Monday, February 28, 2011
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, I managed to squeeze in both a wordplay and a movie reference. BTW, my friends at Global Source / Turkey Data Monitor came up with the same wordplay in their monthly, just a few hours after my column. As they say, smart people may not think alike, but they at least think of similar titles:)...
I will have an addendum as usual, where I will expand on some points I raise the column. But that will have to wait for a day or so... Anyway, on to the column:
With winds of change blowing in the Middle East and North Africa, or MENA, the Turkish media has focused on the impact of the turmoil on the domestic economy.
With all attention on Libya, the magic number is $15 billion. That’s the total value of the projects undertaken by Turkish companies in Libya during the last four years. Although the outstanding bills from these projects are not available, revenues from construction services abroad amounted to $1 billion last year.
Accounting for 15 percent of the revenues, Libya is in second place after Russia. All in all, MENA accounts for over a third of Turkey’s construction income, but the substantial discrepancy between the size of the projects and revenues has led me to believe that most of the revenues of the Turkish construction companies’ overseas businesses are retained abroad. Therefore, while some companies could face difficulties, the overall impact on the economy would be limited.
The same could be said of exports. Although just over one-fourth, or $30 billion, of Turkey’s exports were directed at MENA last year, the countries currently in turmoil received less than 5 percent of the total. Similarly, foreign direct investment from the region is negligible. Of the $7.2 billion that has come from MENA since 2002, nearly one half is from one item, the sale of Türk Telekom.
The phantom menace to Turkey lies in higher oil prices. I should tell you outright that I will not attempt to predict this year’s average oil prices. The forecasts out there go all the way from $100 to $220, and for every compelling analysis on why the oil shock is transitory, there is another one that argues it is permanent. One more guesstimate from a non-expert will not add much in this highly uncertain climate. Instead, I’ll go over the effect of oil price increases on the Turkish economy.
First and foremost is the impact on the current account deficit. The rule of thumb every Turkey economist knows is that a $10 increase in the oil price raises the country’s current account deficit by $4 billion. Working with percentages for a change, I found that the current account deficit would increase by 0.4 percent of GDP in response to a 10 percent rise in oil prices.
As for inflation, I am somewhat more pessimistic than the Central Bank: Although Gov. Durmuş Yılmaz recently noted that a $10 increase in oil prices would add 0.4 percent to inflation, I got the same number through a 10 percent rise.On the positive side, I found that the budget balance would improve by 0.4 percent of GDP as result of a 10 percent increase, mainly through import duties. When I integrated all these results into a growth equation, I surprisingly found a negligible effect.
But my models, and others for that matter, are limited in two important ways: First, they ignore the impact on the rest of the world. For example, if higher oil prices increase global inflation or decrease global demand, Turkish inflation and growth are sure to be negatively affected as well.
Second, and more importantly, while these models can handle a reasonable rise in oil prices, they would break down completely in the case of a huge oil shock, as all of the statistical relationships would fail. Then, Turkey would import much fewer barrels of oil and contract substantially, as would the rest of the world. This is the stagflationary scenario feared by Pimco’s Mohamed El-Erian, among others.
Otherwise, my basic predictions, all of which involve the number four, should be a good proxy for the impact of the MENA turmoil on the Turkish economy this year. In honor of the number of goals yielded by my beloved team in each of the last three games, I have decided to call this the “Beşiktaş rule.”
The January trade balance was announced, and there goes my prediction that the import growth would slow down: At $7.3 billion, the trade deficit turned out to be much higher than market's ($4.1 billion) and my somewhat more conservative ($4.5 billion) expectations.
Reader Abe Rudder was quick to note my miss with a humorous comment:
Well, like everyone else (myself included) you also missed the target with a great margin. Pictures may be worth more than thousand of words but figures are always misleading :) at least when you are looking ahead.
I guess he is right. And he reminds me of the predictive power of economics of economists. Part of it has to do with the nature of the job, but the following words from Rower32 are worth thinking about as well:
A totally unrelated but funny quote from Warren Buffet's annual letter:
"John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They made the ones learned in graduate school last a lifetime..." Just throwing it out there :)
So this is not a totally unrelated quote, after all:)...
Anyway, I did a pretty good job with exports, but imports just did not reflect fully the sharp fall in the VATs:
So what happened? I dunna!, but according to TEB Economic Research, "delay of tax payments by BOTAŞ (state-owned Petroleum Agency), could be reason for the disconnect between the tax payments and import volume in January." They also note that "if this is the case, this would mean that other energy enterprises could be accumulating arrears to BOTAS"...
Sunday, February 27, 2011
...is the sharp drop in value-added-taxes, or VATs, on imports. It is a common Turkey economist trick to use import VATs to forecast actual imports, as the former is released a couple of weeks before the latter:
Although the relationship has not been picture-perfect, as you can see in the graph above, it still means that we could end up with a low January imports figure, which would mean that the CBT's policies have started to work... Doing a simple regression reveals that import growth could have retreated to around 20-25 percent year-on-year, or yoy.
We can also use preliminary exports data from Turkish Exporters Association, or TEA, to come up with a forecast of actual exports, which is in fact much more reliable than the imports estimate, due to the close relationship between the two, which somehow weakened in the last couple of years, but is still robust:
Getting my exports forecast from a simple regression between the TEA and TurkStat figures and combining the result with my imports projection, I end up with a monthly deficit figure of $4.5 billion. This would mean that the trade deficit widened around 28 percent yoy, which would be a remarkable slowdown in the pace of the widening of the deficit, even though it is still widening!
That's why, despite inflation is expected to come in just over 4 percent on Thursday on the back of base effects (mainly because of high food inflation last February), I believe that the most important domestic data release of the week will be tomorrow's January trade balance...
But since I started with the budget, let me finish with it. I just want to reiterate that the January budget, as summarized in the table below, is not nearly as good as it looks:
Why? The improvement in the budget is mainly driven by revenues (indirect taxes resulting from robust growth as well as non-tax collections such as privatization and transfers from the Unemployment Fund), whereas primary expenditures continue to grow at a rather robust pace. So no fiscal tightening, i.e. tandem fiscal policy, even though it is not pork barrel spending, either.
