Weekly Hurriyet Column: Talking Turkey on the crisis

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

As I was trying to summarize two presentations, both about a 100-page paper, as well as my comments, in about 600 words, I again failed to make all the points I wanted to make. Therefore, I will have an extensive addendum, but it will probably have to wait until Wednesday if I can not get it before I go to bed tonight. But let me entertain you with a photo of my buddy Ferhan from the presentation for the moment:

Yep, it was a good idea that I did not go the presentation with my Besiktas Jersey, as I was planning to- there was a game the same night. But I still looked well underdressed in my Oxford shirt and jeans. Well, what can you do?- I am just a tactless journalist:) BTW, I did mention that he is my buddy in the unedited version of the column and did mention him by his first name to emphasize that fact. But the editors at the Daily News have edited them. They do have a point: It kind of looks unprofessional, especially as I was referring to Sumru Altug formally by her last name. But I would still have wanted to disclose that he is a good friend. Not that there is any instance of conflict of interest in my column, but still...

Enough chit-chat already; on to the column:
 
 

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

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

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

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

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

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

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

But we know that external vulnerability has a 45 percent weight in the overall index, and that two items, ratio of reserves to short term debt & current account deficit and current account deficit as share of GDP together make up half of the external vulnerability sub-index. As I argued before, the Turkish economy does not look strong on these indicators, so I doubt the Fund’s model would deem Turkey with low vulnerability in 2007.

Besides, as Altuğ notes as well, Turkey was late to respond to the crisis. The Central Bank started its great easing cycle in November 2008, and the fiscal measures were enacted during the first of half of 2009, when some countries were already starting to emerge from the crisis. But the Fund would argue that the Turkish response was muted precisely because of the country’s vulnerabilities.

Altuğ, on the other hand, argues in a recent paper that the main reason behind Turkey’s record contraction is the collapse in expectations, which started after the 2007 general elections and accelerated with the global crisis. As a result, private consumption and especially investment expenditures collapsed.

I would opt for a similar explanation after acknowledging the role of Turkey’s vulnerabilities and late and insufficient government response: Turkish businessmen and consumers have experienced painful crises, so it would make sense for them to cut back on consumption and investment, rationally or irrationally, at the slightest sign of a crisis.

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

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

Suluman the Economist: Episode II

I went over the travails of Suluman the Economist in the addendum to last week's Hurriyet column. Although I discovered him only recently while playing with Sabah's Ipad application, he seems to have established quite a fame, as noted by reader Tahsin in a comment to the addendum:

I remember him saying that Turkey ,in fact,had a positive growth in 2009(in nominal terms).he even said that national income increased in Turkey in 2009.Ekonomiturk calls him "amigo yazar suleyman". if anyone wants to read things funny about him, have a look

I thank Tahsin, whose link I transformed into a hyperlink, and an anonymous poster from earlier, who may be Tahsin as well, for pointing out the earlier achievements of Suluman the Economist. I also thank the bloggers at Ekonomiturk for providing me with good old entertainment.

It also seems that my spider senses were right: Suluman the Economist does indeed seem to have a problem with TEPAV: First, he comes out labeling TEPAV as the crisis lobby and accusing Ozan Acar, the author of the paper I discuss in last week's column, as using unsubstantiated data to prevent Turkey from getting a ratings upgrade. By the way, he is doing this after the weak December budget turnout, using the yearly figures while opting to stay silent on last month's figures. Then, he makes use of Tunisia by asking what TEPAV, the think-tank trying to prevent Turkey from getting a ratings upgrade, would say about the fact that Tunisia is rated above Turkey. Finally, he attacks TEPAV again in today's column by openly suggesting that it is employing bureaucrats in the high interest-low exchange rate lobby.All of this is in the couple of weeks following his highly intellectual analysis of Ozan's paper.

I will not waste my time to discuss the latest budget data or to explain that there is no high interest-low exchange rate lobby in Turkey. Nor will I try to ask him again to separate his personal feelings from his columns by inviting him down the ethics highway. I am just pulling back my meyhane invitation, as I don't think I would be able to last a couple of hours with him, even with plenty of raki. But the sad thing is that he seems to be quite popular; each of his columns gets several "likes" in Facebook- his masterpiece on the budget has managed over 50! Am I jealous? Absolutely! But I cannot help but say "Cry, the beloved country", as I had noted a couple of times, although in slightly different contexts (or maybe not, now that I think about it)...

Finally, loyal readers know that I can not do without linking everything (or anything) to football. Besides, my perennial spammer left a comment today saying that my football insights were even better than my movie ones. So, in order not to disappoint her, I should add that all this reminds me of the rows between legendary! TV commentator Erman Toroglu and legendary footballer Sergen Yalcin. Erman, who was a rookie in the TV world at the time, used to tie everything to Sergen. For example, when Hagi's age was mentioned, he would say "They talk about Hagi's age, but I wonder how much Sergen will be able to run when he is at Hagi's age?". I think the hatred came from Sergen's mockery of Toroglu once by saying "There is this dude who has been criticizing me. I have no idea if he is a TV star or ex-referee, so his comments do not mean much to me". So, now I am wondering: TEPAV, what have you guys done to hurt poor Suluman the Economist?:)

Really Great Day (and tomorrow's column)

I am too tired to finish this post, so will probably post it on Sunday, but had an amazing day yesterday:

In the morning, I attended two presentations by IMF economists, compliments of Koc University's Economic Research Forum. The first presentation, by my buddy Ferhan Salman of the IMF's Strategy, Policy and Review Department, discusses a recent IMF paper on how emerging markets coped with the crisis. Then, Lorenzo Giorgianni of the same department (and of Turkey desk fame) went over the Fund's new mandate in the brave new world. Out of these presentations emerged tomorrow's Hurriyet column, where I will be going over Ferhan's presentation (and the accompanying paper) as well mine and Sumru Altug's (discussant of the paper- Koc University professor and ERF director) takes on it.

