Weekly Hurriyet Column: Cry, the beloved country

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Two weeks of non-cheesy titles were more than enough for me, so I returned with a vengeance: A movie reference that can double as a literary reference. As for the column, I was originally planning to devote the column solely to the two papers, but I was really disturbed by the lack of an intellectual debating platform, so I had to digress a bit and talk about broader issues. Besides, I wanted to wait for the complete papers to do a fair evaluation. Speaking of which, the Central Bank's only fault at this process was not to publish these papers on the day of the conference. I understand their concerns, but the critiques should understand that a CBT working paper should not bind CBT policy, the same way as an IMF working paper would not bind the Fund. The Fund has policy papers for that purpose, and the CBT has documents such as Inflation Reports or annual Monetary Policy Reports. These are the documents that tie CBT policy.

As for the papers, I already have one of the them, which I plan to read carefully in the next couple of days (mid-December). But from the presentations and reviewer comments, it seemed to me that they are far from perfect. For example, as Kamil Yilmaz of Koc University noted, the first paper could be showing scale economy-related specialization and high prevalence of intra-industry trade in developed countries. Or as Cevdet Akcay of Yapi Kredi Investment noted, lack of production of intermediate and investment goods should not lead us to dismiss price-related issues. After all, the reason those goods are not produced might be because they are simply too costly to do so. But then again, the exchange rate is only one of the many factors that affect production cost. I could go on and on. But the point is that the critiques do not mention these points, choosing instead to hide behind old hats such as the imaginary high interest-low exchange rate policy... Anyway, just read and decide for yourselves:


I would have never thought that a couple of working papers in a conference would steal the Economics agenda of a country for a good couple of days.

But when the country in question is Turkey, and the papers are by researchers from the Central Bank, the institution everyone loves to hate, on one of the most, if not most, polarized economic debates, explaining the country’s growing trade deficit, anything is possible. The conference, Structural Transformation in Foreign Trade: Global Dynamics and the Turkish Economy, consisted of presentations of two yet-unpublished Central Bank papers as well as a panel discussion on world trade and Turkish economy in the aftermath of the global crisis.

The first paper attempts to place the trade deficit in the context of global developments. By separating sectors into intermediate and final goods, the authors show that the increased import requirement of exports, deemed as the gangrene of Turkish industry, is not a development specific to Turkey at all. It seems that vertical integration and global supply chains have led firms in developing countries more dependent on imports of intermediate goods for exports. But this does not explain why Turkey has the highest intermediate goods imports for a unit of exports.

This is where the second paper comes in: Asking 145 firms why they import intermediate and investment goods, the authors stumble upon the surprising result that insufficient domestic production of these goods and the need for high-quality products come out at top. These results were unsurprisingly not well-received by exporters and the government, who have long been accusing the strong lira.

While it is difficult to do a complete evaluation without reading the papers, the need to move beyond the exchange rate towards more comprehensive discussions is clear. But even at a more basic level, I have yet to grasp why running a trade deficit is inherently evil. After all, as Martin Wolf noted during my interview with him for this paper at the IMF-World Bank Conference, capital should be flowing to where it has most use and help shift growth towards consumption.

Similarly, I do not understand why the benefits of a strong lira are not put to the table as well. For example, I have yet to see a discussion, with the possible exception of a couple of thoughtful pieces I referred to in my discussion of the structure of Turkish private savings last month, how much the exchange rate has contributed to what I deem, in homage to New York Times columnist Thomas Friedman, the democratization of consumption, by boosting the purchasing power of the country’s burgeoning middle class.

It is no coincidence that it is the labor-intensive sectors that are hurt most by the strong lira, according to the Central Bank survey, who do all the whining. This suits the government just fine, as putting the blame on the exchange rate sways attention from the real issues, the structural problems such as innovation, infrastructure, human capital, and the institutional set-up that the two papers are pointing to. To give just one example, Rauf Gonenc highlighted during the panel discussion that Turkey has the most rigid labor market among OECD countries.

But then again, we live in a country where the so-called experts criticize an imaginary high interest-low exchange rate policy and support the obsolete industrial policy of handpicking sectors by the government, arguments that surfaced not only in last week’s conference but also in the competitiveness conference I wrote about last week. If we cannot get the basic concepts right, what hope is there for scientific policy discussion?

All this leads to my own whining: Cry, the beloved country...

