Tuesday, November 30, 2010

Topic for next week's Hurriyet column

As I mentioned at the end of the previous post, I have been quite a few reader comments of late, which I have yet to address. But before I do, let me jot down what I am thinking about writing for next week's Hurriyet column:
  1. Is the Turkish economy overheating?: An analysis of the most recent data, like capacity utilization, PMIs, consumer confidence and the like. I am not leaning towards this that much, as I did a similar piece long ago and so loyal readers already know what I think about this issue (YES, it is overheating).
  2. Potential of contagion from Europe, esp. PIIGS, to Turkey: That would be a very timely column, obviously.
  3. Reader babadog from the Hurriyet website suggested I write of the reliability of Turkish statistics. I promised him a blog post on that issue, and if for some reason, I decide not to tackle the contagion issue, this would be a very good topic. But I am more or less leaning towards doing the contagion next week and leaving statistics to either the following week or Christmas.
Anyway, I usually wait until U.S. market close on Friday to decide on a topic, so if you would like to suggest a topic as well, please by all means, go ahead...

The Art of Deduction

When I was learning English -a long time ago, in a galaxy far away-, I used to read a lot of abridged Sherlock Holmes novels. I especially loved how the great detective could come to surprising conclusions on someone he has seen for merely a few seconds. Let me try that for my loyal reader who "hates to love me" or "loves to hate me"- expressions in quotes are hers, not mine, and who, after a longed-for absence, resurfaced again (see comment below post) a few days ago:
Are you not tired yet of incessantly going on these ego trips by talking mostly about yourself and precious little else that could be classified under the heading of "economic analysis"? Do you really feel you HAVE to occupy media space with what basically amounts to NOTHING? I don't think too many people are genuinely interested in what you have to say about Beşiktaş (or any other soccer team for that matter). On the other hand, concentrating on economic analysis (as opposed to paraphrasing economic news features) might just help increase your popularity and reduce the boredom of those who allocate their valuable time to read your so-called "ramblings". (Expression in quotes is yours, not mine...) 
First of all, although I have been calling this person "her" for just P.C. reasons, I believe she  is indeed a she:), as I see quite a bit of pent-up sexual aggression in here- although the male gender of the homo sapiens has this phenomenon as well, it is usually associated with the female of the species- apologies to all the female readers I might be offending, but obviously I am not talking about you specifically, so please don't burn me on the stake for this. She is definitely Turkish, from the way she writes Besiktas (no shit, Sherlock!). Finally, she seems to be under the illusion that I have ego trips (or inflated ego, whatever) and that she seems to be really pissed off with me occupying media space. In addition, she seems to believe that I have been interfering with the daily press. Which lead me to believe that she is associated with Today's Zaman, which is the Gulenist newspaper I comment on most of the few times I "interfere with the daily press" (again, the ecpression in quotes is hers, not mine)- not that I have anything against them, but they and the Daily News are the only two English language newspapers, and although my objectivity regarding this matter could be questioned:), Today's Zaman is the one with, how shall we say, more room for improvement:)... In fact, judging by her excellent English, I would not be surprised if she is an editor at Today's Zaman.

But other than this profiling, I have little to say to her: After her initial response, I spent an hour writing her a lengthy and polite response, basically asking her to be more specific: Why she thinks I have an inflated ego, who she thinks I have offended and why she thinks my pieces have no analysis. I even asked her to send me articles/columnists engulfed in analysis so that I could learn from them. Instead, I get exactly more of the same thing: That I have an ego problem, that I have no analysis, just quotations (after I explained a CBT MPC decision by quoting the MPC statement!) and that I have nothing to say other than Besiktas (Besiktas "ramblings" -expression in quotes is mine, not hers- take less than 1 percent of my blog, and maybe 0.01 percent of my columns). 

I don't have any hope that I will ever get any valuable feedback from this person, but if I do, I would be pleasantly surprised- respond her properly... Otherwise, I'll just use her spam for more practice in the art of deduction. And I have been receiving really good questions and comments from  other readers, who actually contribute to my posts and columns, so if she'll excuse me, I need to attend to others now...

Addendum to latest Hurriyet column

I got quite interesting comments to my latest Hurriyet column via email, which deserve to be shared with my readers.

First, a couple of readers note that the home sales figure was low compared to last year because of a "base effect". The argument is that last year's figures were extremely high because of the cut in title fees in March 2009, which led to many transactions that had already happened to "officially get registered". There was indeed a funny spike last year, as you can see in the picture below:
However, I doubt it is so simple: For one thing, although the yoy fall was 25.2 percent, home sales fell 7.3 percent qoq as well. So it is useful to look at alternate explanations. 

A news article that recently appeared in Hurriyet (unfortunately in Turkish only) relays views from sector professionals: According to them, the main reasons for the fall are the "summer effect", the "Ramadan effect" and the "Referendum effect".

To gauge the first two, we can  look at past data. Unfortunately, home sales data goes as far back as only 2008, making a statistical seasonal adjustment impossible. Nevertheless, you can see that although home sales did decrease during the third quarter of 2008 as well, the fall was rather small. Therefore, with the very limited amount of data I have, the home sales fall last quarter seems to be too large to be explained by seasonality alone. 

As for the referendum, there is no way of knowing for sure whether there was a referendum "wait-and-see" effect, but I would doubt it. For one thing, a "yes victory" was more or less in the bag, with most polls pointing at at least a small yes outturn.

Monday, November 29, 2010

Weekly Hurriyet Column: Desperate house-economist seeking help

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, this is the first time I am paying homage to a movie/ TV show I have never watched before. But I am sure all my chick friends immediately recognized the reference right away, as it is one of the most popular chick flicks (or rather TV shows) of the last few years. I wonder when they'll turn that one into a movie as well...