Here's Rower32 again (the second comment that did not appear in the blog, although relayed to me through email), this time on monetary and fiscal policy working in tandem, which I mentioned at the end of this week's column and then explained in an addendum:
There's section in Koo's book: "Fiscal Policy Determines The Effectiveness of the Monetary Policy" altho the situation in Japan was almost completely opposite. Ben Bernanke in a recent speech (can't remember which) echoed the same sentiments. But I still don't think fiscal and monetary authorities ever worked in tandem in Turkey. +it's election year..don't expect fiscal tightening anytime soon.
I should say that I was really anxious to make Koo's book my first non-fiction Kindle book, but found out (for some reason, my editor friend prefers "found" to "found out", so I took advice and used the former in tomorrow's column, but the blog is for imperfect English) that it is not available as an e-book:( What a bummer:(...
Long-time reader Rower32 made two very interesting comments a couple of days ago, which, while relayed to me through email, for some reason did not appear in the blog. First, he answered to my plea for help with next week's topic:
Definitely something on income inequality! I didn't have time to do research on income inequality in Turkey or in other emerging economies in general. But it'd be nice to get some perspective. I've been reading a lot on that lately and my impression is you get different results depending on the way you slice and dice the data oh and on your political affiliation. But still the income inequality has been getting worse past 30 years in US and much of it is a result of tech innovation and education they say. Here's a good paper with tons of good stats and an interesting discussion with Robert Frank of Cornell.
I had already got another suggestion along the same lines:
Maybe you can write about unemployment, poverty, income inequality, i.e. things that people on the street care about.
Another blogger, after translating "cigeri bes para etmez" as "your liver is worthless" (I went for "your liver is not worth a penny"), gave a similar suggestion:
i think you should write more in microeconomics.these are things that interest people and affect their lives.
This was our editor-in-chief's advice to me when I first started writing for the Daily News as well. After highlighting that almost all the Turkish economics columnists were writing about bonds, stocks and the exchange rate, he stressed the importance of writing about microeconomics, what really effects the average person on the street...
Although I have written very few columns about asset prices, and have no intention of devolving (is that the right word?- the opposite of evolve, i.e. a backward evolution) into a market economist, I have not exactly followed David's advice, either. This is because I got my official training in hard-core macro, but I did mostly micro during my stint as a think-tanker, so I should be able to handle more micro.
Anyway, I will try to move into more micro columns, and the first step should be an analysis of the CHP's economic policies- I guess I want yet more insults:)... I could wait until they disclose the full thing, or do a column about the family insurance scheme in the next two weeks. But whatever I do, I'll be sure to integrate poverty, inequality and unemployment into the picture...
Muchas gracias to all those who took the time to comment...
For the curious journalist following my blog:
A friend told me that he had seen football executive Peter Kenyon with Besiktas' Portuguese footballers Simao, Q7, Almeida and Fernandes at the Istanbul club 360, in early January right after the footballers' arrival in Istanbul.
As far as I now, Peter Kenyon has been involved in transfer deals since he left Chelsea in at the end of 2009. It seems that he decided to do this more professionally, as part of fund. So in case you were wondering about the fund that had financed the Almeida transfer, you now know... I'll leave it up to you to find out the name of the fund and Kenyon's exact relationship, but please do let me know:)...
Saturday, February 26, 2011
I have been thinking about three potential topics for next week's column:
- The 2001 crisis: Tuesday was the tenth anniversary of the 2001 crisis. So to celebrate a decade without a crisis, at least a domestic-created one, I could write about lessons from and consequences of the 2001 crisis. This would also give me the chance to relate to the great comments by ex-CBT governor Sureeya Serdengecti at a conference I attended last month, which I am anxious to share.
- The CHP's economic policies: I could write about this and get lots of nasty comments, similar to yesterday's, but from both CHP and AKP supporters (don't ask me how, it is a secret of trade), which would be a lot of fun:)- or not, as most comments would get censured by the Daily News web editors... But since their program is likely to be announced in March, it is better to wait for the details. This will also let me speak about inequality in Turkey, which a couple of readers have asked me to discuss.
- The effect of the MENA tremors on Turkey: I could write about the channels through which Turkey is to be affected. I did some metrics on this yesterday, which will let me do a sad football allusion, so I am all set to go for it.
I am trying to choose between 1 and 3 at the moment, but kind of leaning towards 3. The way I figure, I could always do a late anniversary next week, but I am thinking I should strike while the iron is hot with respect to the Arab tremors... Anyway, I am heading for dinner, and should get to work by 22.00 Turkish time, by which time I should have made up my mind. So feel free to let me know which you prefer (or throw something else at me) in the next hour or so....
Friday, February 25, 2011
First, the good news: The family insurance scheme is finally up at the CHP's web site (in Turkish only). And it is the headline item, as it should be, so I guess me and all the many other critiques were right after all... BTW, a reader just noted that it was already there, but it definitely wasn't on the front page in the morning, as both me and Atilla Yesilada could not find it.
BTW, Radikal has asked their economics columnists what they make of the CHP's economic program, or rather the rough sketch of it as outlined by CHP top brass Umut Oran in his Radikal interview. Unfortunately, the article seems to be in the hardcopy version of the paper only, as I could not find it on their web page. In general, while the columnists applaud the end-results (i.e. objectives) of the program, they want to know about the means: For example, the party is aiming for 7 percent growth. How will they achieve that, given the country's savings-investment gap, and their claims that they will also cut the current account deficit? It is not that it can't be done; it just has to be spelled out. Or vague statements like "shifting the economy from hot money to production" need to be cleared up. While these are better than nothing, I hope they will release a serious document soon.
And as my general comment on the CHP's inability to provide effective opposition to the AKP: An expat friend (vital to stress for objectivity), who had read the insults and my answer, highlighted that many many well-educated, upper-class Turks tell her that there is really no viable alternative to the AKP. So throwing insults even at friendly advice is what I call the ostrich strategy: Bury your head in the sand and ignore the reality, living happily ever after in your dream world...