And then at night, I attended the season opener at Inonu, where my beloved Black Eagles, re-energized with the new acquisitions, demolished Bucaspor 5-1. It is true that the opponent was not very powerful, and that the real test will be against the Lazes on Wednesday, but still I was quite happy with the level of play. It seems that it starts to make a difference when you have at least 4-5 high-caliber attacking midfielders & forwards. Not only they play in better harmony with each other, it is virtually impossible for the opponent to guard against all of them. I think that is a key difference from the team from the first half. BTW, my perennial spammer had found my movie insights much better than my economic ones- I am wondering how she'll feel about my football (that's soccer for you, yanks) ones:)

And by the way, I met one of my few loyal readers in between the conference and the game...

Roubini Post: The Turkish Rating Wars: Episode II

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 an large addendum in the blog, which includes some serious stuff as well as some humor.

The Sore Loser Monetary Policy Watch, Before the MPC

When I discussed the Central Bank of Turkey's new policy mix back in December, I had noted that I found it confuzzling, as it contained many inherent inconsistencies, as I outlined in detail in a Roubini special...

As a recent FT piece notes, with Turkish assets having underperformed since then, with the exception bonds, which were bound to rally, the magic seems to have worked. But still, the CBT would know all these inconsistencies in their framework much better than me. So why did they go ahead anyway?

Maybe, they wanted to create some confusion on purpose:)[semi-winkish]. I had argued back in October that some uncertainty in monetary policy would be good in the current brave new world. But if that is indeed the purpose, I wonder if they have gone too far: I am not sure if talking so much about one of the country's biggest risk areas, the current account deficit, is beneficial. OK, you are signaling you care, but you are putting the CAD right on the investors' radar!

Speaking of the CBT and the current account deficit, I read that in a speech in Vienna yesterday, CBT Governor Durmus Yilmaz noted that the credit demand and accompanying surge in imports from the rate cut would could outweigh the benefits of a higher exchange rate on exports... I don't know if he really said that, but if he did, all I have left to add is: Good morning in Uskudar!

Addendum to latest Hurriyet column

As promised, here's my addendum for Monday's Hurriyet column.  I will group my points in three main categories: Additional comments on the paper, my comments to a  critique of the paper, and my take from the email conversation with my usual gang:

Additional comments on the paper:

Whenever I write about a paper, I do my best to talk with the author(s), and having known and worked with Ozan during my TEPAV days enabled me to track him down quite quickly. Anyway, first of all, I asked him why he concentrated on specific variables. Ozan's response is that he did not want to come up with a model that explains Turkey's ratings; that's more or less what the Citi paper tries to do. Instead, he tries to show that Turkey's investment grade upgrade is not as in the bag as everyone assumes: The indicators that most people use in favor of Turkey's case, such as primary balance and debt to GDP, are not correlated with ratings. On the other hand, Turkey looks quite weak in other indicators that seem to matter to ratings a lot, such as real exchange rate & GDP volatility and interest expenses to tax revenues.

I also had some question marks on Ozan's methodology. To establish a relationship, he does a simple linear regression, controlling for GDP per capita, which proxies for "everything else". I would have opted for a standard ratings regression like the Citi paper. Ozan told me that he did that as well and obtained similar results. He decided to leave those out and go for the simple regression to make the paper accessible to a wider audience.

Suluman the Economist

A certain Suluman who writes in the daily Sabah had a harsh critique of Ozan's paper a few days before my piece.When she first started criticizing me, my perennial spammer revealed she was not very pleased with my "miscellaneous interventions on the daily press". Since then, I have moved those interventions to Twitter, as it mush easier to intervene there. But old habits die hard:

Suluman first notes that CRAs care about the primary balance, not interest expenditures. But as I explained above, Ozan shows that common belief is not true at all. If Suluman had criticized Ozan's empirical methodology, it'd have been OK with me. But to criticize one of the main findings of the paper with the explanation "it's not that way" does not seem like valid criticism to me. Or maybe, he just read the paper the same way Woody Allen had read War and Peace - or War, what is it good for?, as some know it:)....

Suluman then goes on to boldly state that the paper claimsmTurkey's current account deficit stems from government balances. There is no such claim in the paper, just that current account is a sovereign risk. I attribute Suluman's mistake to bad command of English, Turkish or Economics, possibly a combination of at least two of these factors.

I would not have voiced these criticisms, if only Suluman had not concluded his thought-provoking piece (for the lack of thought in it) by accusing TEPAV of trying to affect expectations by spreading false opinions on the Turkish economy (sort of like the "scaring foreign investor away with orders from Dogan headquarters" accusation I often get from my international columns). I could vouch for the invalidity for this statement from personal experience: During my stint at TEPAV, I was not even once asked by anyone to argue a specific opinion in a paper. The director there used to read our papers to make sure we were not using language that could put the institute or its mother TOBB (Business Chambers Association) in a tight spot, but I don't remember being censured, either- just displeased because it would take the director several weeks to get back to us with a short paper).

