Presentation mystery solved (and on CBT communication)

After getting confuzzled (have a look my latest Hurriyet column to see what this word means) by Erdem Basci's missing presentation, I emailed a few economist/journalist friends on what they thought was going on.

An economist friend found the presentation under Remarks/Remarks by Deputy Governors. I have no idea why it was moved there just after one day in the "new items" on the main page. The only explanation, which another economist friend gave, is that they might have wanted to emphasize the Governor's presentation over the weekend. But whatever the reason, this does not bode well for good communication.

And I think this is a general point: I was thinking, until the last couple of weeks, that the Bank was doing an outstanding job in the communications department, especially during their implementation of the exit strategy as well as their more recent efforts in fighting capital flows/lira appreciation, which included pretty novel ideas.

And those efforts worked, partly due to the cleverness of the good policies, but also due to good communication: For example, in the month and a half, the yield curve steepened and the share of overnight in total repos tumbled from one half to one third.

But then, I think they really blew it with the announcement of the new policy strategy, which they hinted first in the Financial Stability Report on December 7. Markets did not heed the hints simply because the FSR is not place for such drastic policy change announcements. Then, the Bank probably got worried because of the market indifference, as the Bank was planning to implement the measures next week at the MPC meeting, so what do they do? Deputy Governor Erdem Baci scheduled a weekend presentation at the Turkish Economic Association, where he spelled out the new strategy.

Let me cut down to the chase: This is not the way to communicate major policy change. That belongs to a large, carefully-written policy strategy document, or at least a well-planned speech by the Governor. I cannot grasp why the Central Bank chose not to wait until tomorrow's 2011 Monetary and Exchange Rate Policy meeting. It is true that they would have missed Thursday's MPC meeting, but then you could have gone ahead and uses something similar to Governor Yilmaz's weekend presentation in Konya, which is much more detailed and explanatory than the Basci presentations.

Unfortunately, I see the same trend in the MPC one-pager: There is a very important rationale for not making markets complacent about low policy rates, which I spell out in my latest column. In this respect, I feel that "It should be emphasized that any new data or information may lead the

Committee to revise its stance." is just not strong enough (the Turkish version is a bit stronger, but still...).

Finally, from my conversations / email exchanges with economists and finance professionals, I can assure you I am not in the minority opinion this time around!...

Non-economics book by economists

By Dani Rodrik and Pinar Dogan:

If you don't know Turkish or the background, Dani and his wife Pinar have written about the inconsistencies in the Ergenekon case, for which Pinar's father Cetin Dogan, a retired army general, is being tried.

I intend to devote this blog to matters of Economics only, so I will not share my valued! thoughts on the matter. But let me say one thing: When I mention to people about their blog, where they have been sharing their findings for some time, the most common complaint I get is that it is impossible for them to be objective on this matter. Why I do agree with the reservations, anyone who has followed their blog regularly can confirm that they carry on their scientific objectivity. I know this did sound like President Abdullah Gul vouching for the Kayseri mayor accused of corruption a day after saying that he is impartial and cannot comment on such matters, but still.... Have a look at the blog and decide for yourselves; there are quite a few posts in English.

BTW, I plan to read the book once it is published in the next few days, and I am thinking about writing a review then. And there goes my "economics-only policy" down the garbage drain:)- so much for being resolute and principled:):):)

BTWW, there is more info about the book on the publisher's web site. And if you want to buy it, they have contact info. on their web site as well.

New Kid on the Block

I just found out that Haluk Burumcekci, chief economist of Fortis Turkey and ex-Referans columnist, has joined the short (but hopefully of high-caliber) list of Hurriyet Daily News & Economics Review economicsa columnists.

I kind of knew that he was getting on board; just didn't know when, but I am glad it is sooner than later, although he beat me to the 2011 forecasts- I probably will not be able to write mine for another 3 weeks or so. Anyway, he will be writing Fridays. With me on Monday, academic Erdogan Alkin on Tuesday and market economist Haluk Burumcekci on Friday, I believe we have quite a good mix. If it were up to me, I would have guest columnists for the remaining two days, and we would be all set....

BTW, if you speak Turkish, Haluk Burumcekci has an Economics blog in Turkish...

TSL MPW: The Sore Loser Monetary Policy Watch

A friend commented on my remark in my last Roubini Global Economics Economonitor contribution, that markets had made fool of central banks all the way from the United States to China: He duly noted that CBT had made a fool of the market including all the big names, or those big only in names, throughout the last two years in Turkey, concluding that such remarks under heavy losses would amount to being a sore loser.

While he is a good friend, he is known not to mince his words, but still, I don't think think he was shooting at me, especially because you are I am the messenger and the implicit rule is that you just don't shoot the messenger... Besides, I am not a big name at all; if anything, I am a no-name (another pointless hyperlink, but God, I miss that place and the Greek philosopher-waiter working there). Anyway, he concludes by noting that we are all fallible, and better to act as such, and I have been quite at ease with admitting to being made a fool by the Central Bank of Turkey several times...

Nor do I think that he was aiming at Atilla Yesilada, from whom I was quoting... I think his arrows were rather pointing at the overconfident, dark-suited dudes seemingly spending a lot of dough on styling gel, who happen to crowd the country's main business channels (yep, I am jealous, it is the cat and the liver deal- I only appeared in Atilla's program at CemTv once, although I would prefer his program any day, unless getting laid with the anchor-chicks is included in the others; maybe I should just call up and ask about that to one of the slick-hair dudes). 

But his comments gave me the idea for the title of my just-inaugurated Monetary Policy Watch: The Sore Loser Central Bank of Turkey Monetary Policy Watch, or TSL MPW... If anything, it should indeed be a reminder that we are all indeed fallible, especially against a Central Bank that has huge advantages against tactless market economists like me commenting on its policies, both in terms of available data and human capital (research power)...

