Thursday, December 16, 2010

Yet another addendum to an addendum:)

I wrote this in the morning, but things came in the way before I had a chance to post it. But it is still up-to-date, or at least for the next 15 minutes, until the rate decision...


I need to say add a couple of things to my yesterday's take on the CBT's new policy strategy, which also appeared in Roubini Global Economics.

First, I have read several reports taking yesterday's November budget release as supportive of policy rate cuts. On the face of it, with a surplus of 4.6 billion liras in the central government budget, compared to November 2009's deficit of 1.2 billion, the figures do look strong. Even after you account for last year's VAT collection of 2 billion that spilled over to the following month as well as this year's 1 billion interest revenue, this is still a significant improvement over last year. Honestly, I would have expected the government to open up the coffers a bit in the final two months of the year. Overall, revenue and expenditure performance has been commendable so far:
Given this year's strong growth, revenue performance is not a big shocker, but expenditures have been reined in (my editor friend doesn't like this word, I think it is one of the many abuses of Shakesperian by economists, but what the hell) so far.

But this is mostly cyclical performance: You would need a reduction in the structural deficit for the sort of fiscal support I was asking for yesterday.

At this point, I am really wondering how fiscally responsible the government will perform in the first half of year, and honestly, I am starting to be hopeful. But then again, as I explained in yesterday's piece, if the government would not open up the coffers, then the CBT would not have to sail in uncharted waters with its policy rate easing/non-policy tools tightening strategy. Yet another dilemma.... Go figure....

But speaking of the budget, VAT imports allow me to have a vague idea about where imports are heading- the relationship used to be quite good, but it has kind of broken down of late, see for yourself:
Anyway, while I will not attempt a formal imports projection, a significant positive surprise in imports does not seem very likely...

Finally, to get back to the matter at hand, I read a couple of comments supportive of CBT's policy at this morning's Radikal, one by none other an ex-CBT Vice Governor nonetheless. One of the arguments is that the Central Bank is now pursuing a two policy goals (price and financial stability)m and for that it would need two policy tools, a principle first noted by Tinbergen, the first winner of Economics Nobel Prize.

I would not counter this rule, but just to the statement that the CBT is pursuing two policy goals.On the face of it, the CBT's two main goals are controlling inflation and hot money flows. The exchange rate, the current account and domestic lending could all be put under hot money. But then what about growth? In fact, I was doing another round of email exchanges with my usual gang this morning, and one of the team summarized the Bank's new direction as "curbing hot money without hindering growth"?

Anyway, I know I can be confusing at times- that's because I am confused by all this as well:) But a recent note by the Turkey economists of Citi illustrates all my reservations.
To close, have since it is already past market-close time, have a look at how the markets reacted today:
We have about 15 minutes or so to the rate decision, so I'd better post this, before it becomes totally worthless:)...

4 comments:

Rower32 said...

I guess the Lex called it best: "Turkey: an anti-stimulus stimulus"

LOL

http://www.ft.com/cms/s/3/8136a7d0-08f9-11e0-9e7a-00144feabdc0.html?ftcamp=rss#axzz18HjOaTcU

Emre Deliveli said...

Yep, I saw that. I definitely agree that this is much more riskier than what the Fed is doing, as the Fed is more credible the CBT- although I would argue the CBT has taken important steps on that front as well...

Emin said...

"FED is more credible [sic] the CBT."
Wow, we are talking about an institution that missed the two largest asset bubbles of the last decade, the stock market bubble and the housing bubble. What more do they need to do to lose their credibility?

Emre Deliveli said...

@ Emin- sorry for the missing word, "than"....

OK, this is debatable, but this gets into whether it is possible to identify bubbles in advance or what the best response is if the answer to that question is a "yes"...

But I tend to think of CB credibility as a creeper; it is tough to gain and tough to lose. Remember that the CBT is still facing a credibility gap in terms of inflation expectations despite commendable performance in the last two years...