You don't have to believe me since having worked there, I may not be objective. But anyone who knows the circumstances of my departure from there (and its aftermath) would not dare to question my objectivity regarding this matter. And that's where my advice to Suluman the Economist comes in: It seems that you have some issues with TEPAV. So do I, or at least I used to, until God made its peace with me during the summer:) If you want to get it off your chest, drop me a line and I will invite to this great meyhane in Kurtulus. But don't mix your personal feelings with your columns...

Conversation with my gang

I also had an email conversation thread with my usual gang (two ex-traders, one economist and me) on Monday. We ended up exchanging 27 emails. Here are some good points that came up:

• It is tough for Turkey to get a ratings upgrade in the current quantitative models of the CRAs because of factors like debt service to FX reserves ratios and current account deficit to GDP. But nevertheless, perceptions are working in the country's favor, as they are running quite ahead of the reality of the Turkish economy of late.
• We agree that it is the relative standings that matter; after all long term obligation ratings are opinions of the relative credit risk of fixed income obligation with an original maturity of one year or more, as Moody's notes. But we also agree that it is how peers are doing that matter. In that sense, Mexico, Russia, South Africa, and Brazil's performance may be more important that The Usual Suspects' woes.
•  A common argument is to note that Turkey was rated higher before the 1994 crisis than today, which does not make sense. While there is some truth to this argument, the peer relativity idea is useful here: Turkey's peers were also doing very poorly at the time, with Chindia not in the picture yet.
• We also entertained the idea that ratings are not all that important any more. For example, many funds who would not consider taking on Turkey a few years ago now cannot live without us.
• The ex-traders also talked about some technical shit, some of which was beyond me: For example, Turkey's CDS and cash spreads are tight because of technical reasons- to give one, the country's external sovereign debt is relatively very low. Or that repo technicality entered the emerging markets world with Turkey's 11 7/8 2030 sovereign issue- although I have yet to figure what repo technicality is and how it figures in all this:)...
  

By the way, if you are wondering, what my gang looks like:

If it were up to me, I would let the abi trader be Q7, as he always talks about technical shit I don't understand well, i.e. he is a technical player (sorry for the direct translation from Turkish). I would have the other trader be Almeida, as he is quite large as well. I would have the economist be Fernandes, as he is a gorev adami. And that leaves me with Simao. Not only I love his style of play, his jersey number is also the license plate of my ancestral hometown...

Ego deflated for sure

Speaking of the perennial spammer, I got a further hit in the Daily News top 10 rankings yesterday:

As you can see, I barely made it to the list with yesterday's column:(- so it is now official: Not only the ego has deflated, it is now deflated, as in a deflated state, as well:)

Soooooo Happy

My perennial spammer loves my stuff for a change. Here's what she wrote as a comment to yesterday's post on CBT's expectations survey:

Sincere CONGRATULATIONS!
I must admit that your insights into the movie world are far superior to your ramblings on economics!
Your perennial spammer...

As I noted in my response to her, it is great to hear that she likes my stuff for a change, even though it is not economics:) But given that everything in this world is relative, and knowing what she feels about my "ramblings on economics", that should not have been very difficult:)...

But I must admit she does have a good sense of humor, at least for once:):):) At least, she managed to make me laugh with that comment:)...

Another idea I am entertaining: The Usual Suspects

So I am not the only one with the cheesy movie references in the economics & finance world after all: I have been seeing a lot references to the European peripheral countries with sovereign debt problems as The Usual Suspects in the last few weeks. Here's how I would assign the countries, making use of shameless stereotyping based on their appearances:

But the zillion dollar question that many are avoiding is who Roger "Verbal" Kint is. In retrospect, this amounts to asking who Keyser Soze is. You might argue there is no Keyser Soze, but you know about the devil's greatest trick...

I would argue that Keyse Soze does exist, and he is Germany. Just like Keyser, with record growth, he is the least likely suspect, but I would argue Germany is the real reason of the intra-European imbalances that bankrupted Club Med (Ireland is a bit more complicated).

I am planning on doing a column on that, either for the Daily News or Forbes, for whom I have not written for a long time, but if I don't, I will do a post explaining my reasoning in detail. In the meantime, note that my identification is not so far away from Keyser's supposed roots...

Expectations versus Reality

One of my favorite movies in the great movie year of 2009 was 500 Days of Summer, and my favorite scene in the movie is the Expectations versus Reality scene (the Turkish subtitles are not intentional; it is the only copy I found after a Google search)- I love the cinematography, and the Regina Spektor song fits the scene really well.

Anyway, I recently sort of lived the economics version of that scene when I looked at the latest CBT bi-weekly expectations survey:

The first thing you notice is how "adaptive" inflation expectations are. After the low December inflation, end-year and 12-month ahead inflation expectations plunged. Even the 24-month ahead figure was affected. That's why I advise not to make too much of sudden movements in inflation expectations.

The second thing noticed was the inconsistency between growth and current account expectations for this year. I am OK with the 2011 growth forecast for this year, which is consistent with my outlook as well. But there is no way the current account deficit would be USD 46bn at that growth rate- unless you are making some weird assumptions on the exchange rate. Or to put it differently, if the current account is to be USD 46bn in 2011, growth would have to be much less. Moreover, for the CAD figure to be realized, imports would have to growth about 70% or so less than exports (or exports 40% faster than imports)!