Before I jump into more serious matters, I have a request from IMSAD, or other industry associations, for that matter: To tell you the truth, I was really excited when I first received the press bulletin for the report, as I was hoping they would provide us with proprietary data on their members’ production. Since they are, after all, input-providers to the construction sector, such data would have made the perfect leading indicators of construction activity. But alas, no suck luck... Incidentally, coming up with such proprietary indices was one of my pet projects for the Daily News, and labor force, construction and autos were the top of my lists. I first started with labor force data, as there is a Dogan (Daily News' parent company) employment firm that naturally has timely labor supply and demand data. But they were not interested, and I lost interest in the project:(

As for the usual addenda, first, note that you can not immediately conclude that there is an increase in housing loan demand from the fact that housing loans are increasing. Like any other good, there is a supply side as well as a demand side and what you are observing (quantity of loans and price) is the interaction of both. Loyal readers would know that I have a method of separating supply and demand, which I have used in my columns a few times before. However, a simpler method would be just writing out credit demand and supply equations and estimating them simultaneously. I recently came across an IMF paper that does exactly that for Jordan, so if you've got some time, an econometrics software installed in your laptop and at least some vague memories of an undergrad. metrics courses, feel free to go ahead and replicate their results for Turkey. Or if you don't have the time, the software or the memories:), just have a look at the TurkStat subindex for consumer confidence, probability of buying a house in the next 12 months:
By the way, I did not ask whether they were inspired by my column, but soon after I wrote it, the Daily News ran an article about a well-known photography retailer entering the real estate sector. "bubble, buuuubbbleeee, buuuuuuubbbbbbleeeeee!!!!" was the response of my ex-trader friend, I mention in the column who happens to be, other than being an fener5ce fan (after watching Barcelona on Monday, I am confident, i.e. wishing:), we will give the eziks the high-five in Inonu at the earliest opportunity, kind of moonlighting in the real estate sector as well.

I guess he may be right: After all, you know what they say about the 1929 crash: If shoe-shiners are giving you stock tips, it is time to get out of the stock market. So I leave you with a simple question: If photographers are starting to build buildings rather than photograph them, is it time to leave the real estate sector? Real estate bubbles build and burst more slowly than the stock market, but you get the idea...

Anyway, this is enough "rambling" for one week, on to the column:

I am prone to getting confused quicker than you can say Confucius, so it is no wonder that two recent, and seemingly conflicting, data on housing managed to profoundly baffle your friendly neighborhood economist, who had become a self-proclaimed house expert some time ago.

First, the Turkish Statistical Institute, or TurkStat, released third quarter house sales statistics on Thursday. Home sales fell 7.3 and 25.2 percent compared to the previous quarter and same quarter of last year. While there are important regional differences, sales in Istanbul plummeted 24 percent.

Before the ink had dried on the TurkStat figures, the Association of Turkish Building Material Producers, or İMSAD, painted a completely different picture the next day. In its inaugural report on the construction sector, İMSAD boldly claimed that housing loans were undergoing a boom similar to 2004. How could falling home sales and a housing credit boom be consistent?

While İMSAD is right that housing loans have been robust since early 2009, their rate of growth is nowhere near the 2004 episode. The weekly change in housing loans, after hitting rock bottom in early 2009, has recovered in the next few months and has been hovering around 0.6 percent for over a year.
In any case, decreasing home sales and robust credit growth would be consistent only if the amount of credit in each transaction increased. This could happen if the average value of a house sold were increasing, or if people started to use more and more credit to buy homes. We’ll never know for sure because such data, while readily available and closely followed in the U.S., do not exist in Turkey.

However, an ex-trader friend was noting that people might have started to see homes more like an investment: As the stock market seems to be saturated and Treasury bills are already at record-lows, it could make sense to invest in the most expensive house you can afford by borrowing as much as you can at low interest rates.

The problem is that for the past year, the rise in house prices has consistently been below inflation, according to an index created for Garanti Bank. But that doesn’t mean it will always be that way. To make an educated guess on where prices are headed, it is best to look at the forces of supply and demand.

While the low-interest rate environment could keep demand flowing for a while, the supply picture is a cause for concern. İMSAD takes the manufacture of other non-metallic products in industrial production data as a proxy for production of construction materials. Using that and other publicly-available leading indicators, it concludes that construction activity remains strong.
I have followed an alternate route by looking at construction and occupancy permits, as I have found permits to be a good leading indicator of construction activity. Third quarter data will be released Dec. 7, but municipalities have granted nearly 53,000 construction permits in the first half of the year. While that means a robust 8.4 percent yearly increase, it translates to 322,000 apartments, or a yearly 29.1 percent rise.

Using the same figures, it is possible to tie at least part of the dismal third quarter home sales to supply. After all, occupancy permits, which builders apply for at the building’s completion, had fallen 32.2 percent yearly during the first half of the year. That supply shock, in turn, can be traced to the low construction permit numbers in 2008 and 2009.
It seems that the construction sector is hoping that if they build it, the customers will come. If that doesn’t happen, we are likely to see a downward pressure on home prices as all those apartments start hitting the market.

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.

Sunday, November 28, 2010

A really belated response to a reader

A reader who goes by the name Tarik has apparently asked the following question to my article on the Central Bank of Turkey nearly two months ago:
You proposed fiscal policies against capital inflows.What fiscal measures can be taken against capital inflows? Many economists started getting worried about hot money(Faik ozatay e.t.c). Another thing,What do you think of the employment figures?there was a significant drop in unemployment figures. hasan ersel wrote about it in a statistical view. faik ozatay points out that there was a sharp increase in employment in agricultural sector.I think that he finds it a little bit puzzling. Thanks
As I explained in a rather belated response, Daily News does not automatically update authors on reader comments, so I have no way of knowing of new comments unless I look at the article. While I check for comments the next few days after I publish an article, I do not usually return to an article after that. I accidentally saw Tarik's question when I was rereading that piece to, believe it or not, see what I had written:) Am getting senile or not?:)

Anyway, I plan to write on unemployment soon, and so will address that question in a separate Daily News column, but let me take on the fiscal question: I have in mind tighter fiscal policy, especially on the expenditures side. Why? IMHO, the best way to fight capital flows would be to attain fast and sustainable disinflation to reduce nominal interest rates and eliminate the interest rate differential (to some degree, at least) with developed countries. And the key is that you'd need to do this fast; otherwise, hot money will continue flowing in. The best way of attaining that would be via fiscal policy...

My apologies for Tarik for the very late response, but as they say, better late than never, right:)....

Friday, November 26, 2010

A Missed Anniversary

Although I have been accused of using media space essentially to further boost my already highly-inflated ego, I managed to miss a very important anniversary, at least someone who fits that description: My first article for the Hurriyet Daily News & Economic Review appeared on November 24, 2008, so it was my second-year anniversary on Wednesday.

That column is not available in the Hurriyet archives; for some reason, the earliest column there is from mid-December of the same year. But it is in my blog, if you are interested. I was surprised at the length of the paragraphs at those early columns. Good thing I learned to keep them short quite quickly...