And without further chit-chat, allow me to directly jump in:

As I noted yesterday, there wasn't much of a surprise in yesterday's rate decision, with the policy rate cut 50 basis points, as expected. The Bank also widened the band between its overnight borrowing and lending rates, making more room for the market rates to wonder around. The move is also geared towards the Bank's long-term goal of smoothing financial intermediation by encouraging banks to deal with each other rather than with each other.

And this morning came the expected reserve requirement hike, and it is, again as expected, maturity-dependent: Before, it was a flat-out 6 percent for all maturities. Now, it  is 8 percent for deposits with maturities up to one month, 7 percent for deposits with maturities of three to six months, 6 percent for deposits with maturities of six to twelve months and 5 percent for longer-maturity deposits. With nearly one half of deposits at a maturity of less than there months (and almost all less than six months), a static weighted average calculation, without considering the maturity implications of the hikes, means the the effective required reserve hike is about 1.5 percent. The Bank is also closing loopholes in the balance sheet by making retail repos liable to reserve requirements as well.

One interesting implication of these reserve hikes will be on base money: While the measures are expected to decrease liquidity about 7.6 billion liras & 200 million dollars, without a decline on Bank's liquidity injections, base money will go up (this is not economic theory, just balance sheet accounting). Why is this a problem? With so much money around, the reserve hikes are likely to be passed on to deposit rather than loan rates, which would beat the purpose of the hikes. Note that if it chose to, the CBT could very easily cut liquidity to prevent base money growth, especially since the banks will be much more dependent on the Central Bank's one-week repo funding from now on. But doing so, as I noted in the last Roubini piece, would create upward pressures on interest rates. The same old dilemma reemerging....

Finally, one important lesson of the previous week was to never ignore Central Bank presentations, especially those by Erdem Basci. So I immediately had a look at his Wednesday presentation at the ECB High-Level Policy Workshop on Macroprudential Policy when it was posted on the Bank's web site this morning. It is in English, so feel free to have a look, but let me go over what I deem important:

• Slide 9: Using the wedge between the Bank's overnight lending and borrowing rates, i.e. the corridor, has been mentioned as early as the Bank's exit strategy report.
• Slides 13-16: Nice summary of the Bank's policy tools.
• Slide 21 Communications: I would still argue such important strategy change does not belong in Inflation and Financial Stability reports. It is also interesting, but not the least surprising that Mr. Basci's last-minute presentation at the Turkish Economy Association is not listed: I would not call that effective communication at all.

P.S. The presentation has mysteriously disappeared from the Central Bank's main web site. It is still accessible when you click on it, but for some reason, it is not where new stuff is placed. I became suspicious and went over the presentation again, and surely, there is nothing that should be kept from the public eye at all. I have no idea what's going on, but this definitely is not good communication:)...

Roubini Post: Turkey: To Cut or Not to Cut

This post already appeared in the blog yesterday; 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 an addendum in the blog as well, if you are interested. And if you haven't heard already, no surprises in the CBT rate decision (English version not available yet), as far as I can see: The Bank cut the policy rate 50bp, from 7 to 6.50 percent, as expected. And it also increased the gap between its overnight borrowing and lending rates, by cutting the former from 1.75 to 1.50 percent, and the latter from 8.75 to 9 percent. This is in line with the Bank's goal of ending its dual presence as a lender and borrower, i.e. increase intrabank lending...

BTW,  I just saw, when I checked thee CBT web site for the English version of the MPC one-pager, I saw that the English translation of the famous Basci presentation is now available. So here's the English version of the slide I explain in the piece:

I think I already said what I would like to say about the rate cut, so I don't think I will have another addendum. But I'll just wait and see the probable reserve requirement hike and the market reaction tomorrow before I scribble anything...

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:)...

Addendum to Roubini/Hurriyet columns: To cut or not to cut

Although I claimed it would be unwise to do so at the end of my latest Roubini Global Economics contribution (updated version of this week's Hurriyet column, although the updating only changes one word, "credible" to "wise" in the last sentence, as the weekend presentation has made it credible all right), it looks likely that the CBT will be cutting the policy rate tomorrow: Vice Governor Erdem Basci, noted as the most likely successor to Governor Yilmaz in a U.S. Istanbul Consulate WikiLeaked cable,  in an emergency presentation at the Turkish Economic Association, clearly spelled out that a policy rate cut would be on the agenda at tomorrow's MPC meeting.

The overheating argument I spelled out in the Hurriyet/Roubini columns is only a part of the picture. To see what is going on, it is important to understand the Central Bank's rationale before getting into a discussion on whether this will work and the potential Turkish asset price consequences.

What is the Bank's rationale:

In one sentence, to deter capital flows and address the current account deficit & loan growth. Note that a casual look at the latest Balance of Payments, or BOP, statistics tells you that these two issues are intertwined: The most significant contribution to the October capital account, i.e. financing of the current account deficit, was from short-term bank borrowing. Turkish banks borrowed net $2.1 billion in short-term loans from abroad in October, roughly the same amount as in September and a  record-number. Those figures look really nice when graphed alongside loan growth:

So you know where the banks' loan growth is coming from...

Note that cutting the policy rate is only part of the picture: In his presentation, Mr. Basci is hinting at a two-tier strategy: The idea is that short-term lira rates could be decreased to deter lira appreciation, while at the same time hiking reserve requirements for banks in order to rein in credit creation.