That's why a simple excel sheet that links the different accounts of the macroeconomy and ensures consistency goes a long way for good forecasts- that's what I was doing when I was doing my own projections. It is true that these are averages of forecasts, so they don't have to be 100% consistent. But even if the averages are so different, there must be something fishy going on...

BTW, when I said exports and imports were the most important part of the current account a couple of hours ago, this is exactly what I meant:)

Coming back to movies, I looked at the top 250 IMDB movies by year and found out that they are far from being evenly distributed; there are indeed great movie years, like 1998, 1999, 2009- and mediocre ones, like last year. But that's for another post....

Weekly Hurriyet Column: The Rating Wars: Episode II

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, after a one-week hiatus, it is the return of the cheesy movie-reference title:)

Coming to more serious matters, I again could not say all I wanted to say due to the strict 3700-character limit. Besides, I would like to respond to a certain Suluman who wrote an opinionated column (maybe, that's what op-ed stands for after all) about Ozan's piece. In addition, I had another very interesting chat with my usual gang, at the end of which I was confuzzled by all the trader details. But I would like to incorporate those comments as well, but after I understand what "repo technicality" is. So as soon as I find some time to call up the trader buddy in the gang and jot down all this, you will see a very detailed addendum to the column (probably tomorrow, as it is already 19.30, my stomach is ringing bells (Turkish idiom), and I have to pick up my brother and his wife later on).

Enough chit-chat already; on to the column:

As the venerable Yoda would say, begun again the rating wars have.

Recent research by Ozan Acar, prepared during his stint as a guest researcher at the Brookings Institution, discusses why Turkey is still rated below investment grade by the credit rating agencies, or CRAs, and whether an upgrade is on the cards.

The standard argument is that markets, as gauged by Turkey’s credit default swap, or CDS, spreads, have already been priced in an upgrade and that the CRAs, whose ineptitude was proven during the European sovereign-debt crises, are simply trailing behind.

Irrespective of problems with the CDS’ which I outlined during the first rating wars, a simple graph of CDS spreads against ratings shows the fragility of this argument: while there is a negative relationship between the two, there are many countries bundled at the 100-150 basis-points range, with some sitting below and others sitting above investment grade.

But those in favor of Turkey receiving an upgrade argue that the country’s fiscal position is sound. After all, its primary balance and debt as shares of gross domestic product, or GDP, look quite strong. However, Ozan shows there is no relationship – after controlling GDP per capita – between these factors and sovereign ratings.

When you think about it, this conclusion actually makes sense. A country’s GDP is different from a company’s revenues or an individual’s income, in the sense that the government has no mandate over all of the country’s GDP to honor its financial obligations.

On the other hand, countries with a lower ratio of interest expenditures to tax revenues enjoy better ratings. Such countries have more resources not only for their financial obligations but also for public services such as education and health, boosting their potential growth.

Unfortunately, despite significant improvement during the last decade, Turkey’s interest payments are still relatively high. Informality and tax evasion ensure that not only the tax base is low, but also that tax revenues are extremely procyclical. Add in a fiscal rule suspiciously swept under the carpet less than a year before the elections and suddenly Turkey’s fiscal position does not look so strong.

Moreover, notwithstanding progress made after the 2001 crisis, one quarter of public debt is still external or linked to foreign currency, making it vulnerable to sharp currency moves. Ozan also finds a negative relationship between real exchange-rate volatility and ratings before concluding that he is not very optimistic about a ratings upgrade.

In other recent research, Citi economists used a statistical model to determine Turkey’s chance of an upgrade. Their framework, which uses the current account deficit, inflation, GDP per capita, public debt to GDP and political stability as determinants of ratings, sees the probability of Turkey becoming investment grade at around 50 percent now and as high as 66 percent in the next two years.

Both papers concentrate on just a few of the many factors taken into consideration by the CRAs. Standard & Poor’s, or S&P, divides its ratings framework into nine categories, each with several different sections, so a definitive empirical study is no easy task.

Although I believe there is a good chance Turkey will become investment grade sometime this year on, if nothing else, the perception of its relatively successful economic performance, monetary policy – one of S&P’s main categories – might be the deal-breaker. If the Central Bank’s unconventional policy mix, which has left many confuzzled, actually works, then Turkey may see investment grade even before summer.

If not, investment grade – which we are sure to get before Fenerbahçe wins the F.A. Cup – will be the least of our worries…

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

Why the current account deficit?

Here is my answer to the second reader question, as part of the reader appreciation weekend. But let me remind you the question first:

Can you tell me why people are so focused on the current account deficit figure? If the underlying worry is the potential destabilising effects of hot money and short term borrowing then why doesnt' everyone simply focus on metrics that track those figures? Is it because CAD is a more readily available/computable figure or is it because of some other reasons drive why CAD is so important to focus on? Any comments/insight you got on this would be highly appreciated.

Now, compared to the previous question, this is something I know one or two things about. I will address the question in three steps, going from the general to more detailed:

First, I understand the reader's point. If you care about the CAD because of financing concerns, why not concentrate on these financing concerns rather than the CAD. This makes sense, but you'd still need something to gauge the financing with. Say, if Turkey attracted USD 10bn of portfolio flows during the past year, is this too little and too large? Compared to what? That's why you also need the CAD. In fact, that's why we call the both of them (and reserve accumulation, which is the difference between the two) the Balance of Payments, or BOP. And of course not all items under the CAD headline number are created equally. For example, if I am forecasting the CAD, I would spend much more time with exports and imports; it is pretty straightforward the to project the only other major item under the current account, tourism revenues, and the other items are way too small to make a difference.

