Monday, January 24, 2011

Weekly Hurriyet Column: Talking Turkey on the crisis

Below is  my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website. As for the title, another cheesy one, but not a movie reference

As I was trying to summarize two presentations, both about a 100-page paper, as well as my comments, in about 600 words, I again failed to make all the points I wanted to make. Therefore, I will have an extensive addendum, but it will probably have to wait until Wednesday if I can not get it before I go to bed tonight. But let me entertain you with a photo of my buddy Ferhan from the presentation for the moment:
Yep, it was a good idea that I did not go the presentation with my Besiktas Jersey, as I was planning to- there was a game the same night. But I still looked well underdressed in my Oxford shirt and jeans. Well, what can you do?- I am just a tactless journalist:) BTW, I did mention that he is my buddy in the unedited version of the column and did mention him by his first name to emphasize that fact. But the editors at the Daily News have edited them. They do have a point: It kind of looks unprofessional, especially as I was referring to Sumru Altug formally by her last name. But I would still have wanted to disclose that he is a good friend. Not that there is any instance of conflict of interest in my column, but still...

Enough chit-chat already; on to the column:
The International Monetary Fund, or IMF, was in town on Friday as part of its own 360° World Tour, thanks to Koç University’s Economic Research Forum, or ERF, and the Turkish Industry and Business Association, or TÜSİAD.

Ferhan Salman and Lorenzo Giorgianni have been globetrotting for the past several months, presenting the Fund’s new mandate as well as a recent IMF paper titled “How Did Emerging Markets Cope In The Crisis?Salman’s presentation with the same title summarizes that paper’s findings on the impact of, recovery from and policy response to the crisis.

Although emerging markets, or EMs, have been affected from the crisis less than other countries, there is quite a bit of variation among EMs themselves. Using the Fund’s proprietary vulnerability index, the paper groups together EMs with high, medium and low vulnerability at the onset of the crisis in August 2007.

Not only the stock markets of EMs with low vulnerability fell less during the crisis, these countries’ real sectors were also less affected. Compared to the more vulnerable group, they were hit later, and their GDPs contracted less as a result of the crisis.

However, there is a bit of chicken or the egg problem going on here: EMs with stronger fundamentals (the low vulnerability group) were also able to carry out a stronger policy response. EMs with more room for fiscal or monetary accommodation made full use of that liberty to dampen the impact of the crisis.

Sumru Altuğ of ERF and Koç University, during her discussion of the paper after Salman’s presentation, went one step further by noting that those EMs with low vulnerability were precisely the ones that were able to enact institutional and structural reforms following deep crises.

She also questioned whether the findings could explain Turkey’s record contraction of 12 percent (peak to trough), underlining that Turkey would not emerge as vulnerable from the Fund’s methodology. The IMF does not reveal individual country indices, as it would amount to shouting “Fire!” in a crowded movie theater.

But we know that external vulnerability has a 45 percent weight in the overall index, and that two items, ratio of reserves to short term debt & current account deficit and current account deficit as share of GDP together make up half of the external vulnerability sub-index. As I argued before, the Turkish economy does not look strong on these indicators, so I doubt the Fund’s model would deem Turkey with low vulnerability in 2007.
Besides, as Altuğ notes as well, Turkey was late to respond to the crisis. The Central Bank started its great easing cycle in November 2008, and the fiscal measures were enacted during the first of half of 2009, when some countries were already starting to emerge from the crisis. But the Fund would argue that the Turkish response was muted precisely because of the country’s vulnerabilities.

Altuğ, on the other hand, argues in a recent paper that the main reason behind Turkey’s record contraction is the collapse in expectations, which started after the 2007 general elections and accelerated with the global crisis. As a result, private consumption and especially investment expenditures collapsed.
I would opt for a similar explanation after acknowledging the role of Turkey’s vulnerabilities and late and insufficient government response: Turkish businessmen and consumers have experienced painful crises, so it would make sense for them to cut back on consumption and investment, rationally or irrationally, at the slightest sign of a crisis.

This “once bitten, twice shy” or “crisis savvy” approach could also explain other interesting phenomena of the Turkish economy, such as sticky dollarization. It definitely deserves more thought.

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

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