Weekly Hurriyet Column: Competitiveness for a way out

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. Another week without a cheesy movie title... Other than that, I do not have much to add to this column, except that I somehow did not like this article. I have no idea what's wrong, and I think I hit a couple of important points, but they all somehow did not fir together well. Anyway, if you know what's wrong with this column, please let me know...


I have to renege on my promise to write on Turkey’s 2010 budget in favor of a convention I attended on Friday, which is much more relevant for Turkey’s long-run prospects.

The Competitiveness Congress, organized jointly by the Federation of Industrial Associations, or SEDEFED and the TUSIAD-Sabanci University Competitiveness Forum, or REF, has been held annually since 2005. This year’s conference, titled Way out the Crisis: Competitiveness, consisted of the presentation of a report on Turkey’s position in the latest World Economic Forum, or WEF, Global Competitiveness Report and introduction of a new database to compare the country’s competitiveness with 48 peers using standard international trade competitiveness indices, in addition to a couple of panels.

The authors of The WEF Global Competitiveness Report 2009-2010: An Evaluation for Turkey have to be commended for undertaking the tedious task of looking at almost all the possible combinations of Turkey’s rankings in different competitiveness indicators and benchmark countries. The result is a comprehensive laundry list of Turkey’s comparative strengths and weaknesses, but not much more.

The problem with such lists is that they give no sense of binding constraints. In other words, given that the government needs to prioritize with its limited resources, it should know where it will get the biggest bang for the buck in the shortest time. Luckily, Fusun Ulengin, the principal author of the report, did mention where she thinks the binding constraints lie: Human capital, especially education & women’s participation, and innovation were also highlighted in the panel discussion following her presentation.

Incidentally, both areas have already been underlined in recent World Bank labor market and education reports as well as the Bank’s Investment Climate Assessment, which precisely tried to identify the private sector’s binding constraints. While it might be self-assuring to reinvent the wheel now and then, we have to go a step further with policy recommendations. Without a prescription, you’ll just have to cross your fingers that the binding constraints just disappear by themselves.

But even then, I would doubt that the government would be willing to swallow the pills, as it is anything but a hypochondriac. Or at least, that’s the impression I got from Competition Board’s chief advisor Erdal Turkkan during his question-cloaked criticism of the report. His putting the blame for Turkey’s mediocre competitiveness to lack of perfect competition, while not supported by WEF data, could be deemed valid to a certain degree. It could also be forgiven as a reflection of the institution he is affiliated with.

It is also easy, at least as an economist, to sympathize, and even concur, with his criticism of panelist recommendations that the government should support certain sectors- the so-called Asian model, which was applauded and studied as a role model, until the Asian crisis exposed the inefficiencies of such managed industrial policy. It is therefore a twist of fate that another crisis has put the Asian framework back in vogue globally, and the panelists have just been following this international fad.

On the other hand, Turkkan’s criticism that such rankings look at the macro environment without considering sectors and firms is definitely valid. In response, Fusun Ulengin has dislosed that they are holding discussions to measure competitiveness at the sectoral level, which I am looking forward to.

But Turkkan is missing the subtle point of these rankings: Once governments provide the cultivating ground for competitiveness with the right environment and incentives, competitiveness will flourish.

Weekly Hurriyet Column: Jobless and joyless recovery

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. For a change, there is no cheesy movie reference this time around. As for the column, the unemployment data that were disclosed a week after my column revealed that I had in fact been too optimistic on the timing of the turnaround in unemployment, which did not wait for year-end to get started...


The debate on the shape of global recovery has been going on unabated for some time, with everyone choosing their favorite letter, leading some to declare, more than three decades after the Fab 4, that all you need is LUV.

This scenario of an L-shaped recovery for Europe, U for the United States, and V for emerging markets is definitely plausible. But more importantly, recent data, while definitely not strong enough to justify markets’ performance, have made it less likely for a W-play. In fact, last week’s October Purchasing Managers Indices, or PMIs, are suggesting a gradual recovery in major developed countries irrespective of the shape of recovery.

While markets tend to give much more weight to PMIs as a leading indicator than proven by empirics, if they’ll be taken at face value, the only country defying trend is Turkey, where the index has been slowly creeping down after registering sharp rises in the second quarter, hinting that the recovery has been losing pace. Unfortunately, the Turkish PMI has been not only consistent with the Central Bank’s own real sector confidence index, but also confirmed by actual data.

However, a glimmer of hope has come recently from trade statistics. Not only there is a considerable increase in imports of consumption goods in the September figures, preliminary October data from Turkish Exporters Association has shown the first yearly post-Lehman rise in exports. Even more importantly, imports contracted less than exports for the first time since trade dried up after the Lehman collapse, a strong indicator that things are going back to normal.