But these are only accounting identities. If you want to go beyond mere accounting, you have to know how the different sectors of the economy work. For example, a great deal of the banks' short term borrowing, or well short-term capital flows in general, is related to the banking sector's lira liquidity gap. Since covering the liquidity gap just by borrowing abroad and selling FX would bring in a currency mismatch (besides, BRSA, the banking regulator, has open-position limits), it makes sense for the banks to access the hot money parked in the money market via swap operations and then extend it via credit. BTW, that's why the CBT is so fixated on credit growth and and making the country less attractive to short-term capital flows: If no capital flows, no swaps that end up as credit. If no credit, no surging imports. If no surging imports, no ballooning CAD. Yep, it is as simple as that...

Or if you want to know the reasons behind the current account gap, you would have to know about the country's private savings gap. My hands are starting to hurt, so just read the column, but the main point is that controlling the CAD is no easy task...

A couple of sentences on commodities

As I mentioned earlier, a reader asked me my take on commodities.

Starting with the very important disclaimer that my knowledge of global developments is limited to what I read (in contrast to my Turkey pieces, which depend my own analysis as much as what I read), mainly in the Financial Times and some of the blogs I follow, I would say that the current commodities run is as much based on the forces of demand and supply as a result of market sentiment & animal spirits. 

This is especially true for food, where some key crops seem to be shaped by what's going on in the US. Therefore, there is good reason to believe that the commodities run is more than a short spell and could be with us even when the global easy money conditions are over.

The same can be said of oil as well. But one thing I find puzzling and difficult to fit into this picture is the Baltic Dry Index, which is not following commodity prices...

But I know that I have readers who know about these matters more than I do, so any comments, on commodities or the BDI, would be more than welcome...

Reader Appreciation Weekend coming

I got a couple of very interesting reader questions, so I decided to do another reader appreciation day, or rather weekend, where I will be addressing those questions.

For some scoop, the first question is on my expectations on commodity prices and whether it is real or inflated (like my ego). As for the second question, it better that I quote directly from the reader:

Can you tell me why people are so focused on the current account deficit figure? If the underlying worry is the potential destabilising effects of hot money and short term borrowing then why doesnt' everyone simply focus on metrics that track those figures? Is it because CAD is a more readily available/computable figure or is it because of some other reasons drive why CAD is so important to focus on? Any comments/insight you got on this would be highly appreciated.

I will be addressing both of these questions over the course of the weekend.

Roubini Post: Common Misconceptions on the Turkish Economy

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 an minor addendum in the blog. 

Another deflated ego

I don't know if it is New Year effect: It could be that my columns are getting more and more boring, or maybe my usual readers have not got back to their usual routine yet, but I got yet another hit in the Daily News rankings for my last column:

This is good news for my perennial spammer, as my ego is getting more and more deflated:):):)

Weekly Hurriyet Column: Common misconceptions on the Turkish economy

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

Hurriyet South Weekly Editorial: The pursuit of happiness by economists

I just wrote another editorial, aka The Southbound, for Hurriyet Daily News Economic Review's weekly supplement South Weekly, which appeared in today's issue.

I wanted to forgo the cheesy and equally mysterious titles for this week, so the title summarizes the article, as you can see (or rather read):

The most common New Year’s wish, as epitomized by the phrase “Happy New Year”, is happiness. It turns out economists have a thing or two to say about happiness.

Although the Fab Four once said, “Money can’t buy love,” it can certainly buy happiness, at least according to most economists. In the basic economics model undergraduates are introduced to in their first semester of economics, an individual’s utility function, which measures her satisfaction, depends on consumption. And it is not just a simplification for college kids: It is probably one of the most common frameworks in economics.

So philosopher Tyler Durden was right after all: The things you own end up owning own you, at least according to economists. But with economics, there is never a definitive answer, and as early as 1974, economist Richard Easterlin found that while there was a relationship between income and happiness within a country, it disappeared when looked across countries and through time.

Although the so-called “Easterlin Paradox” has been shown to be largely an artifact of data paucity by more recent research, it has paved the way to questioning the dependence on Gross National Product, or GNP, for measuring national welfare. Bhutan measures Gross National Happiness, or GNH, and France launched a commission in 2008 to go beyond GNP.

Like most ideas in economics, this one is not new, either. Economist Simon Kuznets, who devised the first comprehensive GNP measures for the United States, warned as early as 1934 that "the welfare of a nation can scarcely be inferred from a measure of national income.” Bob Kennedy noted in 1968 that GNP “measures everything in short, except that which makes life worthwhile.”

But the shortcomings of GNP for measuring wellbeing should not mean that it should be discarded, just that it should not be given any more responsibility than what it measures, which is the market value of all goods and services produced by the citizens of a country. For well-being, there are already plenty of other indicators such as inequality, poverty and health.

Besides, measuring happiness is not without problems, either. The perception of happiness may differ between countries. For example, in the 2001 Eurobarometer survey, 64 percent of the Danes, in contrast to just 14 percent of the French, said they were very satisfied with the life they led.

Tim Harford of the Financial Times, who brought this interesting statistic to my attention, finds it “tempting to question how much the survey really tells us about the relative well-being of France and Denmark.”

But it does tell something about the French and Danes: My days in Paris, the capital of melancholy and depression, lit up considerably in the summer of 2001 after I started going out with a Dane. Good science is good observation, after all.