And it seems that the CHP footsoldier who attacked me this morning following my post on the party's undisclosed economic policy is by no means a lone wolf. Atilla Yesilada told me that the Artvin branch of the Ataturkcu Dusunce Dernegi (Kemalist Thought Institute) reproached him on TV for supporting the AKP's economic program. The poor guy is confused, trying to figure out whose side he is on. Sounds like me... I have really grown sick of people who are asking me why I work for a pro-AKP guy when they hear my work for polling firm KONDA, only because its founder, ex-CHP deputy Tarhan Erdem, has dared to criticize the part. All part of of the same witch hunt!
Speaking of the footsoldier, I never answered her insults, but just commented on their general tone. I just have two small comments for her: First, she claims I am wasting people's time. As I have said many many times before, unlike Besiktas, I am not forcing anyone to follow me, so anyone who finds reading my stuff a waste of time will never read it again. In fact, she should do that as well. Second, she claims no one finds my stuff interesting. She should go and check the popularity of my Hurriyet columns. Obviously, I am not Martin Wolf or Paul Krugman, but still my statistics depict a rather different picture.
BTW, I should say I am also thankful to her for providing my expat friend with a good text to study Turkish idiomatic slang. I translated for her "ipe sapa gelmez" and "cigeri bes para etmez" as "good for nothing". She is very happy with her new vocabulary.
Finally, I couldn't help but wonder whether the footsoldier got mad because of my calling Deniz Baykal "Denise the Menace". For that, I would argue that many think like me on Mr. Baykal's contributions to the CHP's perennial role in the opposition, as accenuated by this excellent caricature:
Here's a comment that just came in to my post on CHP, which proves my point:
YUH SANA TERBİYESİZ, CİĞERİ BEŞ PARA ETMEZ HERİF!
HER GÜN İPE SAPA GELMEZ Bİ BOKA YARAMAYAN SÖZDE EKONOMİ YORUMLARI İLE İNSANLARIN ZAMANINI İŞGAL ETTİĞİN YETMEZMİŞ GİBİ, ŞİMDİ DE ANCAK MAHALLE KAHVESİNE YAKIŞACAK FUTBOL MUHABBETLERİNİ BLOGUNA ALMAN, AMA YİNE DE, UTANMADAN YAZDIKLARINA "ECONOMICS BLOG" ADINI VERMEN, EKONOMİSTLİK MESLEĞİNE HAKARETTİR.
ARTIK BİRAZ BÜYÜ, OLGUNLAŞ VE İNSANLARIN, YAZDIĞIN SAÇMALARI ÇOK İLGİNÇ BULDUKLARINI SANMAKTAN VAZGEÇ!
ALLAH BELANI VERSİN!
Having read this, you might have thought that I was throwing insults at the CHP. Have a look; I was merely noting that they should have made their economic program available...
Anyway, I am grateful to Mrs. Anonymous ("she" is my default use) for three things...
- She has shown my readers exactly what is wrong with the CHP. Rather than come up with ideas and policies, they are letting people like her flourish by supporting a policy of unconditional hatred (Don't worry, the AKP is not much different, either).
- She has shown the degree of polarization in the country, and especially the "if you either with us or against us" mentality so prevalent in Turkish society.
- She has shown the typical Turkish way of debate by attacking my personality and throwing insults rather than providing civilized criticism. She could have easily politely explained why I am wrong (if the family insurance is readily available, she could have sent me the link, in which case I would have apologized), but then she wouldn't be a political bigot, like a considerable chunk of this country.
...Even though I would have preferred that she emailed me these wonderful comments and revealed her identity rather than hide behind the internet's veil of anonymity or better still speak them directly to my face.... After all, it is very easy to be an internet thug, but rather difficult to be a real one, especially when facing a disgruntled, ready-to-explode Besiktas fan...
It wouldn't be proper if I left my morning bashing rounds without taking on the Turkish media. After all, when my "perennial spammer", who has been awfully quiet for a while BTW, first got in touch with me, she made it known that she was not happy with my miscellaneous interventions on the daily press, leading me to think (or rather deduce) that she was working for the Turkish daily Today's Zaman, the paper that usually gets my arrows. But how can I stay quiet when all the Turkish dailies are claiming that commodity prices are on the rise? Here's a screen grab from the financial data program Blue in my Blackberry:
I guess the Turkish press equates commodities with oil and agriculture!!! But I still thank them to let me test the screen-grabber program I recently installed on my Torch...
And these last three posts seemed more aggressive than my usual style, apologies: I am really not myself after Besiktas conceded a dozen goals in three matches (four-a-piece), and in only one week. That's what I call achievement:(...
I wasn't going to say anything, but after watching Atilla Yesilada take this on at his morning newsreading show, I have gathered enough courage (I took out a bottle from the CBT's bootlegged whiskeys to help me out) to speak out:
I had been wondering some time now what CHP's economics agenda is, so I was glad when news of part of their economic program, the "family insurance" scheme, began to appear in the papers last week. Apparently, there is a book that explains the program, but it is nowhere to be found! I emailed the CHP's web site, even asked a former MP to help me get it, but to no avail. And obviously there is no copy on the web. Come on guys, how difficult could putting a Pdf version on the web be? Definitely not more difficult than an Arabic web site...
Besides, we have yet to see CHP's full economic program. In an interview in Radikal yesterday, Umut Oran, one of CHP's top brass gave some hints, but only on the contents. It is three and half months until the elections, and I have no idea what the main opposition party's economic agenda is. Although the same Umut Oran (then an opponent of the CHP leader Denise the Menace Baykal) had accused the CHP leadership of not desiring to come to power, as Atilla Yesilada aptly put it a couple of hours ago, CHP is indeed still striving hard to stay in the opposition.
It seems that, although I am not sure it will last 1000 years, the AKP's rule is sure to be longer than the thousand-year Reich, which lasted only 12 years. Especially if the CHP's attitude on disclosing its economic program is any guide...
Thanks to Atilla Yesilada, who highlighted this interesting news during his morning newsreading show (a Turkish classic, since Turks don't read, the TVs read to them, as every major channel has a similar program), I now can now explain the CBT's unconventional monetary policy mix: For those of you who do not speak Turkish: At a raid to the CBT's recreational facilities in Ankara, 250 bottles of bootleg alcoholic beverages are confiscated.... I don't know about you, but I thought about the famous raid scene from The Untouchables:)....