But these positive signs should not lead to overjubilation: For one thing, the increase in consumption imports is mainly in autos, as consumers scrambled to take advantage of the expiring tax reductions. As for the improvement in preliminary exports, the rise looks less impressive once you notice the low base. In this sense, this week’s data releases will help to clear up the picture a lot.

Friday’s September trade indices will provide a better indicator on the normalization in trade, whereas today’s September industrial production and Wednesday’s October capacity utilization figures will show if the stir in imports has spilled over to domestic production. Tuesday’s CNBC-e consumption indices for October, on the other hand, will reveal the health of the consumer.

Even if all of these data confirm the Turkish recovery, a jobless recovery is bound to be joyless. In fact, I see the recent employment statistics, which have been showing seasonally-adjusted unemployment falling for two consecutive periods, as misleading. For one thing, the decrease in unemployment is partly due to the decrease in the rate of extra workers entering the labor force.

This added-worker effect, which was boosting unemployment earlier in the year, is likely to stay unemployment-friendly in the next release on November 16 and even for a couple of months more, after when it could reverse without strong growth. A shift out of agriculture, which has been seeing bloated employment figures for the past year due to the crisis, will only add insult to injury.

Interestingly enough, the employment side of the Turkish crisis has got little attention from the government so far. Despite having the highest unemployment rate in the G-20, Turkey is one of the eight countries in the group that does not have any labor measures in its 2009 fiscal stimulus program, according to a recent report from the IMF. With elections looming, I wonder how long this can go on.

In fact, the unemployment picture is yet another reason why the 2010 budget looks detached from reality. This is where I will pick up next week.

Weekly Hurriyet Column: My Minority Report’s collateral damage

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. And not one but two cheesy movie references squeezed into the title this time around. And I managed to make a reference to the word collateral, which I use in the second part of the column. As for the column itself, here are a few extra notes:

First, a small game: Replace the word capital with IMF in the article (hint: there are two) and you'll see why I favor an IMF deal. As for the CBT's need for collateral, as I was doing my weekend reading of favorite Econ. columnists Sunday afternoon, I found a really good article by Ugur Gurses explaining in painful detail why the CBT did not need bonds as collateral or any collateral at all. Most of the points he is making were already relayed to me by my friends from the CBT, but since I am no CBT expert, I definitely could not have written them that clear myself. Finally, I am now realizing I have once again been too harsh. Governor Yilmaz noted that the full details of the bond-buying deal will be given out at the press briefing for the 2010 monetary policy strategy on December. I will therefore be waiting for this annual strategy document on monetary policy and be on the lookout for any developments before then. Maybe, I will be pleasantly surprised at that time, but the fact remains that the Bank has taken a really awkward first step in a very delicate matter. Anyway, on to the column:


The Central Bank, or CBT, released its latest Inflation Report on Tuesday. With analyst reports having gone into all the nitty-gritty details, I will only briefly summarize the Report’s salient features before jumping to my own minority report.

First, the Central Bank’s inflation outlook is, if anything, slightly more optimistic than before: Despite higher commodity prices, the Bank has only marginally revised its end-2010 forecast. The CBT also notes that inflation will creep up during the remainder of the year and the first half of next year due to base-year effects, unwinding of tax cuts and administrative price hikes, but sees inflation continuing with its downward move afterwards.

This trajectory is fully in line with your humble neighborhood economist’s own projections as well, although I see inflation edging up higher than the Bank envisages and being more resistant on the way down. While this is partly due to my higher oil price expectations, I guess I am also penciling in a higher exchange rate pass-through. In any case, even if my well-above-consensus October forecast of 2.3 percent is realized, yearly inflation will still be below 5 percent, a level we are unlikely to see again at least for a year.

While its inflation outlook may be more dovish, the Bank’s assessment of risks to this outlook is actually less so, as the Bank has taken a more balanced approach than before, highlighting upward risks to global inflation such as growing developed country budget deficits and exit strategies. However, domestic risks barely get any mention in the Report. It seems that the CBT has opted to take as given the government’s fiscal outlook as outlined in the budget and the Medium-term Program, which are, lo and behold, consistent with each other, but totally inconsistent with reality.

Without a weaker-than-expected global recovery and appreciation pressures on the lira driven by capital flows, the CBT is set to pause after limited cuts in the near-term, and the seemingly contradictory views of the report are simply efforts by the Bank to position itself against tail risks in both directions. All in all, I would have said the Bank did a pretty god job with communication this time around, only if this bond-buying business had not come up.