Joking aside, problems in measuring happiness have urged economists to more sophisticated methodologies, summarized by Tim Harford in the same article. While these are sure to lead to more accurate measures of well-being, they should nevertheless be used as a supplement to, not replacement of, the hard data. Otherwise, they are bound to fall into the very same trap they were supposed to avoid.

Surf and turf is equally stomach-upsetting: Combining objective statistics with subjective measures of well-being to come up with measures of GNH would only lead to confusion and subject the statistics agency (and of course the government) to accusations of manipulation of data.

I wish you a belated Happy New Year!

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

Double Trouble Monday coming...

I just finished editing (i.e. putting the hyperlinks in) for my Hurriyet Daily News & Economic Review columns for Monday.

Yep, I said "columns" because this is another week where I have two coming: The editorial for the South Monday, aka The Southbound, as well as my regular weekly column. The weekly should appear at exactly midnight, and the Southbound a couple of hour after.

And just to give up a bit of scoop: The Soutbound is called "The Pursuit of Happiness by Economists", whereas the weekly is on common misconceptions about the Turkish economy- that's the original title, but I am not sure if the editors were able to fit that in...

Roubini Post: Turkey: Lock, Stock and Three Smoking Barrels

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 an addendum in the blog, where I roughly sketch my methodology for the forecasts. As you'll figure out, it is basically augmented financial programming- forecast the basic variables and make sure everything else fits in.

The ego is deflated

As always, a picture is worth more than a thousand words:

Only seventh place this week, so maybe my ego is not deflated yet, but it is definitely deflating, which should please my perennial spammer.

BTW, what I have found is that the title game is a bit tricky: While interesting titles do get attention, you should also try to give a hint of your topic in the titles. I think I overdid the former in favor of the latter...

A tiny observation on today's inflation figures

December inflation, at -0.30 percent mom, came in much lower than expected. The food prices were again the main culprit, registering their largest December fall since 2003. Inflation ended the year at 6.4 percent yoy, coming in at even better than the CBT's projections.

I will not do a complete review of the figures. If you are interested in that, you may have a look at the piece published by Citi economists. But I will just make a very small observation, using my well-known maxim that a picture is worth more than a thousand words:

As you can see, headline and core inflation have historically (whatever short history there is to the figures) moved more or less together. However, this recently changed, mainly on the back you know who- our good old friend food inflation. But they are likely to converge in the coming months, and not only because of normalizing food inflation (note that global food price developments pose an upward risk to food inflation, but let's ignore it for the moment), but also because of rising core inflation.

In fact, the uptick in core inflation is the only blemish to an otherwise a pearly-white inflation figure. And it is not just one-time: We should see more of that as temporary factors, including base effects, exchange rate appreciation, and price setting still attuned to the previous phase of the economic cycle, that more than offset the rapidly closing output gap, as the IMF was recently noting, begin to lose effectiveness (note to perennial spammer: another opportunity to strike me, as I am quoting instead of doing high-caliber economic analysis).

In fact, my inflation forecast shared in today's column is based on these factors, rather than nasty surprises on the food inflation front, so God help us if we are torpedoed on that front as well....

Weekly Hurriyet Column: Lock, stock and three smoking barrels

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  a reference not only to the expression, lock, stock & barrel, but also to Guy Ritchie's movie: The idea is that if he has two smoking barrels, I just have at least one more:) Joking aside, I wanted to highlight the three main risky ares of the Turkish economy... 

 

As for an addendum, I would like to sketch how I came with the forecasts: My main forecasts were growth as derived from the National Income Accounts, or NIA; everything else depended on it or just fed into it: Within growth, I looked at domestic and external demand separately. Withing domestic demand, I weeded out inventory buildup and treated government spending exogenously: With the latter, while I was rather "generous" for the first half of the year, I did allow some pullback after the elections. I also projected consumption and investment separately, while they did some common explanatory variables. For consumption, in line with the fad nowadays, credit growth turned out to be a determining factor, whereas the rest were just "reasonable assumptions" on consumer confidence and the like. For credit growth, I adopted two approaches: For one thing, I took the credit growth as exogenous (nominal 20-25 percent growth) and determined capital flows accordingly. Then, I also, by making simple assumptions about capital flows to emerging markets and Turkey's share of the cake (using EPFR and IIF figures), I took capital flows as exogenous and got a credit growth rate consistent with that.

 

Everything else either fed into or was derived these main numbers: For example, the fiscal and debt figures, which I did not mention in the column, are all "made" consistent with government spending, using simple linear relationships. Similarly, the Balance of Payments are in line with capital flows , credit growth and external demand of the NIA. But it is important to note that I did not rigorosuly forecast all the variables. For example, it is impossible to formally project FDI, so I just penciled in a logical number ($10 billion). Base money, on the other hand, depended on the capital flows as well as the Central Bank's actions, with the former semi-exogenous and the latter exogenous in my framework. 

 

Which brings me to the tricky part of these projections: Monetary policy. It is clear that the traditional Taylor Rule does not do a good job in forecasting even the direction of monetary policy any more, so I  took monetary policy as exogenous into my framework, assuming some more policy rate cuts  & reserve hikes in the first quarter, more of hold-and-wait in the second quarter, when a new Governor will be appointed, and some forced policy reversal in the second half. Luckily, the reversals do not play a  big role in my inflation forecasts due to the lagging nature of monetary policy on inflation. I used standard inflation forecasting equations, with the output gap and credit growth playing the most role. 