Since my ego is sooooo inflated, it is only proper I do a best-of list to honor the occasion: I went through the columns, and here are my favorite, in chronological order, along with an explanation on why I think so:
  1. Value of political links, a la Turca: I think I managed to tie academic research to the Dogan vcase quite well.
  2. Of Mrs Tasimasu’s watermill and 007: Super-cheesy title. Plus the first time I mention the concept of temporary patches to the budget and knockoff fiscal policy, common themes in my columns.
  3.  Twin deficits: A tale to end in tears: The actual writing of this column has a very personal story to it, which you can read in my blog.
  4. Seven years in slump: This column was quoted in the IMF's Daily Press Briefing email- the first time I hit international.
  5. Fool some sometimes you can: Other than paying homage to my favorite movie of 2009, the column was a very good call. It turns out I caught the government's IMF ploy very early on.
  6. The Çarşı approach to monetary policy: Gotta love the title...
  7. You don’t mess with the CBT and Capital punishment on the banks: My most challenging columns- I was trying to explain rather complicated topics.

Addendum to Hurriyet & Roubini columns: The Dukes of Moral Hazard

Here's an addendum to most recent Hurriyet column, which also appeared in Roubini Global Economics.

First, I got a couple of reader comments questioning whether there is indeed an amnesty. On the face of it, since the principal is not forgiven and adjusted with inflation, you could argue that this is simply a restructuring. But when you think about it, the government had to borrow for making up for unpaid taxes, and since the Treasury interest rate is higher than inflation, we are indeed faced with an amnesty...

Second, readers are asking whether it will work. Here, I will look upon the experience of my friends at Global Source / Turkey Data Monitor, who were practicing Turkish economists well before I had taken my first Economics course from Ray Fair:
• Up to 80% of debtors would enroll;
• Tardiness would remain in 10-20% range in the first year, only to accelerate to 60%
and above in the second and third years;
• A deduction roughly equal to amnesty payments will be made by tax payers in their
2011-2013 tax filings.
But even if the predictions of my buddies turn out to be pessimistic, one needs to remember the spillover effects of such amnesties. I already mentioned the moral hazard aspect in the column, but another equally important negative side effect is that such amnesties are putting honest/tax-paying businesses at a competitive disadvantage against their tax-evading competitors.

On the lighter side of things, here's another reader comment:
as one of your American readers, I would like to point out that perhaps you had this in mind when you referred to God and taxes? :)))) "'In this world nothing can be said to be certain, except death and taxes." -- B. Franklin
I know the Ben Franklin phrase, but for my purposes, the God and taxes one was much better. And for all that I know, that one is anonymous... I first heard it from the tour guide during my D.C. sightseeing tour (yes, we were passing by the IRS), but have heard it numerous times since then.

By the way, I know I am giving my secret enemy, who just resurfaced again (see the comment to the blog), more ammunition to pursue her claim that I have no analysis, just quotations. But whatever, and I'll deal with her later:) And speaking of her, I can not see how she also accuses me of not respecting other economists, when I quote decent economists like the TDM folks, Cevdet Akcay and the like so often. But I refuse to pay respect to a B.S. argument even when it is coming from a professor or chief economist of Zanzun Securities, which you probably guessed that I just made up but you get my point... And the same goes for shitty Econ. columns/ news articles, and if that's going to be miscellenous interventions on the daily press, so be it...

By the way way, all this was supposed to be posted to Facebook, when I shared the column, but I found out the hard way that Facebook comments have a character-limit just like Twitter. I had no idea, since I had not hit the wall before, but Facebook does not give any warnings, either. Or maybe they do, but I completely missed it.

By the way way way, I wrote another addendum when I posted the column to my blog a couple of days ago, so feel free to have a look there as well.

Thursday, November 25, 2010

Roubini Post: Turkey: The Dukes of Moral Hazard

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics Emerging Markets 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, along with the usual addendum right before the actual article. Feel free to have a look at it as well, as I asked the editor at RGE not to incorporate the addendum into the piece this time around. But I plan to post a more relevant addendum to the blog in the next 24 hours or so.

Tuesday, November 23, 2010

Barely missed the Bronze...

Medal, that is... The following picture is from the Daily News website, late Monday afternoon:
The fourth in the most popular list on the right is your friendly neighborhood economist's latest column:)- it is the first time he has made it so high...

Joking aside, I have finally managed to get some comments to my columns as well. They are quite interesting, and I thoroughly enjoy the interaction. In other words, the economics writing is starting to become more enjoyable again after nearly hitting rock bottom last month

After all, it is the law of Physics: What comes down must come up (and vice versa)...

Monday, November 22, 2010

Weekly Hurriyet Column: The Dukes of Moral Hazard

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 returned to cheesy homages to movies in my titles, and this one is one of the classic American shows of the early 80s. There was a remake in 2005, which turned out to be a complete flop.

Jumping right into more serious matters, as is the norm, I do have an addendum: First of all, I was kind of unfair to the SMEs that I accuse of evading taxes. Part of the problem, which I could not mention in my column due to space constraints, is that if you totally go by the book, taxes are quite high in Turkey for an SME: While the corporate and income taxes do not seem that high by themselves, put in all the indirect taxes and labor taxes, things get piled up quite quickly. Interestingly enough, total taxes appear as only 44.5% of profits in the latest World Bank Doing Business survey, on par with many developed countries, but that seemed a bit optimistic to me. Maybe, they are assuming you can deduct all the indirect taxes? Definitely not in the tourism sector, where I moonlight!...

By the way, I got quite  interesting comments at the Hurriyet page. It seems that the opinion is divided on the use of incentives to nudge people to pay taxes. One reader is suggesting holding a lottery among taxpayers and forgiving the winners' taxes. But another thinks that severe punishment, not incentives, is the key: I do agree that incentives do not do the trick by themselves; as another reader was commenting, no one wants to pay taxes. I would argue that at the extreme, if you beheaded tax evaders and their families and burned their houses down, you would not have many evaders. But not many democratic & civilized governments would want to take that route, so you would need some incentives as well. Yet another reader pointed out to the relation between taxes and democracy: When you pay taxes, you are more likely to be involved and informed in decision-making, according to her. I remember reading papers on this topic both at the inter and intra-country level, but although I promised the reader I would post the links to my blog, I have not been able to find them. So a public apology is in order, but I will keep looking.