Anyway, although we do not if they were smoking something, we now know what the MPC members were drinking when they took their bold policy decisions. Apparently, alcohol does not make you bold only against the opposite sex:).... But now that the problem has been solved, I do not expect any more rate cuts... Unless they also have a stack of weed down at the Bank's vaults:)....
Thursday, February 24, 2011
This post already appeared in 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...
Note that there is an addendum over at my blog, where I expand on some of the points I made in the column...
As is the norm, I want to say add few things to this week's column:
First, I should note that I wasn't all that clear when I said monetary and fiscal policy were not working in tandem. In fact, a reader did ask about that in the comments to the column. Here's my answer to him:
I could not be as clear as I wanted to be because of space limitations: While I will have a detailed addendum over at the blog soon, let me try to summarize the gist of my argument: If the CBT is cutting the policy rate, then you'd expect the government to enact some fiscal restraint to make up for the Bank's loosening. As I and the Fund are noting, this has not happened despite claims otherwise. Of course, the Bank is saying that, because of the reserve requirement hikes, monetary policy is overall contractionary, but still...Or if liquidity is increasing as a result of the decline in Treasury deposits at the CBT, the CBT should make up by mopping the extra liquidity via open market operations. As you can see in the second graph, this is not happening, either. BTW, although it does not use the word "tandem", the policy incoherence is highlighted in the IMF report as well. And in the column, I was reporting on that report as well as add in my own views, so it's not just me:)
By the way, Haluk Burumcekci, the EFG Securities economist from whom I borrowed the tandem/center-back terminology, used that phrase a long time ago. I haven't been getting his stuff since he moved from Fortis to EFG, so I am not sure if he would agree with me today. But since he is the father of that phrase, I duly referenced him....
Note that the Executive Board discussion is based on the Staff Report, which has not been published- probably because it is probably in negotiation stage between the Treasury and the IMF: These reports are written after "consultation" with the local authorities, meaning that they go back and forth until a consensus is reached. Therefore, the Turkey Staff Report is bound to be softened somewhat before it is published. BTW, this is solely my opinion, so nothing has been leaked to me, although I do know people on both sides of the table. In fact, I would have killed to get a hold of an earlier draft of the report. What I'm trying to say is: If you are journalist, don't make a headline out of this!
BTW, this process is not valid just for Turkey, or only for Staff Reports. In fact, the Independent Evaluation Office, the IMF's Internal Affairs, recently published a report where they were extremely critical of the dealings of the Fund's dealings with British authorities. If you don't feel like reading the whole thing, the FT has a nice summary.
As for some of my other points: Loyal readers would know that I think the Turkish economy is overheating, and although I would say the Fund would more or less agree with me. But this is a highly contested issue, and I have linked to a paper arguing for the opposite view in a recent post.
As for my argument that fiscal policy and liquidity management are the key culprits behind the ballooning current account deficit, Citi Turkey economists have made similar arguments, supported by nice charts, in a recent research note.
A friend had the following comment to my post on TIPS:
when i read this, it s just make me think of french tips =) which is just a manicure and a lady thing. im suprised how woman can think of mani from such a subject =)
Well, I did not know the word "french tips", so what she says makes sense:) Besides, I am like that as well: One of the topics I am thinking about for next week's Hurriyet/Roubini column is the 2001 crisis; after all, on Tuesday, it was the 10th anniversary of the crisis. But the first thing that came to my mind was not the number 10, but the number 29: For those not in the know, 29 is the number of years the eziks have not won the Turkish F.A. cup. So it is french minis for my friend, the eziks for me:).... And yes, I am still sore from Sunday:)
Speaking of the column, the other idea I am playing with is the effect of the Arab tremors on Turkey. Let me know if you like one idea over the other, or would like to suggest an idea of your own- any thoughts will be greatly appreciated....
Wednesday, February 23, 2011
Since I wrote a few tips on TIPS, Nomura has come up with some very interesting research:
First, they note that for Turkey, the correlation between real yields and core inflation is stronger than the correlation between breakevens and core inflation:
What does this mean? They have written their interpretation at the top of the graph, but I would be more interested on the impact of core inflation on nominal yields, which you can guesstimate from the info. given by Nomura...
In a separate note, they argue that nominal bond rates in EMEA have already moved a lot, and unless core inflation rises, we are not likely to see further rises in yields. But the one country they expect an upward move in core inflation is..........Turkey..........
As you can see, they have also calculated real rates and brekaeven inflation (both 5-year) for four countries, including Turkey, so Arigatoo Gozaimasu, Nomurasan!:)
A former student from my time series course sent me the following graph:
He has used H-P filter and the Christiano-Fitzgerald approximation to the band pass filter to get the cyclical component of real GDP from 1987 up to present day. He is wondering if he could say, by looking at the this graph, that the output gap has closed.
I prefer to look at GDP together with its trend, but from the graph, it does appear that the output gap has closed. In fact, you get a similar picture if you decompose trend component of GDP using just the H-P filter:
The problem is that this is a mechanical and unrefined methodology, which can lead to wrong conclusions. Cevdet Akcay and Eren Ocakverdi have written a technical note to explain why this is the case. If you just want to get the intuition, have a look at this post...
BTW, because of these limitations, my argument that the output gap has closed down is not merely based on doing this exercise on Eviews. I use as much as art as science, such as monitoring of demand conditions:
At the end of the day, even if you spend a month with time series, it is going to boil down to your subjective opinion...
Another respectable 8th place finish from your friendly neighborhood economist:
It seems that that's about my normal/mean/median performance. I sometimes don't make it to the top 10, and for a few weeks late last year early this year, I was continuously in the top 5, even making in to nummero uno a couple of times, but my normal place seems to be at the lower ends of the billboard...
Tuesday, February 22, 2011
WoW, first time I see you giving investment ideas, I hope you are not evolving into a "market" economist. :)
Well, I would see that as a backward evolution, so I hope not. BTW, I was a market economist for a good 16 months, so I have already made the evolutionary leap from market economist to economics columnist, and I have no intention of retorting back!:) BTW, speaking of evolution:
Yes, I am still sore from Sunday!:) Anyway, joking aside, Abe Rudder need not have worried: That was one of the few times I will be giving investment advice. For one thing, as Abe Rudder implies as well, there are many market economists/ analysts dishing out such advice, so there is definitely no need for one more. Besides, it is impossible to forecast asset prices accurately in the short-run (I am saying this both as a former market economist as well as someone who has taught a course in time series). When I was a market economist, I hated the short-term USDTRY forecasts we had to fill out every week precisely for that reason.