 

Note that although I did pour quite a bit of effort into it, this is not the only way I would have done it, if I had more time and resources. For example, while I do not appreciate that most policymakers nowadays treat it as God's word, a DSGE model would have solved my endogenity issues. But those take time to build, and even more time to maintain, so there is no way I am getting into such deep shit unless I am paid to do so. Therefore, I had to stick with my piecewise solution, making sure that there are no inconsistencies in the framework... 

 

Anyway on to the column:  

 

 

“Stock” is the name of the game in my first column of the year: I would like to take stock by going over my 2010 forecasts of the Turkish economy as well as offer my lock, stock and barrel projections for 2011.

My 2010 Report Card…

One factor singlehandedly messed up most of my beginning-year projections: I did not expect capital flows to be so strong. As a result, growth came in much larger than I expected, which also affected my other projections: The budget deficit came in lower, mainly on the back of stronger than expected tax revenues. Similarly, the current account deficit was higher, another artifact of the strong growth.

On the positive side, I once again hit bull’s eye with inflation. And I was once again right on target with my policy predictions. I did not mind being in the minority when I claimed the IMF Standby Arrangement and the fiscal rule would not go through. And unsurprisingly they didn't.

Then, there is monetary policy, which warrants a separate paragraph: For the first three quarters, the Central Bank of Turkey, or CBT, was quite predictable, except for once, when I got under the impression that the Bank would start hiking during the summer, and on live TV at that, prompting the host to wonder what I had been smoking.

Nothing, really! It was just that I was able to see the strong growth in the economy as early as in April, thanks to my work at Konda, and was assuming the Bank would address that early on. Needless to say, the other forecasts I revised in April-May were rather accurate.

And the 2011 outlook…

For 2011, I see growth slowing to 4.5-5 percent. The economy is already near its potential, and the nature of the growth is unsustainable, so if anything, there are even downward risks to this forecast. Very strong capital flows, bolstered by a ratings upgrade early on, on the other hand, could lead to stronger growth.

The current account figure consistent with this growth figure is around $65 billion, assuming oil prices average out to about $85-90 per barrel. Then, along with a debt service and short-term trade credits of around $35 billion each, Turkey would have an external financing requirement of around $135 billion. The question is whether this can be financed painlessly.

Once bitten twice shy, so I am assuming capital flows will continue to be strong this year. A ratings upgrade to investment grade by Fitch, which would soon be followed by the other agencies, after the ruling AKP’s election victory in June, would boost this scenario further. But external financing is nevertheless one smoking barrel of the Turkish economy this year.

The second barrel is pork barrel spending: Contrary to common belief, fiscal policy has been pro-cyclical this year once adjusted for the strong growth (i.e. the business cycle), although the government has not really opened up the coffers so far. That is sure to change during the first half of the year. While the government’s deficit target seems achievable, too much profligacy, combined with slowing growth, could lead to nasty surprises.                

The final barrel is inflation and monetary policy: With the output gap closed down and price-setting behavior still sticky, inflation is more likely to end the year in the 6.5-7 percent range rather than fall to 5.4 percent, as the CBT envisages. And that is with the Bank forced to reverse gear later in the year, after a couple of reductions in policy rates early on, once inflation begins to move out of control and its unconventional policy seems not to be working.

If global or domestic developments do not cause one of these three barrels to explode, the Turkish economy could as well have a good year.

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

The Spammer Strikes Back

It was a long time since I heard from my perennial spammer. And suddenly out of the blue, she stroke back with a vengeance, with THREE comments in 24 hours, prompting me to wonder if she did not have anything better to do on New Year's day. Anyway, since she is getting behind the anonymity cloak, she will not be able to get an automatic alert to my responses. Therefore,  since, for some weird masochistic reason (it is beyond me why she keeps reading my stuff if she hates it so much), she continues to read my posts, the safest bet to ensure she sees my responses is to write yet another open letter:

She first responded to my New Year's message. After wishing me a Happy New Year, she shares with me a New Year's resolution of hers of direct relevance to me:

FYI; one of my resolutions for the New Year is to continue criticizing you until you realize that your so-called economics blog HAS to become just that and not a space where you take advantage of readers' time and patience to satisfy your highly inflated ego.

Here's a slightly edited version of my answer to her, posted as comment below hers:

Thanks for stopping by; I was starting to miss you:)! And I am glad that I was not able to trick you into believing that I do not have an inflated ego by calling myself a "sore loser":)


BTW, one of MY resolutions for the New Year is to continue not to take your criticisms seriously as long as you continue not to provide any backing/substance to your critiques/claims. Especially because nobody (I hope) is putting a gun to your (or anyone else's for that matter) head to read my posts/columns:)


So I guess we'll have another year where you'll sometimes drop by and say I have an inflated ego and/or no analysis, and I will have to laugh it off.


I am saying "have to" because joking aside, I would have responded to your critiques if I knew how to. But I still don't see why you think I have an inflated ego and why even technical columns such as those on monetary policy, have, according to your "expert opinion", no analysis.


I have had very constructive critiques from friends and readers, but unfortunately not even one from you. Actually it is not that difficult: All you'd have to do would be to add a because: "You have an inflated ego because..." or "You have no analysis because..."


I have always been an over-optimistic person, so despite no logical reason for me to do so, and every indication that I should not, I am still hoping for one constructive critique from you. So why don't you make another New Year's resolution: To provide me with at least one "useful" critique this year...