But instead let me point at other interesting sources: For example, UK's Institute for Fiscal Studies just published a complete review of the British tax system, led by Nobel laureate Sir James Mirlees. If you don't want to go through the whole thing, Financial Times reports on it (so does the Economist, though I don't have the link for that), and FT's Undercover Economist Tim Harford comments on it. Another interesting read is the recent WB PWC publication on tax effectiveness, also reported by the FT, albeit with an emphasis on the U.K. And this is the same data used in the tax category of the WB Doing Business Survey. Finally, one of the case studies in that section is Turkey's 2007 tax reform.

I am done with the addendum, so on to the column:

The government offered the perfect “bayram present” to the masses last Monday by introducing a complete debt amnesty.

The package includes the restructuring of nearly 300 specific items – not only tax, but also social security, water and electricity debt as well as items that took the media’s attention such as traffic and smoking fines.

While the draft law was introduced as an amnesty, the full amount of the debt is not actually forgiven. Only the late payment fines and interest are to be erased. The principal, on the other hand, is adjusted with inflation and can be paid in installments, with more or less a zero real interest rate. The debt can also be paid with a credit card, a first for Turkey, which would in effect transfer some debt from the government’s receivables account to the banking sector’s.

When you think about it, the move makes perfect sense for the government. Not only is it playing to the public a few months before the general elections, it will also be getting much-needed revenues, creating more room for pork-barreling before the elections. According to this paper, over 1 million individuals and institutions owe the state 6.5 billion Turkish Liras in tax debt in Ankara alone, so the amnesty could indeed create a windfall gain.

But leaving this myopic view aside, the amnesty is not helping with tax collection at all. As Economy Czar Ali Babacan noted during the press conference for the amnesty as well, Turks are not paying their taxes.

Actually, that’s only partly true. People on payroll pay their taxes as long as they are registered. So do large companies, although they make sure they deduct as much as they can – despite the government’s claim that it was merely upholding the law when it went after the Doğan Group. It is the self-employed and the small & medium enterprises who are making up the most of tax evasion in Turkey.

But the government has to make ends meet somehow, and as a result indirect taxes get boosted up. That’s why, in sharp contrast to any developed economy, indirect taxes make up the bulk of tax revenues in Turkey. And that’s also why a Bimmer costs more than twice as much here as in Germany. Economists do not like indirect taxes much because among other things, they distort people’s consumption choices. They are also regressive in the sense that they impose a greater burden relative to income on the poor than the rich.
Part of the solution should be better enforcement. Therefore, Babacan’s announcement that tax inspections would be increased considerably and 1,500 new inspectors would be hired is only commendable. It is said that Americans are afraid of only God and the Internal Revenue Service, or IRS; tax collection would certainly improve by installing some fear in the average Turk’s heart. Speaking of the IRS, a similar independent collection agency would go a long way in convincing people that the government is not using tax collection as a political weapon.

But that is hardly enough. The government needs to create incentives for people to pay taxes as well. Inter-country research on the ethics of tax evasion has revealed that many Turks believe their tax liras are wasted. In this sense, Republican People’s Party, or CHP, leader Kemal Kılıçdaroğlu’s suggestion of printing, on the back of tax returns, where taxes were spent last year is not as silly as it sounds. An independent budget evaluation agency, also a necessity for the now-shelved fiscal rule, would be helpful as well.

But most of all, it is worth noting that tax amnesties create disincentives to pay taxes by making those who are able, and sometimes even willing, to pay wait until the next amnesty. Producing such a moral hazard is exactly what the government needs to be avoiding.

*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.

Friday, November 19, 2010

Another reader response

Since I spend a lot of time responding to ego-boosting spam, I should response to legitimate requests/comments/questions as well. Here's a comment from Rower32 to my post of my most recent HDN&ER column:
That's a nice looking V-Shaped capital acct chart there. Lemme make a bold prediction: the TTM flows will hit $90-100bil by May 2011. Two major plays right now are EM growth and commodities. The EM managers i talk to LOVE Turkey. It's such a success story in their eyes (and i partly agree) and you know how they love winners here in the states.

Anyways, maybe you are right and we'll see higher CPI prints in the next couple quarters. I think more troubling chart is seasonally adjusted unemployment rate. It's good to look at the long term trend here. Now I don't know how the stat agency calculates unemployment rate in Turkey. Would be nice to see civilian participation rate& labor force #s. Maybe some of the marginally attached workers coming back to the labor force, I don't know. We'll see how that evolves. Thanks for the insight. 
Reader32 is making four separate points, on the capital account, Turkey play, CPI and unemployment. Let me address each in turn:

On inflows: 90-100 billion of inflows (I am talking about inflows, not capital account here) is higher than my end-year 2011 projection of $85 billion, but it is not inconceivable, especially if flows to EM continue unabated. It is important to note that Turkey already got $85 billion of inflows in 2008, before the crisis decreased flows to $60 billion in 2009. This year, flows are very likely to end the year at over $80 billion, so Rower32 is definitely not ranting.

And he is right that EM managers love to talk Turkey. OK, I would agree that Turkey has achieved a lot in the past decade in the aftermath of the 2001 crisis, but I and many Turkey economists I respect are amazed at how the fund industry loves to cherry-pick data for Turkey, i.e. emphasize the strengths of the country, while turning a blind eye on the weaknesses... I believe this has to do partly with the investors' beauty contest, i.e. Turkey looks relatively good compared to the competition. But to render unto AKP what is AKP's: Economics policymakers are experts at PR: Not only they use their speeches to manage expectations, it is very easy for a fund manager to make make an appointment with the top policymakers and then get convinced on how strong the Turkish economy is.

On inflation: Let me be crystal clear so that I do not look like an idiot in a couple of months: Yearly inflation prints will continue falling because of base effects for the very least. But I AM claiming that the inflationary outlook is challenging: For one thing, food inflation will spillover to core inflation. That and the sticky inflation expectations make it very difficult that inflation will be anywhere near the Bank's target at the end of next year.

On unemployment: TURKSTAT unemployment rates come from a survey. Because of the high degree of informality, it does not make sense to use payrolls data, and that's why we get labor force statistics with a two and a half months lag. Anyway, the data you are asking is available. Here are a few charts, compliments of my friends at Turkey Data Monitor:

Fist, Labor Force Participation rates:
Employment by sectors:
Changes in employment by sectors:
And if you are interested in Turkish labor force statistics, I can recommend the Turkish think tank BETAM: They release short notes after each labor statistics release, usually in English as well as Turkish. And if you do speak Turkish, their director Seyfettin Gursel is a labor economist, and he regularly discusses Turkish employment figures at his columns in Radikal.