And what's the rationale for their action? To (liberally) translate slide 5 of the presentation: "Increasing the policy rate, while it would reduce the current account deficit from the credit channel, it would have the opposite effect from the currency channel. It is not possible to halt the widening current account deficit via short-term rates, the basic policy tool of the Central Bank, alone. Therefore, tightening non-interest tools to curb credit growth, while at the same time decreasing the policy rate in a controlled fashion to limit currency appreciation, has emerged as the ideal policy response to the widening current account deficit." (footnote to my perennial spammer: you win! Once again, I have no analysis, just quotes)

Mr. Basci's presentation contains more details: As their goals, he notes that they would like to lengthen the maturity of both deposits and capital flows as well as a steeper curve in deposits and swaps. In addition, he is explicitly saying they would want to make short-term swap rates more volatile than long-term swap rates, to discourage carry-traders, just as they had done when they cut the overnight borrowing rate.

Will it work?

It is possible, but I personally don't buy it. First, it is unlikely that the hot money flows will be too much affected by a 50 or 100 basis points cut in the policy rate, even though the rising U.S. Treasury rates are working in the Bank's favor of late (sorry for the double axis, but it makes my point much clearer):

On the contrary, it is equally likely that that the falling rates will cause a rally in Treasuries and equities, attracting even more hot money.  And the other details of the Bank's great current account reduction scheme are not without problems, either. For example, with the average maturity of deposits only a couple of months, it is also equally likely that the rate cut would reduce the marginal propensity to save rather than channel deposits to longer maturities, as the Bank is hoping, worsen the country's private savings problem and widen the current account deficit further as a result.

But let's give the Bank the benefit of the doubt and assume that it managed to discourage short-term capital flows and weakened the lira, with the current account deficit getting under control. It is not given that credit growth will automatically dampen, or that the Bank's measures towards that goal will work.

My skepticism arises mainly form my firm belief that to reduce the quantity consumed of any good, its price will ultimately have to go up. In our case, to curb credit growth, its price, the interest rate, will have to go up. Reducing the policy rate, even with the accompanied reserve requirement hikes, could easily feed its way to consumer confidence, more consumption and eventually to the current account deficit.

The Central Bank's proposed actions also create an interesting dilemma of tightening the quantity of money and reducing its price at the same time. If the Bank cuts downs the one-week repo rate but does not provide enough liquidity at the repo auctions, then market rates will go up. And if it will, then the extra liquidity will find its way to credit. Of course, that's the idea behind simultaneously hiking the reserve requirements, but still...

But speaking of money and liquidity brings me to a related dilemma: I am not going to get into whether inflation is mainly a monetary phenomenon or not, but the rapid growth in the Turkish monetary base does not need to be debated. This arises from two factors: 1. The growing role of net foreign assets, i.e. capital flows; this is the Central Bank balance sheet way of seeing the capital flows working their way into domestic credit, as I discussed above. 2. The Central Bank's reluctance to lower its liquidity support and fully sterilize FX interventions, as the picture below shows:

Why is the Central Bank not doing so? Simple: If they did, they would create an upward pressure on interest rates. But then this would be inconsistent with the policy strategy outlined in Erdem Basci's presentation. But then again you are essentially easing financial conditions with this excessive liquidity support. See the dilemma?

Enough of dilemmas... Just for the sake of argument, let's go one step further: Let's assume that the Bank's policy strategy manages to curb credit growth as well so that there isn't a lot of pressure in inflation from that front. But what about the the effect on inflation because of the now-depreciated lira and sticky expectations? As economist Atilla Yesilada notes at his Turkish economics analysis website Bilgeekonomist (i.e. the wise economist, highly recommended if you speak Turkish), there could easily be ripple effects such as negative deposit rates, booming consumption, double-digit bond rates and higher interest expenditures.

Now, you probably see why I am worried about the Bank's new course: It depends on too many "if"s... In essence, the Bank is behaving more like an ardinal (adrenaline a la Turca)-junkie trader rather than a conservative Central Bank. But then again Yapi Kredi Chief Economist Cevdet Akcay, one of the few supporters of the Bank's new strategy, argues in his latest weekly that these are extraordinary times, and extraordinary times call for extraordinary measures. He may be right, but again: Such risk-taking should not be a Central Bank's cup of tea, especially as markets have made fool of central banks all the way from the United States to China, as Mr. Yesilada notes in the same piece mentioned above.

An important side point

While it does further explain the Central Bank's rationale as well, this side point is also a  discussion of the overheating argument of my most recent Hurriyet/Roubini columns and is a bit technical, at least conceptually. But feel free to skip it if it is not your cup of tea.

Note that an important point of the Central Bank's argument, which I have ignored until now, is that the economy is not overheated. In fact, they have the following nice chart, from the summary of the Financial Stability Report (also in Mr. Basci's presentation), to illustrate their point:

Unfortunately, there is no English version, so let me summarize what it means: The x-axis is financial stability, with quadrants of slowing and rising credit growth. The y-axis is price stability, where the quadrants are slowing and rising inflation. For example, the Southeast quadrant illustrates an economy where credit is growing, but inflation is slowing down. The Bank thinks we are in the originating bold oval, i.e. it sees credit growth faster than desired and inflation about where the Bank wants it to be. Originally, the Bank was seeing the economy move towards the Base Scenario, towards the Northeast, but now it sees the economy moving towards Scenario I. Whereas the Basis Scenario would require tightening both the policy rate and other tools, Scenario I calls for tightening other tools, while at the same time, cutting the policy rate.

As I explained in my latest column, I am already seeing signs of overheating in the economy, and so would argue we are a bit to the North of where the Bank says we are. And I would also argue we are heading to the northeast, i.e. more inflation and credit growth, i.e. the Bank's Basis Scenario.