Then, she responded to my book/TV program recommendation:

Stop telling the world what you think of Atilla Yeşilada's "pretty co-host". Keep your fantasies -- in which no one except you is interested -- to yourself and concentrate on economics, for a change!.

Now, now, now, we are not getting jealous, are we:):):).... I see more of the pent-up sexual aggression here. But if you really have nothing better to do, you are more than welcome to go through all of my 774 posts (including this one) and see how many are economic analyses, and how many "fantasies". And it is the first time I am hearing that calling someone pretty would be fantasy:)

Finally, she has something to say to my bright idea as well:

What a bright idea for those who have plenty of time to play little games, but not enough strong economics background to produce economic analyses of high caliber.


BTW, I am profoundly impressed to learn that you have spent 10+ years in the US. WOW!.. I myself have spent some 17 years doing an MA, a Ph.D.and working as a finance professional in several European countries. But not once-- until I read your latest rambling-- did it occur to me to use it as PR material on a public website. A free and friendly advice to you: BEING MODEST IS ALWAYS BEST!

Hmm, as I made it clear later on, this is not for me; the only time I  will be spending will be with setting up the blog and a few minutes each day for administering it. So in fact, your words are targeted, although unintentionally, at the potential blog contributors, who will be the ones to play what you deem as silly games, rather than me.

And just like above, where you turned a compliment into fantasy, you seem so obsessed with small details. I just mentioned having spent time in the U.S. as a way to note that despite that, I don't see the details expats are seeing. And I am not sure how having spent the U.S. is PR material. And while you are at it, could you tell me which countries would qualify as PR material? Say, if I spent 10+ years in Zimbabwe, would it qualify as PR? And how do you discount what has been done? For example, could you tell me which is better: 1 year in Papua New Guinea producing economic analyses of high caliber or 17 years in Europe, but still not knowing what economic analysis is after an M.A., Ph.D. and several years of work experience in the finance profession?

There is also one thing I am really wondering: First, you tell me that one of your New Year's resolutions is to continue criticizing me until I produce economic analyses, but then you say above that I do not have the background to produce economic analyses of high caliber. So if it is the latter, then wouldn't you be the one wasting her time "playing little games"?

But don't despair, you have at least one admirer: One friend, in an email aptly titled "PUHAHAHAHAHA", has this to say:

agzina sicmis, kim yazmissa, cok hosuma gitti :) expat arkadaslarin arasinda bekar kari var mi

I am pretty much sure my spammer knows Turkish, but for those of you who don't, he is saying: "Whoever wrote it f--ked you up big time, I loved it. Do you have any single females among your expat friends?"

Yep, my dear civciv (I call him civciv, i.e. chick as in babe-chicken, in reference to his being an ezikbahce fan), she really has nailed it!!! Wow!!!!! And to answer your question: Yes, I have many single female expat friends, but I don't think I am introducing you to any of them:) But I could introduce you my perennial spammer if I learn who she is. After all, she has a M.A., Ph.D. and experience as finance professional in several countries. I am pretty much sure it is a she, from the pent-up sexual aggression, but in case it is a he, you could still get married and live happily ever after, and even have a baby, like Elton and his hubby:)....

Coming back to my perennial spammer: I really enjoy these little conversations, especially after having spent three days doing forecasts for tomorrow's Hurriyet column- it took so long because I don't  have enough strong economics background to produce economic analyses of high caliber, I am sure you would have done it in three hours. So all I'll say it, as Zeki Muren would say, "please don't leave me". You and the real azize are the spice of my life:)...

The "bright idea" is a go-go....

It has been less than a day since I posted my bright idea, and I got half a dozen expats willing to contribute, and several others told me that they really liked it, except my perennial spammer, who used it as another opportunity to "prove" that I have no economic analysis and an inflated ego. 

I'll deal with her later; she is at the very bottom of my priority list, but I just wanted to announce that given "the interest", I'll go ahead and give the blog a try. I'll probably get a Blogger address, since it works with a gmail account. Wordpress is supposed to be better, and I am thinking about migrating my blog there myself, but Blogger should be sufficient for our purposes.

But I also need to find a blog name: expatsinturkey.blogspot.com, anexpatinturkey.blogpsot.com or something like that. I would really appreciate if you could post your name suggestions as a comment to this post (or email them to me if you'd like). After all, it supposed to be your blog, not mine. 

By the way, before I go any further, I need to make two important disclaimers to clarify some issues that came up in the comments/emails by potential contributors:

1.  Once I set the blog, I will not post anything, other than the first inaugural post: I will just grant access to those willing to contribute. All you would need to do would be to send me a gmail address (other email addresses may work, but you will need to get a Blogger account if you don't have a gmail one) where I can send you an invitation to join. If you don't want me to know who you are either, you can just get a generic gmail address and use it. Other than that, I will be the administrator to make sure everything flows smoothly and people like my perennial spammer are kept out- I don't mind her on my blog, but I would not want her to spoil someone else's:):):). But I am no expat, so I will not contribute. You will. In other words, you get to decide what to include and what to omit (XXX your company if you would not want to be identified) in your posts, so I don't risk accidentally disclosing someone's identity.

2. I am sorry for having given that impression, but the blog is not supposed to be a complaints board on Turkey. You are more than welcome to tell about bad experiences, as long as they tell about your experiences living here. But + or neutral comments are as welcome as well. The idea is just to recount interesting experiences.

As Forrest Gump would say, that's all I have to say about that! I am looking forward to your blog name suggestions....