Thursday, November 18, 2010

OECD on Turkey

Here's an excerpt from IMF's Daily Press Briefing:
OECD: Turkey Must Keep Tight Fiscal Policy, Key For Confidence
The Organization for Economic Cooperation and Development praised today Turkey's medium-term economic plan as prudent, but stressed that policymakers should avoid pro-cyclical spending if the economy grows faster than expected and it urged the central bank not to wait too long before withdrawing stimulus. In its latest economic outlook, the OECD said Turkey's economic growth will likely exceed 8% this year, before moderating to around 5% in the two following years as a rebound in exports, consumption and investment tapers off. (DJ)
I learned the publication of the report through the Fund's email, so naturally, I have not had a chance to even skim through the report. But since things are quiet around Bayram, I hope to do so in the next few days and then relay thoughts here. 

But one thing note is that while 8 percent growth this year is certainly possible, I find their 2011 and 2012 projections a bit on the optimistic side...

Roubini Post: Capital punishment on the Turkish banks

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics Emerging Markets 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, along with the usual addendum right before the actual article, but it is not different from the Roubini post, as the able editor there has been able to squeeze in my additional comment, while at the same time getting rid of the cheesy stuff:)...

Tuesday, November 16, 2010

Again, the inflated ego

Since we have established that I have an inflated ego, the following picture, taken from the front page of Hurriyet Daily News & Economic Review on Monday, definitely belongs in this blog:

As I had discussed before, being the low-self-esteemed guy I am, I was thinking people are rather attracted to my attention-grabbing titles, but this one had a regular title, so maybe things are not looking that bad for me, after all...

Monday, November 15, 2010

Weekly Hurriyet Column: Capital punishment on the banks

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. And no cheesy movie references this time around: The title is just a wordplay: I wanted to emphasize that the MPC meeting and the reserve hike are response to capital flows, but the banks see it as capital punishment...

Jumping right into more serious matters, as is the norm, I do have an addendum, but before that let  me mention that I already posted on this topic on Friday: The editors at the Daily News had asked for my comments for an article they were doing on the same topic, and I decided to turn those comments into a post, but I had to write very quickly, so the post is somewhat disorganized and with a couple of grammatical errors. And while some of the stuff has found its way to the column, there is some extra material as well, so fell free to enjoy it as comp. reading. Speaking of comp. reading, the Daily News article is excellent comp. reading as well: I would suggest you actually read it first, especially if you don't follow the Turkish economy closely. Because of the space requirement of in the hard-copy edition of the paper, I never get to explain as much as I would like, leading sometimes to frustrated readers. But that's what this blog is for. 

Speaking of readers, a loyal reader asked me to explain the following statement on Friday's post: "...according to my calculations, the NAIRU is higher than before the crisis, and there is actually not that much slack on the employment front, either.":
please elaborate/quantify, just curious...i'm not on top of the numbers but the latest unemployment data was weak (unemp and nonfarm unemployment both increased). Industrial production slowed down in Sept. Eurozone losing momentum. Ok I can see a higher govt spending going into the elections but the numbers just don't add up. Thx.
The reader is right that Turkish growth numbers have started to slow down of late, since I claimed  at the end of last month that they were stronger that the CBT would have liked us to believe. I refined that point later on, saying on Friday's post that the CBT was concentrating on the weakest links of growth leading indicators by mentioning capacity utilization and unemployment in the MPC statement. My point was that the NAIRU might have increased because of the crisis: Actually, according to my calculations I had reported earlier, the seasonally-adjusted NAIRU is now at around 11 percent- before the crisis, it was at around 10 percent. I did not spend a lot of time with this exercise and have not updated it, but if NAIRU has indeed gone up, then overheating pressures could be building sooner than expected. And here's the latest unemployment figures, to put this discussion into perspective:
It is true that Friday's latest labor statistics brought seasonally adjusted unemployment to 12 percent as of August (actually average of July-September), but still, if I am right, there is about  only 1 percent of slack on the employment front. But nevertheless, the reader is right that industrial production slowed down in September. Moreover, Eurozone problems mean Turkish exports may suffer, leading to a bigger-than-expected negative contribution to growth from the external demand side. So things are moving in the Central Bank's favor, but all I'm saying is that there might not be as much slack in the economy as most analysts are suggesting. 

Now, to the actual addendum. Loyal readers would know how much I have adopted the phrase "a picture is worth more than a thousand words", so here's a picture showing the worsening of the financing of the current account deficit:
And another one that shows that the Central Bank is a net liquidity provider, as I claim in the column:
As you can see in the picture, the Central Bank was a net liquidity mopper until early 2008. Since then, it has turned into a liquidity provider. But the net figure hides the fact that banks awash with cash still lend to the Bank, as I had argued way back in April; this is what the Bank would like to change by decreasing its overnight borrowing rate to 1.75 percent. When you think about it, it is not efficient at all if liquidity-strained banks borrow from the CBT and cash-rich ones lend to it. That tells us the interbank market is not functioning properly and that's what the CBT would like to change. And if all had gone as planned, meaning no QE2 and the accompanying capital flows, the Bank was planning a system similar to the federal funds rate, whereby the policy rate would be equal to, and eventually be, the money market rate. By saying that the money market rate will be allowed to diverge from the policy rate, the Bank seems to have postponed that step a bit.

Anyway, now that I am done with my weekly chattering, on to the column:

Holidays should be a time for reflection and reconciliation. It should be no different for the Turkish banking sector.

Banks sharply criticized the Central Bank of Turkey’s, or CBT’s, decision on Friday to hike the lira required reserve ratio 0.5 percent to 6 percent. The CBT expects an impact of about 2.1 billion liras on liquidity when the new ratio will be in effect Nov. 26.

Since the main mandate of central banks is price stability, it is normal for the CBT, or any central bank for that matter, to wish to curb excessive loan growth, which could lead to overheating and inflationary pressures, by hiking reserve requirements.

While I can identify with the banks for shortsightedly worrying about their profits, I am surprised that Tevfik Bilgin, the banking regulator, has sided with them. If nothing else, he should be aware of the large academic literature linking fast credit growth to banking crises, to which one of the previous vice presidents of his agency was an early contributor.