But in this case, I made an exception because: 1. My projection was more longer-term. 2. I had a lot of faith in it. 3. I was making it to use myself, so I wasn't just sharing wisdom from an ivory tower... But again, no worries because: 1. I love what I do. 2. I wanted to be market economist, I would practice it in the market rather than in a weekly column. 3. The editors at Daily News are, thank God, not keen on too much emphasis on asset prices; after all, as they rightly note Economics is much more than that.
Monday, February 21, 2011
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, it cheesy as usual, but no movie reference this week.
I will have an addendum as usual, where I will detail the Fund's "reporting process" as well as well expand on some of the views in the article. That's all I have to say until then, so on to the column:
I will have an addendum as usual, where I will detail the Fund's "reporting process" as well as well expand on some of the views in the article. That's all I have to say until then, so on to the column:
The International Monetary Fund, or IMF, was half-jokingly called “ay aman of” by many Turks after the 2001 crisis.
This Turkish expression, which would roughly translate as “ouch ow oof” into English, was referring to the fiscal austerity of the Stand-by Arrangement, which laid the foundation for the country’s strong macroeconomic fundamentals today. No pain no gain, as Ahnold would say.
Turning to the present day, “ay aman of” was my first reaction as I read the public information notice regarding the IMF Executive Board’s conclusion of the Second Post-Program Monitoring Discussions with Turkey.
An avid reader of the Turkish press would have been surprised by my worries. All the dailies were in total agreement that the Fund had commended Turkey on its successful management of the economy. I would argue that the two-pager would make for a mixed reading at best.
The IMF surely congratulates Turkey on the robust economic recovery and has in fact raised its 2010 growth forecast to 8.2 percent. The Fund also notes that output is above pre-crisis levels, although it does not take a stand on the controversial issue of whether the output gap has closed. But the IMF makes subtle critiques on fiscal and monetary policy as well.
The Fund’s main worry is the “sharply-widening current account deficit” and the possibility of a “sudden capital flow reversal”. Moreover, the high import content of consumption, investment and even exports as well as growth’s dependence on capital inflows are symptomatic of weak external competitiveness.
After having diagnosed the disease, the Fund recommends “a combination of fiscal and macroprudential tightening, more restrictive liquidity conditions, and competitiveness-enhancing structural reforms” as the cure.
With respect to these measures, the Fund praises the existing macroprudential measures and slowdown in liquidity growth, while at the same time acknowledging that more could be needed. But I feel that the Fund has given the Central Bank of Turkey, or CBT, a gentleman’s C on liquidity.
For one thing, the CBT has been reluctant to offset the extra liquidity from its foreign currency-buying efforts and the decline in Treasury deposits with its open-market operations, as doing so would have increased money market rates.
The decline in deposits also reflects the deterioration in the fiscal position, where the Fund is most vocal: The IMF agrees with your friendly neighborhood economist that once the soaring tax revenues induced by the import boom are excluded, fiscal balance actually declined last year. Therefore, the Fund is calling for “fiscal tightening to restrain domestic demand and rein in the current account deficit”.
While the Fund does not state it explicitly, I see the loose liquidity management and fiscal policy as the main culprits behind the resistible rise of the current account deficit. I say resistible because although Turkey’s savings investment gap remains as a fact, the current account deficit would not have spiraled out of control without fiscal accommodation or base money expansion.
As for monetary policy, the Fund sympathizes with the Central Bank’s unconventional approach, but also emphasizes that monetary policy should continue to focus on price stability. After all, Turkey’s competitiveness gap stems more from inflation differentials with the developed world and peers than from the nominal exchange rate, so bringing inflation under control would be “essential for durably strengthening competitiveness”.
But my biggest worry is that monetary and fiscal policies are not working in tandem, to quote fellow Daily News columnist Haluk Bürümcekçi. They are looking more and more like Beşiktaş’s central defenders.
Sunday, February 20, 2011
I checked in with the Dow Jones reporter who had interviewed me for an article on Turkish monetary policy. It turns out they changed the angle of the article a bit: Now, she is working on Turkish inflation-protected securities (bonds), i.e. TIPS. She noted that Turkish inflation-linked bonds seems to have a deeper market of compared to other emerging markets, and is wondering if I have any thoughts on this.
First of all, I should note that the article makes sense: Anytime there is a an important shift in inflation, the relative performance of TIPS versus regular government bonds is sure to change. And as I have noted several times during the past few weeks, inflation has bottomed out. But I can pinpoint to some bumps that would prevent to jump to quick conclusions.
I should start by saying I am too lazy most of the time to do international comparisons, so I did not know that fact. But what I do know is that looking at Turkish TIPS, or any TIPS for that matter, can be tricky. For one thing, there are liquidity differences. In the Turkish case, not only TIPS are much less than other bonds in a nominal sense, they are also much less liquid once you account for the fact that a significant portion is held in the banks' balance sheets until maturity. You'd have to adjust for that
But if you are not worried about inter and intracountry liquidity differences, there are two things you can do to see if TIPS are attractive or not- now, I am talking generally:
First, you can calculate breakeven inflation from the TIPS, which is simply the difference between the real interest rate of the TIPS and the government bond at the same maturity. Comparing breakeven inflation over your or markets' inflation expectations will give you a sense of how good a deal the TIPS is. I should reemphasize that by doing that you are ignoring supply differences between the two instruments, most notably liquidity. But there are several methods that you can use to account for this liquidity- for starters, you can google "cleveland fed TIPS liquidity" and look at the papers that come up.
Secondly,you can look at TIPS using your own or markets inflation expectations, which is really the other side of the same coin. Using inflation expectations, you can calculate the coupon payments of the TIPS. Then, using today's bond prices, you can calculate IRRs and compare them with yields on other government bonds.