The key problem here is with the difficulty of measuring the degree of overheating in the economy. In fact, Cevdet Akcay and his team just published an excellent, albeit slightly technical, note explaining exactly the same point. In an email exchange, Eren Ocakverdi, one of the authors of the report, noted in an email exchange that using multivariate filters, like the ones your friendly neighborhood economist loves to use, to calculate Turkish potential output is problematic. Therefore, he argues that, without a reliable supply-side indicator, output gap estimates based on potential output, like my projections!, are not reliable. He further emphasizes that their note was written to illustrate this fact rather than claim that their preferred filter is superior to the commonly used H-P. I see his point, but just the fact that I have tried three slightly different different methodologies so far and always come up with similar results (almost-closed output gap) should mean something -and not only that I am econometrically-challenged, more than that:)...

What would I have done?

According to your favorite Turkey economist, the ideal response would have been minor monetary tightening, major fiscal tightening, some macroprudential measures like higher provisional requirements for new loans and the sterilized FX interventions I have discussed above. As I have argued before, I would expect these measures not only to curb credit growth, but also bring down nominal interest rates and slow down hot money this way. If that doesn't work, a Tobin tax (or the like) could be the next step.

Note that it is very easy to fire away from the sidelines. Just as Turkey has 60-odd million football (that's soccer for all the Yanks) managers, who love to play the role their favorite team's manager every week, the country also supports quite a few economists (or economist wannabes), whose favorite pastime is second-life Central Banking:) 

First of all, anyone with a few economics courses under her belt would have come with my prescription, but theory and practice are very different animals: For one thing, the macroprudential measures I am mentioning are at the reign of the banking regulator, i.e. BRSA. As for fiscal restraint right before elections: Forget about it... So maybe, as Murat Ucer of Turkey Data Monitor was noting a couple of days ago, since the Bank knows there is no way it is getting support from the government (fiscal) and BRSA (remember the BRSA's row with the Bank right after the latter's capital punishment on the banks), it is merely implementing a second-best policy response. And crossing fingers, praying and hoping for the best...

Also note that the Bank is acting very Machiavellian: With Turkey's risk premium very low at the moment and inflation to fall to as low as 5 percent in the next three months, mainly because of base effects, if the Bank is to cut the policy rate, this may be the best time. In fact, if U.S. interest rates continue to remain elevated, the Bank may see its actions bear fruit on the capital flows front sooner than expected. My only worry about the timing is that it is the end of the year: With traders down in Switzerland for Christmas skiing, markets will be thin, so we may see sharp moves in either direction... 

Implications for Turkish assets:

Again, first the executive summary for the time-constrained: Weaker lira and a steeper yield curve, exactly what the Central Bank is shooting at. And that's what we got in the first half of the week:

With stocks, it is a bit more complicated: First, banks are the dynamos of the Turkish stock market, and they are to be faced with two opposing effects: The rate cut (+) and reserve requirement hikes (-). So at the end of the day, the size of these measures will matter. Moreover, there are many unknowns to the equation, such as the response of the yield curve, the response of credit demand and volatility in the lira going forward, and last but not the least the path of global interest rates (and what it means for the global economy- Martin Wolf has an insightful piece on this).

A word on communication:

Mr. Basci's last slide is titled stability and communication. I am not sure what he explained there, as I was not at the presentation, but the slide refers to the Bank's periodic communication tools, i.e. the Inflation and Financial Stability reports, as well as a couple of recent speeches by Governor Yilmaz.

While I totally agree with Mr. Basci on the relationship between stability and good communication, I don't think those reports or a last-minute weekend gathering would exactly classify for good communication. It seems that the Bank decided on the weekend presentation when its rate-cut signals did not go down as much as it had hoped to and wanted to relay the message straight this time around. But the message did not get through the first time exactly because it was going through the wrong medium! MPC meetings/ summaries and scheduled (i.e. pre-announced) speeches should be the medium for that. In that respect, I am looking forward to the scheduled speech by Governor Yilmaz in Konya this Friday.

The Gossip Boy

There is quite a bit of gossip in the media and markets that all this is as much about the race for the Central Bank governorship as actual policy direction. The current governor Durmus Yilmaz's term ends in April, and he has indicated he will retire. One of the strongest candidates, if not the strongest, for the post, is current Vice Governor Erdem Basci, the hero of the weekend presentation. It is claimed that, given that the Governor will be assigned by the government, and that PM Erdogan's inclination towards lower interest rates is well-known, Basci positioned himself well for the position with his weekend presentation. In other words, the presentation was as much about the man as the ideas.

Hurriyet Daily News, as well as many Turkish newspapers, published a piece on Monday touching the same angle. I find it hard to believe this theory, but then again, I have never been good at office politics, internal strife and the like. But one thing is for sure: If there is some truth to it and word gets out that the MPC is divided on such an important policy change, it would hurt the Bank's credibility real bad...

Then, the hero of the story might find out that he really needs to be saved  (listen to the lyrics) after all...

Roubini Post: Turkey: Burnt by the Winter Sun

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 rambling before the actual article. Feel free to have a look at it as well, if you are have nothing better to do and don't mind reading about cheesy title explanations...

Weekly Hurriyet Column: Burnt by the winter sun

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, it is again a movie reference. It seems a sequel has just been released, butt given the IMDB rating, it seems like a total flop. Pity...
 

I was going to say that the last paragraph means that the Central Bank will soon cut the policy rate:)- I am going through my forecasting performance for an end-year evaluation, and my worst performance has again been in guessing Central Bank policy:)...

But I would no have expected to be disproved so quickly: I just learned that in a presentation on Saturday at the Turkish Economic Association, Deputy Governor Erdem Basci, who was mentioned in last week's Turkish economy WikiLeaks cable as the strongest candidate for the governorship when current governor Yilmaz's term expires in April, is stating the Bank is seriously considering cutting the policy rate and it will be on the agenda during this week's MPC meeting.

