Monday, January 10, 2011

Weekly Hurriyet Column: Common misconceptions on the Turkish economy

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, as I mentioned earlier, I wanted to keep it straight and simple for a change, so no cheesy movie reference there, which was saved for the Batman joke towards the end. And if you found it funny, here's a excerpt from a research note I wrote at Citi when avian flu was discovered in Batman: "There has been a case of avian flu in the southeastern city of Batman, and it is not Robin!":):):)
Coming to more serious matters, I have already devoted a separate column to most of the six misconceptions mentioned in the column, except the last one. For a general and comprehensive look at those issues, the latest World Bank Investment Climate Assessment, which I linked in the column as well, is a great source. It does not dwell on regional differences, but it would still give you a good idea on what investors, domestic and foreign alike, see missing in Turkey.
Anyway, without further delay, on to the column:

The New Year has dragged along old misconceptions on the Turkish economy, in addition to adding new ones. Here’s my take on some, Gumbo-soup style:

If you were to judge the performance of the Turkish economy by last year’s growth, which probably exceeded 8 percent, you would deem the government very successful. But it is often overlooked that growth came through strong capital inflows following quantitative easing by developed economies.

Although growing more than expected is usually preferable to less, I would not deem a growth outturn of nearly twice the government’s projection from a few months back a success. I would rather label it as mismanagement.

Similarly, there seems to be quite a bit of confuzzlement on the Central Bank of Turkey’s policies. For example, judging by the latest credit data from Dec. 24, which showed credit growing 39 percent yearly, you could argue that the Bank’s policies are not working. But year-end, when books are being closed, is always a tough time to make evaluations. Besides, the new reserve requirement ratios were not effective until last Friday.

Or if you were to look at the recent plunge in Treasury yields, you could claim that the Bank’s policies are working. The drop in yields is in fact hardly a surprise, given that the Central Bank has recently cut the policy, i.e. the one-week repo, rate to 6.5 percent.

But with that action, the Bank has also pledged commercial banks to lend them at that rate; if it does not do so, money market rates will end up exceeding policy rates. That’s why it is difficult for the Bank to cut liquidity permanently; this is one of the main dilemmas of its new measures. Unsurprisingly, after laying low for a while, the Bank provided 6 billion liras at the repo auction on Friday.

As for the exchange rate, the age-old maxim that every Turkey economist knows is that if the dollar gains a lot against the lira, retail investors will sell their dollars, limiting lira depreciation. But it seems that these investors acted early, as they sold around $9 billion in November and December.

Furthermore, as a recent Nomura research note points out, retail deposits are only $7 billion higher than their minimum level after the Lehman Brothers collapse. In other words, retail investors have already used most of their ammunition, and when push comes to shove, they may not be able to affect the level of the exchange rate as much, although they will probably help smooth out is volatility.

Finally, the gold medal of misconceptions goes to the Prime Minister, for naively believing that if you build it, they will come. Erdoğan once again demonstrated his knowledge of economics when he recently criticized the tourism sector for not building hotels in the east/southeast although the government had built good roads.

First of all, as Esen Çağlar of TEPAV shows in a recent note, no province in the region has more than five firms in the Istanbul Chamber of Industry’s Top 1000 list, so it is not only the tourism sector that is evading the region.

And good roads are only part of the picture. You would also need cheap gas to transport your goods if you are so far away from a major port. Or even more basically, electricity: There were tweets floating around on Saturday that Batman (the southeastern city; I am sure Bruce Wayne has his own generator) was without power for the past six days. The industrialist would have to pause production or live with the exorbitant costs of running a factory on a generator. By the way, I almost forgot to mention that there is also the risk that your factory or hotel might get torched.

When the guy in charge is led by economic misconceptions, could you blame mere mortals like us?

Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at


Anonymous said...

Thank you for the excellent analysis- Hope it helps convince those who claim that the economic performance of the regime is stellar

Emre Deliveli said...

Thanks for taking the time to comment; comments are never required, but always appreciated.

I don't think the economic performance is stellar at all, but the column is not really about economic performance. Please have a look at the comments of a reader who accuses me of being an opponent of the government and my answer to her:

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