There is no way I will do these calculations, especially on a beautiful Sunday in Marmaris, where I feel like having calamari, octopus and fish by the sea, and when there is the annual ezik-bashing at night. But for the Dow Jones reporter, or anyone else for that matter, quite a few analysts do these calculations. For example, the former Economics team at Fortis Turkey used to do these calculations a lot; Haluk Burumcekci is now at EFG Securities, whereas the rest of his team has been integrated into TEB as a result of the BNP Paribas / Fortis merger.
I just wanted to sketch some very rough guidelines, but if you have questions feel free to get in touch with me- after all, I am your friendly neighborhood economist:) And if we beat the eziks tonight, I am sure to be extra helpful:)
Saturday, February 19, 2011
As I noted at the beginning of the previous post, I have started thinking about next week's column: After coming up to a mutually beneficial agreement with my editor friend (I get my columns edited and avoid getting into a fit of rage @ Inonu, she gets to see Besiktas games, quite a sight after the "defense" chants in NBA games- she is American), I started writing my columns late afternoon/early evening Saturdays, so this means I should already be starting to think about next week's...
My first instinct is to write about IMF's Second Post-Program Monitoring Discussions with Turkey, as it was completely misinterpreted/misreported in the Turkish press as the Fund applauding Turkey's policies. This is not the case; in fact, I would say that the Fund is even critical, as it would be obvious to anyone who is familiar with the politically correct Fundspeak.
But if you have other suggestions, or of there is a topic you'd want your friendly neighborhood economist to tackle, by all means let me know, by a comment to this post or a private email to emre.deliveli AT gmail.com. But I need to have it before 8 pm (Turkish time) or so at the latest.
I am already starting to think about this week's column, and will probably get it done today so that my editor friend can edit it for me tonight or tomorrow morning (I exchanged my Besiktas pass and a couple of other perks for her editing services in the spirit of good old barter, but before the Kiev game, so it wasn't an act of resignation), but the addendum to the latest column is finally here:
First, as you all probably know by now, the CBT left the policy rate constant, allowing my Daily News and Roubini readers make use of my good call. If you want to know the details, Citi Turkey economists have them, but what captured me most was the emphasis on demand and supply-side inflationary pressures at the same time: Not only did the Bank add in supply-side pressures ("the Committee also notes that rising energy and other commodity prices pose supply side risks on the inflation outlook"), it also got rid of a phrases noting lack of domestic demand pressures ("industrial capacity utilization rates remain below their pre-crisis levels due to weak external demand" and "aggregate demand conditions do not exert upside pressures on inflation"). Anyway, if you want to do your own comparison, here's the MPC one-pager from this month and the last....
The constructive ambiguity the Bank has created of late was evident before the decision, with economists evenly split between a cut and and no cut. Radikal had a terrific piece the day of the rate decision, where the economists they interviewed were giving completely conflicting views on the market impact of the decision: Some were saying a cut would affect markets negatively, while others were arguing that lack of a cut would lead to a negative market reaction. At the end of the day, there was a positive market reaction right after the cut, but most of it was taken back before day's close, owing partly due market-negative US data.
More importantly, what is next for the CBT? I find it unlikely that, unless there are very unexpected events, like reemergence of capital flows to EMs, the Bank will cut rates again, given the inflationary pressures and that it has succeeded in curbing hot money (BTW, hot money flows re measured completely mistakenly by many, so I will have something to say about that later). In this sense, I think Emma Hanim, as a reader critically referred to FT Money Supply blogger Emma Saunders, has got it wrong again. But unless there are unexpected events, like those in May-June 2006, which prompted the Bank to a sudden hike, the CBT will not raise rates before July, either, given that the new governor is appointed in April and that there are general elections in June.
But that doesn't mean the Bank will just sit and wait until after the elections. As Juan el Bebe noted in a recent speech, as summarized by J.P. Morgan, the government likes the CBT's line: Sit and wait to see the impact of the measures on credit, and act if they are not enough. As I argued in the latest column, I don't think they are enough- although I only have semi-formal evidence to support my claim- incidentally, I recently saw a BRSA paper that finds, more or less, the same relationship between interest rates and credit growth as I only halfheartedly reported. I still haven't gone through the full calculations (and doubt ever will, given lack of incentives and too much to do in my moonlighting job), but I wouldn't be surprised even the Bank would need a couple of percent of RRR hikes at the very least, as well as some other macroprudential measures, to curb credit for good. Babacan hints that if that is the case, support from the BRSA will be coming.
As for making use of this scenario: There are many, let me name a few:
- You could see banking stocks (and therefore ISE) go down when the measures are enacted. The only problem is the difficulty of timing, so I have not put this prophecy to use for myself yet.
- If you want to restructure a loan or mortgage, these may be the last few weeks to do so (I am actually going through this right now, so I am putting my money where my mouth is)
- Any bet on lira strengthening during the second half of the year is a good bet: You could do options if you have a lot of money, forwards/futures if you have some or dual-currency deposits of you have little. If you want to know you are getting fair pricing, open up any finance book and calculate no-arbitrage pricing, or ask a trader, as I did last week. With this, I am putting my money where my mouth is as well.
Finally, for the interested who speak Turkish, I wanted to hyperlink an Ugur Gurses column in Radikal: Mr. Gurses makes the argument that the CBT measures are not to deter hot money, but keep the existing in before the elections, to avoid a severe external shock. You may not buy it, I am not sure if I do either, but it is an interesting read nevertheless.
That's all folks, but a related post titled "the best charts to see impact of CBT's policy" will be with you soon....
Or "me", if you are a grammatical disciplinarian....
But as a follow-up to yesterday's post, I just learned, thanks to an ezik friend, what Sen~or Zapatero had said: Me importa un pepino (I don't give a damn), and that's exactly what I say to those who simply say that I am boring, without giving any substantial feedback, let alone explain why I am boring...
BTW, the Turkish papers are reporting what he said as "no me importa un pepino", but you don't negate this expression... I am not sure if the papers got it wrong or Mr. Shoemaker, but I just wanted to let you know as someone who learned this expression many years ago in an Almodovar movie.... Yep, I am really an HBB, aren't I:):):)
BTTW, I just created a new label called Besiktas; I just noticed how much Besiktas figures in my columns....
Friday, February 18, 2011
After I learned that I was "ssooo BOOOOOORING", from a comment to my latest post, probably from the perennial spammer who had been quite quiet for some time, reader T. Partee made the following comment:
As Schuster would say; if you aren't happy with it, then stay at home and not visit this "boring" blog!!!!