In Turkey’s case, the credit growth is contributing to the country’s growing current account deficit as well. For example, there is a strong relationship between consumer credits and consumption good imports.

But tackling credit directly is hardly enough. After all, the other side of the coin is capital flows: The current account deficit is growing only because it is financed by the capital account. Normally, one would not worry about money pouring in from outside if most of it were foreign direct investment rather than short-term portfolio flows.
Such hot money not only creates pressures on the lira, but also contributes directly to domestic credit growth, as CBT President Durmuş Yılmaz explained Friday: The foreign money pours into Turkish assets (government bonds or equities) or just parks short-term in the money market. The latter ends up as credit via swap operations with the local banks.

And that’s what Thursday’s CBT policy rate meeting is all about. By cutting its overnight borrowing rate by 4 percentage points to 1.75 percent, the CBT is nudging local banks with excess liquidity to lend to other banks rather than put their money overnight at the CBT. They could also shift to government bonds, but money market, or overnight, rates are likely to fall in any case.

As a side product, short-term foreign flows to the money market will be discouraged, effectively shutting off this credit creation mechanism. To the extent that at least some of these carry traders will shift to government bonds, the move is not likely to fend off capital flows or ease the pressure on the lira by much. But it is likely to bring in some volatility to both interest and exchange rates.

In fact, the Bank is explicitly saying that overnight rates could diverge from the policy rate in both directions. While they could in principle fall to as low as 1.75 percent, the CBT, as a net liquidity provider, directly controls how far they will go. For example, if hot money continues to pour in, and the CBT does not sterilize these flows through reverse repos, overnight rates could drop significantly.

However, a tightening of liquidity could lead to overnight rates shooting above the policy rate as well. End-month tax payments and the new reserve requirement will squeeze liquidity after the Bayram. In addition, Treasury auctions of the same week are likely to drain liquidity, as the Treasury has only 757 million liras of redemptions. If the CBT were also to cut the amount of one-week repos, money market rates could rise sharply.

In essence, overnight rates could go up or down. Such uncertainty and the accompanying volatility is perhaps the best way of taming in hot money and credit growth.

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.

Sunday, November 14, 2010

Open letter to unhappy customer

The unhappy customer from earlier is back. S(he) has posted the following comment to my latest post:
Once again, NO substantial economic analysis, at all. Mostly just quotations from the original sources.
You are becoming more and more boring, my friend... But I guess it does continue to boost your ego, doesn't it?
Happy "bayram" to you!
And here is my response:

I am truly (and weirdly) both disappointed and pleased that you have written:

Disappointed because this comment has shown that you have no idea about Economics or analysis, let alone economic analysis. If you did, you would have known that interpreting a policy rate decision involves discussing what the central bank statement is saying. You don't actually have to use quotations, but you do need to explain what the central bank is saying. Please accept as a favor to a loyal reader a research report on the same topic. And by the way, the quotations from the original source, which happen to be the CBT rate decision, make less than one fifth of the post, with the rest being my comments, i.e. interpretations of those quotations. So I don't see how it's "most quotations"...

Anyway, I was hoping to be able to get some useful feedback from you; when I saw your first comment. I have now realized this would not be possible at all. Likewise, I now know you will not be able to send me examples of columns/columnists with good economic analysis, as I was kindly asking you to in my answer to your first comment. That's why I am disappointed.

But I am also pleased that I finally have an online hater. Paul Krugman has virtually hundreds, and every good columnist needs to have at least a few, so in fact, having you post here is a small step for mankind, but a great one for me. In that sense, you are definitely right that my ego is being boosted- by your comments if you'd believe me. In other words, your comments are my mojo!!! Thanks and God bless...

And BTW, to me every day is Bayram:), but I hope you can use the holidays for some reflection and reconciliation, as I advise the Turkish banks in my latest HDN&ER column, to appear in a couple of minutes on the Daily News website.

Friday, November 12, 2010

Addendum to latest post

It has been only a few minutes since I posted on yesterday's CBT MPC, but an addendum is already needed: I just got a research note saying that CBT has hiked the reserve requirement to 6 percent, bringing it to the pre-crisis level. As I mentioned in the post, I was expecting it this morning, as that's how the Bank usually operates...

Interestingly enough, the move seems to have been announced before I posted, but there is still nothing on the Bank's web page. Neither did I receive an email from them, although I am on their automatic email list- I have no idea what's going on...

Anyway, further hikes in the reserve requirement may be in the pipeline, at least until credit growth slows down a bit...

My take on yesterday's MPC meeting: Capital Punishment

The folks at Hurriyet Daily News & Economic Review asked my opinion on yesterday's MPC meeting. Having always been the generous and practical type, your friendly neighborhood economist decided to share his views with all rather than one by posting them to this blog.

By the way, there is a good chance that this topic will make it to my HDN&ER column on Monday, so you may also be getting an extended preview by reading along.

First, make no mistake: The Bank is maintaining its policy stance, which we can decompose into three interrelated subsections: Economic recovery, inflation and the actual policy rate. On the first, the Bank states the following:
Recent data releases suggest that economic activity continues to recover with the support of domestic demand. However, it would take a long time before industrial capacity utilization rates return to their pre-crisis levels, due to weak external demand outlook.
While it is true that capacity utilization rates, or CURs, are still well below its pre-crisis levels, the NAIRCU, the non-accelerating inflationary rate of capacity utilization (there is no such term, it is the concept of the NAIRU applied to capacity utilization), is likely to have fallen as a result of the crisis. As a result, there might not be as much slack in the economy as suggested by the CU data.

The same goes for unemployment. The Bank says:
Although employment conditions continue to improve, unemployment rates remain at high levels.
Fair enough, but again, according to my calculations, the NAIRU is higher than before the crisis, and there is actually not that much slack on the employment front, either. I am aware that much of this boils down to the fact that the Bank's potential output estimate seems to be higher than mine. But in any case, other recent data are surely hinting at a robust recovery, as the Bank notes as well. In that sense, using CU and unemployment, the seemingly weakest links among the real sector statistics, appears as a bit of data cherry-picking. I wrote on the latest indicators and their meaning on Turkish economic recovery last week, so feel free to have a look there for a more elaborate discussion of these points.