I was already planning an extensive addendum on some of the issues I could not cover,such as the low real interest rate and the rapid money growth, as well as how the Central Bank justifies cutting the policy rate, but now it is a must. I will have it posted @ the blog later today.

As for the column, I stick to all I have said, which justify why it would be unwise to cut the policy rate. Except for the last word: Substitute "credible" with "wise" and there you have it!

As for me, this incident reminds me once again the important difference between "should" and "will" in financial markets. I can explain as much as I want what the Central Bank should be doing, but at the end, what most care about is what they will do. I was told about this by my mentors when I first started out as a market economist, and used to stick to it 100%, but it seems I am just out of practice:):):) Also, I learned that it pays to look at CBT presentations, even when on a weekend:) I am in their mail list, and so was notified when they put the presentation on their web page, but it was the weekend, and I was kind of lazy:):):)

Anyway, on to the column:

Did the cold front sweeping through Turkey hit third quarter Gross Domestic Product, or GDP, numbers first?

According to data released by the Turkish Statistical Institute Friday, GDP grew 5.5 percent year-on-year, or YoY, in the third quarter, versus expectations of 6.5 percent. But the economy still managed to grow 1.1 percent, seasonally and working-day adjusted, from the last quarter, so I think this is still quite a good reading. It seems that the cold front has actually passed tangent to the economy, to quote the Prime Minister.

Moreover, Wednesday’s strong October release brought industrial production to its pre-crisis levels. In addition, capacity utilization, usually a good harbinger of industrial production, has continued to creep up in November. Other proxies for growth, such as purchasing managers, consumer and real sector confidence indices as well as credit growth are also pointing to robust growth in the fourth quarter. My simple econometric model churns out 5 percent YoY for the last quarter, bringing the 2010 growth rate to just below 8 percent.

This would be an impressive figure, but the composition of growth is worrying. Domestic demand contributed 10.5 percent to growth in the third quarter, while foreign demand, because of imports growing much faster than exports, stole away 4.6 percent from it, with stock-depletion cropping a further 0.4 percent.

An equivalent way of saying the same thing is that Turkey’s familiar disease of depending too much on external financing for growth is resurfacing. This unbalanced growth is a cause for concern because it is unsustainable: If capital flows were to dry up, we could see a sharp adjustment either through quantities (growth slowdown) or prices (exchange rate depreciation).

Latest data suggest that the portrait is getting bleaker. Economists were surprised by the surge in imports in October, and the wedge between export and import growth rates rose further. While we will have a better picture when import taxes, which help us to project imports, are released along with the November budget figures next week, preliminary exports data for November from the Turkish Exporters Association hints that the situation hardly improved last month.

Unfortunately, unsustainable growth is not our only worry: The unbalanced growth, along with the leading indicators noted above, is also raising alarm bells that the economy is overheating. But many, including the Central Bank, are arguing otherwise, using low core inflation measures, which exclude items responsive to temporary shocks but not to monetary policy, and slack in the economy as proof to their arguments.

I think core inflation is being given way too much attention at the expense of the headline figure and food inflation. For one thing, the familiar chicken or the egg problem is not resolved for Turkish headline and core inflation yet, and food inflation could spill over to core inflation. Moreover, moderate core inflation is itself a byproduct of the unsustainable growth and a sign of overheating, as surging imports are reining in tradable goods’ prices.

I would also argue that there is not as much slack in the economy as commonly thought, as the crisis seems to have decreased Turkish potential output. I used the methodology of a recent IMF paper to check my earlier calculations, and I again found out that the output gap, a measure of how far the economy is from potential output, has almost closed down.

Overheating means that the inflationary outlook is not as benign as the Central Bank claims. No wonder I do not find the possibility of further rate cuts, as outlined in their latest Financial Stability Report, credible at all.

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.

More on today's growth

A reader asked the following question to my most recent post on 3Q growth:

if Turkish growth is strong why is the lira and bourse down?

This is a valid question, to which the simplest answer would be: I have no idea what I am talking about. Unfortunately, it is a bit more complicated than that:

First, it is expectations versus realizations that matter more than the inherent meaning of any data, at least in the short run. The Joker knew this as well, albeit in a very different context...

Having said that, the impact of data on markets are never that strong in Turkey. This has been even more true recently, when Turkish assets are just flowing with the global current....

But having said that:), there are some important differences between Turkey and peers... For one thing, the lira has been performing worse than its peers of late, which I believe, is largely due to the Central Bank's recent measures taking their toll. The overnight interest rate plunged in the last couple of days from 6.5 percent to around 3 percent:

This probably triggered (and was triggered by) foreigners selling off, the lira losing value as a response and finally the stock market plunging as a result. I am saying probably because I would have needed to view overnight and swap markets in real time to say for sure (or at least talk to someone who does, like an active trader)...

Quick Take on Q3 Turkish Growth

I am in Mugla, with nothing but my Bberry with me, so while I could not look at the data in detail, here's my first take @ the Q3 GDp release of an hour ago:

It seems the cold wave hit 3Q growth figures before Istanbul.

3Q growth, at 5.5 percent yoy, came in lower than expected (6.6 percent).

In line with my recent writings (and earlier data) construction turned out to be strong.

Looking from the expenditures side, it is a very typical breakdown. Very strong positive contributions from consumption and investment (private and public), as well as a strong negative contribution from net exports.

But I still think given there is still seasonal qoq growth, this is a rather good reading.

Leading indicators are telling me the GDP will grow (s.a. qoq) in the fourth quarter as well- I project 2010 growth to be just below 8 percent.

I will be writing about today's release as well as Wednesday's Industrial Production and othe leading indicators in Monday's HDNER column...
Sent by BlackBerry Internet Service from Turkcell

Roubini Post: More on Turkish Housing Statistics

This post already appeared in the blog yesterday; 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...