That's exactly what I am saying; thanks to T. Partee for clarifying that upfront. But there are a couple of crucial differences between me and Mr. Shoemaker, which puts the former German international and Barca/Real superstar at a much more precarious position than your friendly neighborhood economist:
First, Schuster is getting a couple of million euros for his services a year, whereas I am doing this blog mainly for my own enjoyment. Since he is liable to the rules of the free market, if he is not successful and/or he does not please the fans/tupkafa, he will be fired. BTW, I am completely prone to the same market capitalism as he is with my Hurriyet columns: If enough people think like Miss Anonymous above, or if I am getting quite a bit of negative commentary on the columns, or if no one is reading me, David, the editor-in-chief, will probably fire me even though he likes me as a person; after all, business is business. But the blog is my home, and to me it is my castle, just like the English bloke's home is his...
But the more crucial difference between Schuster and moi-meme, the one that warrants this post, is that Schuster is commanding a monopoly of sorts: Almost no Besiktas fan will switch to the eziks or the saibecis because of the dismal performance of his team. It is true that some may not decide to come to the games, in which case ticket revenues and next season's pass sales will suffer. But even that is quite unlikely, given the devoted nature of Besiktas fans, including yours truly, who could not attend yesterday's game, BTW, due to being stuck in the hinterland... Economic theory dictates that Herr Schuster should have more market power, meaning that he can get away with such remarks. But it also means that he has more responsibility to the fans than I do to my blog readers, most of whom are not, unlike their football team, stuck with this blog. BTW, given the power of Besiktas fans
have their say over club affairs, I would not want to oppose the fans if I were der Blonde Engel...
Having made these points, I can comfortably say that I am in a much better position than Mr. Shoemaker to tell my customers to stay at home, or switch to another blog, if they don't like most of what they are reading here...
Thursday, February 17, 2011
I still have not got myself to write the addendum I've been promising about this week's Hurriyet/Roubini column, and given that there is the Besiktas-
Chicken Dinamo Kiev game in less than half an hour, I need to get moving soon. But just another addendum, in the meantime- this one about the column about the IMF paper on how emerging markets have fared on the crisis:
The two Sumrus of Koc University / EAF just published their paper about the IMF paper, which was presented by my good old buddy Ferhan in Istanbul, in a depressingly-small TUSIAD/EAF-sponsored meeting last month. I summarized the views of Sumru Altug, who was the discussant for the paper (and Ferhan's presentation) in the column as well as in an addendum. But if you speak Turkish and want a concise, well-written summary of the paper, as well as the "Sumru view", which is not really that different from mine, as I note in the addendum, have a look at it...
Wednesday, February 16, 2011
While I was putting up this week's Roubini column at the blog, I noticed I had forgotten to put up last week's. Better late than never, so here it is:
This post already appeared in Hurriyet Daily News last 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...
The column is not technical at all, but there is a rather technical addendum at the blog where I discuss the Central Bank's policy using mainly the banking sector's balance sheets and banks' reaction to the policies- because the key agents of the Bank's policies, which will ultimately determine their success or failure, are the commercial banks....
Tuesday, February 15, 2011
This post already appeared in 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 small before the blog version of the article. And I will have a larger addendum "soon"....
After a one-week absence, I managed to get into the the top 10 again with yesterday's column:
A far cry from my top three positions late last year/early in the year, especially given that I had a rather alluring title, but still better than nothing...
BTW, I will have an addendum for the column soon, commenting on today's rate decision as well- I just haven't been able to get around to it yet...
Monday, February 14, 2011
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, I am it is history rather than movies this week...
I will have an addendum later today or tomorrow, especially on detailing how you could take advantage of my lira scenario, but I should out front that I found out today that my view is not as contrarian as I had thought: Among the several pieces I read today on tomorrow's CBT MPC meeting, J.P. Morgan's is the most similar to my views. I like their argument on extra liquidity, but although I did not verify this, it seems their measure only considers daily stock of OMOs. They should have also penciled in the unsterilized FX buying.
As for the implications of a rate cut tomorrow: Master Yesil
AODA (I am a padawan compared to him, especially in market matters, and his last name means GreenRoom, so the Yoda comparison isn't that bad after all) also thinks that there will be a massacre of the lira if the CBT cuts rates tomorrow, as he highlights at the end of his Finansonline article today (in Turkish).
That's all I have to say until the addendum, so on to the column:
Technically, it would not be Saint Valentine’s Day massacre, unless you have decided to inhabit the uninhabited Baker and Howland islands.
Other than these two atolls fourteen hours behind Turkey, the Central Bank of Turkey’s, or CBT’s, rate decision will come the day after Saint Valentine’s Day. Moreover, the lira’s massacre would have materialized only if the CBT were to cut the policy rate again and signal of more cuts to come.
The Bank is unlikely to follow that route, as the conditions that justified its foray into the unconventional policy mix of cutting the policy rate and increasing required reserve ratios have changed significantly. For one thing, the “wall of money” into emerging markets that started with the Fed’s Quantitative Easing II, and prompted the CBT to act, is slowing down sharply.
This means that capital inflows are likely to become selective, and I would expect to see some differentiation between countries with current account deficits and surpluses. The lira, the currency of the archetypical deficit country, is likely to feel some pressure.
Besides, the Bank has been quite successful in weakening the currency, although I am not sure it is the result of its policies, or what I deem as constructive ambiguity, i.e. confusing markets on the direction of monetary policy. The lira has depreciated around 10 percent against the dollar-euro basket since November. To try to weaken it more by cutting the policy rate could lead to a sharp correction.
Inflation does not paint a rosy picture, either, even though it is at a historical low. Even without reversing base effects, the inflation outlook is quite challenging, thanks to the possibility of pass-through from import and producer prices as well as the upward trend in global food and energy prices. In addition, demand pressures are building up, as the latest industrial production figures confirm.
Perennial optimists still believe that the government will support the CBT with tight fiscal policy. The January budget, to be released on the same day as the rate decision, could give them false hopes, if last week’s cash budget is any guide. But counting on fiscal policy before the June elections, especially given that the ruling AKP is aiming for constitutional majority, would be unrealistic.