As for inflation, the usual emphasis on core inflation is again there:
it is expected that inflation would be on a declining path in the forthcoming period, while core inflation indicators would remain consistent with the medium-term targets.
Again, fair enough, but as I argued in my Hurriyet column this week, there might be some spillover from food to core inflation in the coming months. All in all, the Bank is justifying its policy stance, which is unchanged, as the key sentence regarding that is virtually the same as before:
the Committee has reiterated that it would be necessary to maintain the policy rate at current levels for some time, and to keep it at low levels for a long period.
But all this is more or less business as usual. What makes yesterday's MPC meeting more interesting is that the Bank, for the very first time, is explicitly (i.e. in a MPC statement) worried about capital inflows and the current account widening/ strong credit growth that are its consequences:
Recent surge in capital inflows exacerbates the divergence between the growth rates of domestic and external demand, widening the current account deficit through rapid credit growth and increasing import demand and thus highlighting the risks regarding financial stability.
And how is the Bank responding to this threat? In two ways:
the Committee has decided to widen the gap between lending and borrowing rates by reducing the borrowing rates by 400 basis points. Moreover, observing the favorable developments in credit conditions, the Committee has indicated that it would be appropriate to proceed with the remaining measures outlined in the exit strategy.
The first measure has caused the greatest stir, and is solely responsible for the Daily News managing editor calling me during the Besiktas game. While it is certainly not as drastic as it looks, there is also more than meets the eye, or rather more than what reads in the MPC statement: While the Bank continues to encourage market participants to trade with each other rather than with through this sharp rate cut, the move is also geared towards discouraging capital inflows with overnight maturity parking in the money market. But it is not likely to fend off such capital flows a lot, as most of these overnight carry traders are likely to shift to government bonds. Therefore, we may see a fall in yields today as a a result.

As for the second measure, the Bank is simply saying it will hike the required reserve requirement on lira deposits by at least another 50 basis points, which would bring it back to or above the pre-crisis level of 6%. We will probably see this move this morning, in a couple of hours or so; if not, definitely after the Bayram.

But despite all the hype of the 4 percent cut in the overnight borrowing rate, I would argue that the most critical sentence of the announcement is the one right before, which is, according to the Bank, the raison d'etre of the rate cut:
the Committee has decided to allow overnight interest rates to diverge from the policy rate temporarily, when needed.
This means that when liquidity is tightened, overnight rates could remain above the 7 percent policy rate for some time. Now, why would liquidity tighten? In the Turkish market, there are seasonal effects such as end-month tax payments that cause a temporary liquidity squeeze. In addition, Treasury auctions could temporarily effect liquidity. But CBT policy could play a role as well: For example, the above-mentioned reserve requirement rate hike would squeeze liquidity. Or if the Bank decreased its one-week repo funding, liquidity would be tightened and overnight rates rise. As a footnote, note that although the Bank does not state it explicitly, the cut in the CBT's overnight borrowing rate is also likely to bring some volatility into overnight rates. In other words, not only the overnight interest rates would hover above the policy rate, they would also be much less stable. This would further discourage some hot money from a Turkey play, or at least induce them to steer towards government bonds.

And why would the Bank want a sharp rise in the overnight rates? Because it would somewhat curb loan growth; we are back where we started! In essence, the gist of yesterday's announcement is to take precautions against the risks regarding financial stability that have finally made their way into the MPC statement, but without actually hiking the policy rate...

Thursday, November 11, 2010

Roubini Post: Turkey: Attack of the Killer Tomatoes

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics Emerging Markets 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, along with the usual addendum right before the actual article, but it is not different from the Roubini post, as the able editor there has been able to squeeze in my additional comment, while at the same time getting rid of the cheesy stuff:)...

Monday, November 8, 2010

Weekly Hurriyet Column: Attack of the killer tomatoes

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. The title is inspired from one of the most famous B movies of all time.

Coming to more serious matters, as I promised when I posted the column to Facebook, I will talk a bit about my econometrics methodology: First, I like VARs for this kind of exercise because a priori, I don't have any idea on what the relationship between core inflation, food inflation, inflation expectations and the exchange rate is. In such cases where you don't have a structural model, VARs are extremely useful. It is more like gumbo soup; put everything in, and then the model will make its magic and spit out the results. Actually, it is a just a tiny bit more complicated than that: You also need to specify the lags, but there are straightforward methodologies for doing that.

Anyway, to expand on my results: The effect of a one standard deviation shock to food prices results in a maximum impact of 0.4-0.5% on core inflation, with the effect maxing out in 4-5 months. The effect somewhat lessens to 0.2% in the next 2-3 months and stabilizes thereafter.  As for the transmission from food prices to inflation expectations: A 1% mom rise (I converted standard deviation for this one, as I was also doing recursive regressions and wanted to compare my results- I got similar results at the end) in seasonally adjusted food prices increases 12-month ahead inflation expectations the next month by 0.09%. The effect is nearly twice as much for end-year expectations and negligible for 24-month ahead expectations. Finally, the relationship between inflation expectations and core inflation comes out to be almost a perfect quadratic: Again using a VAR, a standard deviation shock to inflation expectations causes a 0.4-0.5% increase on core inflation, with the effect maxing out in 10-12 months.

On a final note, CBT released  the latest inflation expectations this week:
As you can see, 12-month ahead expectations have creeped up, whereas 24-month ahead expectations actually fell. More or less what I was describing above. No wonder they say "a picture is better than a thousand words".

And now that the promised addendum is over, on to the column:

Last week’s October inflation, at 1.8 percent monthly, came in at much higher than expected.

Tomatoes stole the show, as their prices increased a whopping 112.2 percent over the previous month. Unsurprisingly, tomato sauce prices rose 19.8 percent. Your friendly neighborhood economist, whose duties during his seasonal moonlighting in the family business include doing the purchases, was disappointed that he couldn’t get even with the grocer - they had to lock up just as tomato prices were finally coming down at the end of the month.

While tomato’s rocket launch was supposedly due to infection of tomato plants by the tomato moth, food prices were solely behind the higher-than-expected October inflation turnout. Food inflation was 4.5 percent, contributing 1.2 percent to the headline figure. In fact, 13 out the 20 items with the highest monthly price increases were food products.

Unfortunately, high food inflation is not a recent phenomenon. Food prices have risen 13 percent in the past 3 months, and yearly food inflation is now running at 17 percent, almost twice the headline figure.
As a result, the headline figure and measures of core inflation, which exclude items responsive to temporary shocks but not to monetary policy (and are therefore key price metrics for central banks), have been diverging for a while. For example, the Central Bank of Turkey’s, or CBT’s, preferred measure of core inflation, which excludes alcohol & tobacco, energy and gold in addition to food, is at an all-time low of 2.5 percent.
Then, the natural question to ask is whether headline inflation will eventually revert to core inflation. A recent CBT working paper argues that will be the case, but a casual look at the data does not reveal such a relationship since the new price indices began in 2003.