BTW, special thanks to the three friends I exchanged emails with over the course of the past couple of days on this issue; their comments/thoughts were instrumental in this article...

And just to recap, I wrote on this topic in Hurriyet last week. There is also an addendum in the blog...

More on Housing

There have been important developments since I wrote on housing statistics last week, so yet another addendum is in order.

The Turkish Statistical Institute, or TurkStat, released the third quarter construction and occupancy permits yesterday. Apartments with construction permits increased by 34 percent during the first three quarters compared to the same period previous year. In contrast, apartments with occupancy permits decreased 20 percent. So we now have all the third quarter housing data, except for construction in GDP, which will be released on Friday. And for now, we have a strong construction, weak occupancy permits as well as weak housing sales data.

For one thing, the weak occupancy permit figures are a follow-up to the weak construction permit numbers of the previous years (you first get the latter to start building, get the former when you are finished). While I cannot do an official test because of the short time span of the data, have a look at the figures and decide for yourself (the permits are year-to-date, meaning that the 3Q figure is the sum of the three quarters, not just the third quarter; home sales are quarterly):

What is worrying me is the discrepancy between the housing sales and construction permits numbers. So in essence, more houses are being built, but less are being sold. Actually, you don't need to look at data to reach that conclusion. Anyone who has spent a couple of days in the country of late could have told you of the construction boom. But with all the housing advertisements and the bullish sentiment, it might be tough to convince the occasional visitor, let alone the skeptical Turk, that home sales are falling.

The only way statistics and common sense come together is by assuming that home sales are more and more shifting towards new homes (we don't have new home sales data in Turkey). That would explain robust loan growth, which would probably translate to the increase in the value of each dwelling sold. The billion-dollar question is how much this could go on. Construction permits for 480,000 apartments have been granted so far this year, and I am not sure there will be enough demand even for new homes when these half-a-million apartments hit the market.

Having said that, I don't think there is a bubble in the making, although there were rumors (article in Turkish) that the IMF is worried about a bubble. Let me explain why: I was exchanging emails with three guys, one economist, one finance professional and one ex-trader, on exactly the same topic on Monday, and as the economist was noting, housing loans are only 5% of GDP, their average maturity is five years and most importantly they are not securitized. In other words, we simply don't have the conditions for a housing bubble. Besides, the Central Bank has been carefully watching over the situation and taking precautions, slowly but surely for a few months now so that paranoiac people like me can tuck in worry-free at night.

But I continue to claim that housing prices are bound to fall because of a temporary supply-demand mismatch. That was the whole point of the Hurriyet column. And when that happens, the ripples will go far beyond housing. For one thing, since the builders borrow from the banks as well, the banking sector will be affected even if there aren't many delinquencies by consumers, but just unsold homes... So the argument that NPLs will not go up does not mean much. Just as a footnote, I got some insider info. on the amount of credit extended to some of the major builders by a major bank a few months ago, and I was left in awe... After all, when you owe the bank 1 million liras, it is your problem, but when you owe them 1 billion liras, it is the bank's problem.

BTW, the Fund already knows all this, so I don't think they are worried about a bubble at all; when they visited GYODER last week, I would assume they were simply on a fact-finding mission. If the Fund was worried about a bubble for every sector they looked into, I would be the first one to abandon ship...

It is also important to know that there are important regional differences, both at the inter and intra-city level. Just play with the permit and sales data, which have some regional detail, or Garanti price statistics, which go into a lot of detail for the major cities, if you have the time.

Finally, the email exchange with my three buddies also reminded me our lack of housing data. I am sure the banks are doing their own analysis for internal use, but I would have loved to know new homes sales, unsold housing stock, the average length of time a house sits unsold, etc...

BTW, the blog version of the column has an addendum  as well, in case you are interested...

Roubini Post: Turkey: WikiLeaks Cable on Turkish Economy

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.

A really small step for mankind...

but a rather large one for me:

As you can see in the bottom right part of the picture, as of 18.30 Turkish time, my latest Hurriyet column is the most-read article on the Hurriyet web site.

I am not saying it is the most well-written article there, or not even that it is my most well-written (although a friend and reader did say it was "my best piece so far" or favorite piece (I think the Carsi one would get the honor for the latter, just because of its name. I am also aware that my creative title helped me out immensely. But it still makes me happy:):):) Before, I had gone only as high as fourth place.

Anyway, a public thanks to all the readers and especially those who have been giving me very valuable comments, + or -. I am also indebted to my editor friend from lobster/blueberry country who has been giving me really valuable feedback for the past few week and helped me improve the columns immensely.

And finally, I know this post does not serve my case:), but I still maintain that I do not have an inflated ego:)....

Hurriyet Daily News schedule for the next few weeks...

Now that this week's column is over, I can look towards the future- future columns that is... Here is what I have in store for the next few weeks:

• December 13: Burnt by the winter sun / Winter Heat- taking cues from the cold weather hitting Turkey, I want to explain that the economy is heating. I plan to discuss the most recent data, i.e. Wednesday's October Industrial Production and Friday's 3Q GDP as well as the latest leading indicators such as confidence indices and PMIs.
• December 20: Four PIGS and a Turkey: A Modern-day La Fontaine tale- I would like to explain possible contagion channels for Turkey from the PIGS and more generally from Europe. This was supposed to be today's column- blog follower Kursat had suggested it, and it looked like a great idea. But I just had to do the WikiLeaks this week, and next week, I will need to strike while the iron is hot, i.e. talk about growth right after the release of October Industrial Production and 3Q GDP.
• December 27: Last column of the year, and it is Christmas, so some light reading is in order: Reader babadog from the Daily News web site was suggesting I write about the reliability of TurkStat official statistics. That might be a good idea.
• January 3: First column of the year, so my 2010 report card, i.e. how my predictions fared.
• January 10: My predictions for the Turkish economy for 2010.

