discipline.

But as Murat Üçer of GlobalSource Partners and Turkey Data Monitor, one of the more cautious economists out there, put it, most analysts are ignoring the deeds and focusing on the words. What he means is that the government is more than 15 billion liras over the primary expenditure target in the original budget for this year. It is able to get away with this because the higher-than-projected GDP this year makes budget ratios look better.

In short, the market, analysts and academedia alike are selectively choosing to jubilate over the promise to rein in expenditures next year rather than worry about this year’s overrun. Such cherry-picking is perhaps fine, especially since fiscal restraint in an election year would be a first for Turkey.

The only problem is that the government’s track record at attaining announced fiscal targets is very poor. Maybe it’s just me, but I find it difficult to see why this time would be different, especially as the government is envisioning almost no real increase in non-interest expenditures.

Note that curbing such doubts was the whole point of the fiscal rule: It would have been a commitment device. The government would have solved the dreaded time inconsistency problem by tying itself to the mast in the spirit of Odysseus. So when the sirens sang the tunes of fiscal splurge before the elections, it would not have been able to pork-barrel even if it wanted to.

Then, tactless analysts like your friendly neighborhood economist, who are paid by the anti-government media to write in international outfits like Forbes and Roubini Global Economics to scare the foreign investors away, would have sulked and quieted down.

But not everything about the MTP is so grey. Although Finance Minister Mehmet Şimşek went short of saying read my lips, he was clear that there would be no new taxes in 2011. I was pleasantly surprised, as such knockoff measures are the most common temporary patches to the budget in Turkey, although they do more harm than good in the long-run: Not only ad-hoc tax hikes would be disrupting inflation expectations further, they would also create a false sense of fiscal responsibility.

Then, given the Minister’s excellent forecasting track record when he was a market economist, I can only deduce one thing from the expected increase of 33 percent from alcoholic beverage tax revenues:

Beşiktaş will win the Europa League and Super Cup titles, with beer and rakı flowing during the ensuing celebrations!

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

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