On the contrary, just the opposite might happen: Food or other non-core prices such as energy could be feeding in to core inflation in two ways. First, they could directly lead to increases in core prices to the extent that they are used as inputs in other goods. Second, they could lead to higher inflation by causing an increase in inflation expectations.

A simple econometric exercise reveals that the first effect, while slow to build up, is nevertheless there. Food inflation seems to pass through into core inflation fully in four to five months, and while the impact is not that large, it does not dissipate for up to a year.

On the other hand, food prices feed in to inflation expectations rather quickly. The effect is fully there after a month, reflecting the adaptive nature of inflation expectations in Turkey. As for the transmission from inflation expectations to core inflation, the overall impact is similar to the first effect, although its build-up is slower but more persistent.

One might argue that the lira’s recent appreciation might tame expectations. But the effect of the currency comes out as asymmetric in my analysis: While depreciations push expectations higher, appreciations don’t pull them down.

One might also argue that food inflation is a global phenomenon, but comparing Turkey and the EU reveals that one-half to two-thirds of Turkish food inflation is due to domestic factors. Turkish food inflation is also much more volatile than the EU’s and has recently been driven mainly by fruit, vegetables and meat. These results suggest that a global correction in food prices may not spill over to Turkey by much.

I am sure the CBT has gone through all this analysis, but downplaying headline inflation, while at the same time focusing more and more on core inflation, is the only way it can create a breather as the economy heads towards a challenging inflationary outlook.

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.

Wednesday, November 3, 2010

Roubini Post: Turkey: The Garden of Forking Paths

This post already appeared in the Hurriyet Daily News this week; Roubini Global Economics Emerging Markets 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, along with an addendum before the actual article, it is not different from the Roubini post, as the able editor there has been able to squeeze in my additional comment, while at the same time getting rid of the cheesy stuff:)...

Monday, November 1, 2010

Weekly Hurriyet Column: The garden of forking paths

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.
I already explained in the article my inspiration for the title, so I can just right into more serious matters, i.e. my usual addendum:
First, as I promised when I posted the column to Facebook, let me briefly explain how I calculate potential output: I use a variety of non-Bayesian approaches, which are more less summarized in a recent IMF paper for Armenia. Of the methods outlined there, my favorite are the multivariate Kalman filter and production function, but the simplest is HP, which I provide below, courtesy of my friends at Turkey Data Monitor:
Anyway, the non-Bayesian methods have some important shortcomings, which are summarized in the same IMF paper, but Bayesian methods take much more time and since I am just lazy, I don't get into those. But suffice it to say that of I were calculating the output gap more professionally, I would have definitely come up with a Bayesian model.

Coming to policy response robust to consumer loans (the last paragraph of the column), although the CBT is sure to increase the reserve requirement further eventually, it was the government that struck first by raising the charge on consumer loans. Although the Resource Utilization Support Fund will be paid by the consumer, in practice, just like any tax hike, it will be absorbed by both the consumer and the producer (bank). I believe it will eat into bank profits as well because of competition in the banking sector.
Needless to say, I am surprised that I have been correctly guessing (well, sort of) government policy in advance for two consecutive weeks now, and my ego is sure to be inflated further as a result.

Now that I am done with the addenda, on to the column:

I could not have imagined a better description of the Central Bank of Turkey’s, or CBT, latest Business Tendency Survey, than the title of the Jorge Luis Borges story. The survey, which was released last Monday, paints a mixed picture of growth in October.

On one hand, capacity utilization rate, or CUR, at 75.3 percent, came in at higher than expected. While both the yearly and seasonally-adjusted monthly changes, at 7.1 and 1.4 percent, are strong, it is important to note that CUR used to hover around 80 percent before the crisis.
But it is also likely that there was some decline in capital stocks during the crisis. In that sense, there might not be as much slack in the economy. In any case, the CURs for the last two months hint at a low double-digit yearly growth in Industrial Production in September and a high single-digit one in October.
On the other hand, the real sector confidence index, or RSCI, continued with its downward creep, decreasing 3.5 points to 107.2. While the index is still comfortably above the 100 threshold separating economic expansion and contraction, it is at a nine-month low.
There are mixed signals coming from the sub-indices as well. While the new orders sub-component is now 23.3 points lower compared to five months earlier, appetite for investment expenditure looks solid, continuing to hover around 110 since the beginning of the year.

Interestingly enough, such a mixed picture seems to be behind the CBT’s growth forecasts in its latest Inflation Report, which was released Tuesday. The Bank does not actually reveal its growth forecasts. Instead, it makes its output gap projections public, which simply reveal how far the economy is expected to be from potential output.

Despite strong growth so far, the Bank is predicting a negative output gap through late next year. I would take its Research Department’s forecasts over mine any time, but by my account, the output gap has already closed. This is because I am assuming Turkey’s potential output has slightly fallen as a result of the crisis, but even with a very generous potential output estimate, such an enduring gap looks unlikely.

And history is on my side as well: The CBT’s model was also pointing to a negative output gap in 2005-2006 even though rapid credit growth, sticky service inflation and widening non-energy current account deficit were all ringing alarm bells. For example, the first Inflation Report of 2007 reported a negative gap of 2 percent for the last quarter of 2006.

Although overheating is inarguably not as drastic today, and the latest data discussed above do hint at a slowdown this quarter, other leading indicators are showing a strong third quarter growth outturn. It is too early to do an overall check-up of National Income Accounts, but existing data point to a strong consumption turnout.
For example, consumer confidence, actual consumption and consumer loans are all going very strong. The same could be said of investment, as machinery and equipment sub-index of Industrial Production, corporate loans and the RSCI sub-index for investment mentioned above are equally robust.
With import volumes increasing faster than export volumes, some leakage from external demand is to be expected. But I would nevertheless not be surprised to see a yearly growth of 6-6.5 percent in the third quarter. Then, according to my calculations, the output gap will have closed not only on a quarterly basis, but when measured as a four-quarter rolling sum as well.
Maybe, the CBT is foreseeing its exit strategy to curb loan growth. If not, inflationary pressures could start building soon. Then, we’ll see that even though some paths fork, all roads lead to Rome.

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.