I will probably not be able to stick to this schedule. Either I will come up with a brilliant!!! idea like this week, or some terribly Economics news will force beg column space... But it is useful to at least try to plan ahead...

And as I said before, any suggestions would not be only welcome, but also highly appreciated...

Weekly Hurriyet Column: WikiLeaks cable on 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. No cheesy title this time around, but the last line is paying an indirect homage to This is Spinal Tap. That's the line that appears at the very end of the movie. 

As for the usual addenda: Because of the space constraint of the column, I could not get into all that I wanted to: For one thing, I would have loved to mention is the widespread perception that the government is flexing its tax muscles to go after companies/people it has issues with, the Dogan tax levy being the case in point. Note that I am not claiming anything, but when I discussed this almost two years ago, I was able to show that markets did perceive that the AKP was after the Dogan group after all.
 
Jumping to another topic, my favorite Turkish daily Radikal ran a story today, noting that the CBT gubernatorial race had begun. The article, like my column, singles out Erdem Basci as the strongest candidate for the post. Although Radikal and Daily News are both part of the Dogan Group and Daily News had a very good relationship with the new Radikal's predecessor Referans, let me assure you that this was no coordinated effort. Nor do I think that the journalist  behind the story decided to do it after seeing my column. Nevertheless, it kind of shows me that my journalistic nose is improving:)....

Returning to the Babacan versus Erdogan issue mentioned in the column: I was exchanging emails with a few economists/finance professionals a few hours ago. I am sure none of them had read my column, but nevertheless the conversation turned to Erdogan versus Babacan in economics policymaking. These guys feel that there are two camps in economics policymaking on many issues: The Erdogan and Babacan camps. Given Erdogan's love for intra-party democracy!, I don't think there is much discussion going on; it would be more like Babacan trying to convince Erdogan that capital controls would not be useful, or the fiscal rule is a good idea, etc...
 
BTW, I got a couple of emails from friends and readers asking whether any of this was real or all was made up: The short answer is that all the quotes are real, and I elaborate in the more in response to a reader comment below the column, so have a look there for the details...
 

Speaking of the comments on the Daily News web page, I also elaborate a bit more on the AKP's economic successes and failures in my response to a reader who goes by the name babadog- feel free to have a look there as well.

 

I am done with the usual pre-column rambling, so on to the article:

 

 

Your friendly neighborhood economist recently stumbled upon a WikiLeaked United States’ Istanbul Consulate cable on the Turkish economy, dated Nov. 31, 2010, which he is duly passing along:

“Turkey’s macroeconomic policy is mostly on track thanks to prudential macro management after the 2001 crisis. However, macro reforms have not been followed by micro reforms, except for a few feeble attempts during the first reign of the Justice and Development Party, or AKP, government.

"Expatriate CEO XXX told us that the government is dragging its feet on the structural reform agenda: “We have led the horse to water, but we have not been able to make it drink the water,” he lamented, noting that their reform proposals have gone unnoticed. The same complaint can be heard from World Bank official XXX, who states that their findings are never put into action.

"However, economics policymakers are first-rate spin doctors. They are adept at hypnotizing the markets with rumors for months. First, the government dragged its feet on the IMF stand-by Arrangement (SBA) for months, whereby hearsay that the SBA was about to be finalized would conveniently resurface every time Turkish assets tumbled.

"Then, the government’s new opiate for the masses became the fiscal rule. Markets chose to ignore the few economists who were pointing to the deficiencies in its institutional set-up or noting that the government would never engage in fiscal restraint in an election year. Nevertheless, smart maneuvering ensured markets did not even stir when the rule was, for all practical purposes, annulled.

"Part of the problem seems to be PM Recep Tayyip Erdoğan, who recently said that he had “the last say in economics matters.” XXX from the Treasury confided in us that they and the IMF were steps away from an SBA, and that economics czar Ali Babacan was very enthusiastic towards the fiscal rule even a couple of weeks before the PM shelved it for good. These remarks lead us to believe that it was the PM who decided against both, or at least was convinced so by his phalanx of sycophantic advisors.

"It seems that the PM’s authoritarian style spills over to economic policymaking as well. Besides, he has an interesting view of economics, accented by his recent remarks that “low interest rates beget low inflation,” rather than the other way around, as the economics profession mistakenly believes. XXX from the AKP told us that Babacan spends a lot of time and energy trying to persuade the PM. His success is crucial for the clear-steering of the Turkish economy.

"Interestingly enough, the main opposition Republican People’s Party has been unable to spell out a coherent economics agenda so far. As in politics, these elitist ankle-biters are suffering from status-quo bias. Moreover, they have serious issues with main free market economics ideas such as privatization and foreign investment, leaving the business community with no viable alternative to the AKP.

"Among all this white noise, the Central Bank has been doing an excellent job in fine-tuning the economy and resisting demands from exporters as well as certain government ministers for lower interest rates and a weaker lira. The same Istanbul high-finance community that looked down upon Governor Durmuş Yılmaz when he was first appointed is now quick to praise him.

"In this sense, the appointment of the new governor when Yılmaz’s term expires in April is crucial. It is rumored that he will be replaced by Erdem Başçı, a current VP who used to play marbles with Babacan when they were kids. While he is competent, a more complacent Central Bank would not bode well for economic management.”

For those of you who thought this was real, it wasn’t.

Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes, and a contributor to Roubini Global Economics. Read his economics blog at http://emredeliveli.blogspot.com.

The Quest for a new economics modeling framework...

Paul Krugman and Justin Fox are right on track that the search for a new economics framework is nothing new.