Adding all this together, you realize that it would make sense for the Bank to put a stop to the rate cuts. However, despite some claims otherwise, the full effect of the policies on credit has yet to be felt. For one thing, the Bank’s latest reserve hikes won’t be in effect until Friday. Besides, when taken in conjunction with the rate cuts, the net effect of monetary policy so far is only a slight tightening.
Without additional support from the banking regulator or the government, reserve hikes of at least a couple of more percent would be needed for loans to decrease meaningfully, especially if the Bank would continue with providing liquidity through auctions and unsterilized foreign currency interventions. The CBT would then probably start hiking rates during the second half of the year.
Therefore, without ruling out some more weakness in the short-term, the lira’s prospects look good over the longer run. Interestingly enough, markets have not fully priced in this policy shift at the moment. Longer-maturity dollar-lira bets look especially attractive, and several, like dual currency deposits, are accessible to the average investor. In fact, I will have got some as you read these lines.
But that doesn’t mean you should, too: Doing exactly the opposite of what economists are saying, especially of those with little market-savvy like your friendly neighborhood economist, is often a great strategy.
Sunday, February 13, 2011
I guess I am not the only one who questions the claim that the CBT's new policies are already taking their toll on deposits and. Reader R.Mutt (love the wordplay, R.Mutt==armut is pear in Turkish) who has her own Economics blog, although not yet in press, wrote the following as a comment to my post on whether data defy CBT doubters:
I think you have been way too courteous with Emma Hanim. In my opinion, she deserves nothing but a good “Ottoman” slap on her butt with that ridiculous analysis. How can anyone, for God’s sake, claim that the average maturity of Turkish deposits has increased in this very short time span? For one, the Turkish monetary statistics are notoriously unreliable, especially during year-ends when banks do all sorts of tricks to inflate their asset sizes. One of the ways they achieve this is through establishing back-to-back inter-bank deposits. (During the last week of 2010, those deposits have increased by an “unbelievable” 35%, and then somehow (!) deflated to their original levels.) The other point is that it is almost an insult to Turkish depositors to think that they will be lured by a few basis points increase to put their money into longer maturity deposits, especially when the exchange rate is so volatile. As you mention, the credit side of Emma’s analysis is even more ambigous. She mentions that “three weeks ago, total lira loans fell 1.3 per cent in one week”, but somehow forgets to mention that just one week before that, they increased by an even more remarkable 2.2 per cent!
What is almost certain (out of this ambiguity) is that in order to be successful in curbing bank loans, CBT will need to raise required reserves at least 3-4 per cent more.
Crazyparent:):):) I love good old TGI Friday humor:) (that's when the reader sent this comment). But if I have any say in this, I would prefer Maddervish:):):). Anyway, the reader is perfectly right; I guess being called "ukala", "HBB" (her boku bilen) and "with an inflated ego" by my perennial spammer have made me a bit too careful with my criticisms:)
She is also right with her comments. Incidentally, I am continually visited by local bankers because of my moonlighting interests. When they hear I am a washed-up economist, they ask me my opinion of the Turkish economy and CBT policies. After teasing them that their local economist, whether it be Selim, Cevdet or whoever else he may be, would be pissed off if he heard they are asking the opinion of another economist (for some reason, banks have not been able to figure out how to make their economists accessible to the branches; I mean, I do not expect them to visit the branches every day, but how difficult could it be to have their reports forwarded to all the branches and prepare short recorded commentaries for the branches to listen into?- I know of just a couple of banks who do these, but enough of that, I am digressing), I also ask them a couple of things in return: Pricing for my favorite investment/bet of the year (you have to wait a few hours, until tomorrow's Hurriyet column for that) as well as how the Central Bank's policies are working out. The impression I have got is that R. Mutt is right: Deposits have lengthened only marginally until now.
As for R. Mutt's argument that required reserves would need to go up by 3-4 percent for the CBT to succeed in curbing bank loans: She may be right; I just don't know, but I am sure that more hikes are called for! I am working on credit demand and supply functions, and so far I found that a one unit increase in the interest rate decreases credit stock by 0.1 units. This is way too primitive to be reported. I have yet to incorporate the effect of liquidity on credit and the relationship between reserve requirements and interest rates. After all, reserve hikes work their magic through decreasing liquidity as well as (at least as the CBT hopes) increasing the lending rates and deterring credit. But I would say at least a couple of more percentage points hikes are needed, and if the CBT continues to provide liquidity through auctions and unsterilized FX buying (I said interventions in tomorrow's column, but it is not really intervention, I just did not want to use the word "auction" twice), even 3-4 percent may not be enough.
Anyway, my thanks go to R. Mutt for an excellent explanation on the ways of Turkish banks...
Saturday, February 12, 2011
A reader has written the following as a comment to my post on industrial production and Turkey's output gap:
I disagree with any of the "rapidly closing output gap" or "overheating economy" arguments. Industrial production constitutes only 30% of the total economy and the correlation does not necessarily imply causality as you know it better than I am. The diffusion effect of industrial sector dynamics to services sector may take more time than you expect. Moreover, backward linkages may not be strong as much as you think. In order to comment on a gap, one has to specify a correct reference point, which is the "potential output" in this case. Given the developments in Turkish economy over the last decade, I think CBT's "negative output gap" argument might have a more profound significance. Let me put it this way: Turkish economy would have grown by 60% since 2003, if the real GDP had increased by 6% each year. However, by the end of 2010, Turkish economy is estimated to have grown by 45% since 2003. I believe this could be one reason that why Turkish economy might still has a negative output gap.
First of all, I should thank the reader for illustrating so well the case against the rapidly closing output gap. All her arguments have a merit, but let me add one footnote: Indicators other than industrial production are signaling overheating as well: For example, have a look at the demand indicators my good friends at Turkey Data Monitor have compiled:
The picture does not change if you look at it in a quarterly format:
At the end of it, as this argument boils down to what Turkey's potential output/growth is, and as a corellary what the Turkish NAIRU is. I have discussed both issues quite a few times in the blog, for example, see here and here.
But the reader's comments illustrate that there is quite a compelling case, as argued by the CBT, that the output gap has a long way to go. I don't buy it, but the case is still there!...