But they do not delve into WHY the new frameworks have never taken hold. Let me share with you what I think: 

For one thing, there is a lot of status quo bias and path dependency in the picture. I am not really sure how Economics ended up with its over-mathematical layup, but I guess there was a lot of penis physics-envy involved. But once it is set like this, all the incentives (getting published, tenure, etc) are dependent on sticking with the same old safe framework... Interestingly enough, economists love to talk about these ideas, especially on development. It is surprising that they do not see their own profession the same way, either...

It should not be forgotten that Paul Krugman is a product of the same fraternity, although his models are have not done any harm in obstructing our understanding of Economics. On the contrary, his first ever published paper provided a better understanding of currency crises... But I doubt he would have got the Nobel Prize, at least so soon, if he swam totally against the current....

BTW, I was a research assistant for Bob Shiller (in Justin Fox article), who also ended up as my undergrad. thesis adviser. At the time (95-97), he was already quite well-known for his real estate index with Case, as well as his work on the 1987 crash. But I always felt other academics felt he was wasting his talents, working on weird stuff like behavioral economics... He then went on to predict two more crashes, so what daya know?:)

HT to my ex-trader and socialist FeneVbahce fan (an oxymoron IMHO, but he disagrees) for sending me the Krugman article.

First Take on the Inflation Release

Someone is bound to ask me again, so let me summarize my take on the November inflation.

With a monthly figure of 0.03 percent, prices were virtually constant in November over the previous month. This brings the yearly figure down to 7.3 percent. Note that my expectation of 8 percent yoy was well above market expectations, so bonds are unsurprisingly reacting positively to the news., except  CPI linkers of course:)... However, today's outturn does not share the gist of my inflation outlook that I had shared yesterday:

Inflation is bound to fall for the next couple of months because of base effects as well. In fact, today's figure makes me confident that we will see 5.5 percent yoy by February. By then, everyone will be claiming that inflation is well under control. But that's when base effects will end and sticky expectations, as well as spillovers of higher food inflation figures of earlier will start kicking in- see my previous post on food inflation for my analysis of spillover effects from food inflation to core inflation and expectations- we already got most of the spillover into expectations, but the spillover from food inflation (those damned tomatoes) are still to come...

Always remember, folks. You heard it first from Emre...

U.S. Istanbul Consulate Cable on Turkish Economy leaked...

... to none other than your friendly neighborhood economist by the one and only Julian Assange, who yours truly met during the Besiktas-CSKA Sofia game last night (I was the fat guy without a shirt and with the eagle tattoo on his back). Apparently, Mr. Assange is hiding out among the Carsi...

Anyway, your favorite Turkey economist will release the document in its entirety in his Monday Daily News column. For those of you who are impatient, the column will hit the Daily News web page at exactly 11.59 PM Sunday night.

So stay tuned!

Roubini Post: Turkey: The Desperate House-Economist

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. There is also a separate addendum in the blog...

Reader Comment/Question on capital flows

Blog follower David Rogovic asks a very valid question on the effect of tight fiscal policy, as a response to a recent post on the subject:

Do you think that tightening fiscal policy could actually attract more capital flows into Turkey? For example, if Turkey tightens fiscal policy next year (or maintains decent fiscal balances) that could prompt a ratings upgrade which would make Turkey even more attractive in the eyes of investors. In this scenario, tighter fiscal policy could actually spur even more 'hot money' inflows.

Definitely, but at the end of the day, investors care about the return they are getting. So I see two opposing effects playing out and the lower nominal interest rate winning out.

The game changer here would be investment grade, which is not out of the question if the markets' darling AKP wins another term, there is no major political/geopolitical crisis and the government does not make a fiscal mess in the run-up to the elections. But that would open up Turkey to a whole new breed of investors, more longer-term guys like pensions that are not in for the short haul. So these new guys would not exactly be hot money, although they would not be as safe and sound as FDI, either- sort of "warm money":) In fact, I see a great research note on how Turkey's composition of portfolio (not capital!!!) flows would change under investment grade using EPFR data!!!

Another big game changer would of course be global capital flows. On that we don't know anything!!! But there is also the question of Turkey's growing CA deficit, the other side of the capital flows coin, which has started to emerge on investors' and Turkey economists radars. The more the CA deficit and associated capital flows, the more likely you'll end up with a major destabilizing sudden stop/reversal at some point, right?

On ICC and TurkStat inflation

Blog follower Rower32 has the following comment on inflation, as a comment to a recent post, which was, incidentally, also answering his questions:

Although it's too early to make verdict on the inflation, last month's data, except were def on the bullish side (PMI & Cap Uti). This morning I saw the prices in Istanbul were up 0.34% mom in Nov due to a fall in food prices. I don't know how CPI Istanbul and CPI-U are related but my guess is that they are highly correlated (chart?). According to data looks like the inflation will either go up or down or stay the same.

The inflation figures of TurkStat and Istanbul Chamber of Commerce, or ICC, are not really all that correlated:

But there is a better relationship between TurkStat's food & beverages inflation and the ICC food inflation:

And for that reason, most Turkey economists pay more attention to ICC's food sub-index than the headline figure. It is likely that the + food print of yesterday's ICC has led many to except a benign inflation print on Friday.

BTW, let me spell out my view on inflation once again: Although I don't do official monthly forecasts of inflation like I did during my days as a market economist, I continue to informally & unofficially! play with numbers:

I see inflation falling falling yoy because of base effects. In fact, I expect inflation to fall to around 8 percent this month and end the year at 7.8 percent. The yoy falls will accelerate, again because of base effects in the first quarter, and I would not be surprised with a yearly inflation in the 5.5-6 percent range in February-March. But then, with base effects over, I see inflation creeping up and refusing to come down. I find it unlikely that the end-year CBT target will be achieved...