At first sight, it looks innocent enough: Governor Yilmaz highlighted that all the Bank will be doing is to replace the maturing Treasury debt in its balance sheets from the 2001 crisis bank bailout, as the CBT needs collateral for its operations in the Istanbul Stock Exchange and the reverse repo market.

Now, this raises question marks. After all, as I confirmed with conversations with ex-Central Bankers, not only the Bank has many other means to obtain collateral, it could also conduct its operations without collateral as well. Moreover, someone has yet to explain to me why the CBT would need to coordinate this with the Treasury, unless of course it would like markets to perceive this as fiscal accommodation or debt monetization.

A better explanation would be the need to respond to the financial market liquidity squeeze, which the Treasury’s high borrowing requirements have finally managed to make permanent. Unless the CBT increases FX purchases, which it is unlikely to do without significant capital inflows, all the onus of funding the markets would be on open markets operations, which is only a temporary fix. In this environment, the 9 billion the Treasury would have to pay to the CBT would be a major drain from the market if it were to borrow this amount from the markets.

I wonder why the CBT has not put it this way rather than resort to the collateral argument, risking serious collateral damage.

EconNews Roundup

Not much today:

It is disheartening to see that now the CBT has taken up the tangent argument...

...And the disheartened bondholders

On Debt......

One of the most common BS I have been reading about lately is that Turkey's debt to GDP ratio, now at 47%, is low compared to developed countries.

Simple cross country comparisons, which ignore the vastly different absorption capacity of countries, can be highly misleading. Fellow economist and friend Murat Ucer of Turkey Data Monitor summed up very well in a recent report:

So to those who keep telling us that the debt-to-GDP ratio is very low in Turkey, and hence further fiscal expansion and/or a very gradual adjustment are affordable, our response is unchanged: it’s not the level, but the speed (with which debt is rising), the maturity (still short at about 3 years on newly issued debt), and absorptive capacity (of financial markets) that are concerning us.

Murat does raise three important points, two of which can be summarized with a simple chart prepared from Murat own's proprietary software:

You can see below that debt has been rising quite fast recently, after having turned an inflection point during the summer of last year. As for the maturity, while the maturity of new debt is promising, average maturity is still way too low.

As for the absorptive capacity of markets, I think it is about to be tested soon; there are several ways of showing that, but I am leaving that to another post.

In sum, unless a big positive exogenous positive shock such as improvement in global risk appetite or an IMF agreement (the latter could also be considered endogenous in the sense that the challenging scenario can induce the PM change his mind on an agreement with the Fund), a tough year awauts the Treasury in 2010.

EconNews Roundup

Turkey scores poorly in the World Economic Forum Global Gender gap index, but mainly because there are no women in politics. I agree with the article, but having skimmed the report, I see that the country has fared poorly in other components of the index as well; it is just that politics is the one we are at rock bottom.

I always thought that journalists could make interesting stories out of flow data; the FT just loves EPFT, which publishes global fund flows, but their Turkish colleagues rarely pay attention to bond and equity flows data. So even though I would be careful before making the Brazil link, as correlation is not causation, I still like the piece on the return of the foreign investor.

No disaster without the IMF, says Finansbank Deputy Director Saruhan Dogan: I agree, as I stated clearly a couple of weeks ago. But it is not given that next year, interest rates will stay low while liquidity will be in abundance and Turkish Lira maturity terms will extend. If anything there will be tremendous upward pressure on rates, as the CBT starts hiking. I am not sure on liquidity, but some of the saturated demand for bonds will be channeled to credit, and the CBT is ready to intervene if liquidity gets too tight (look for OMOs in excess of TRY 20bn or so for that). As for lira maturity, it is already extending, but I doubt it will reach the levels to comfort markets.

Fitch follows Moody's with an outlook upgrade; a rating upgrade is on the way as well. Contrary to conventional wisdom, I do not think that Turkey deserves 2-3 notches of an upgrade; a one notch adjustment should brng to Turkey where it should be. Part of my objection is related to my view of debt, which I will refer to in a later post.

CBT lowers its inflation forecasts, albeit only marginally for 2010- 2011 stays the same.

The markets must be crazy...

The fact that Treasury's 2010 borrowing will be challenging, as rates are set up and banks become saturated with bonds, has been repeatedly stated by not only your friendly neighborhood economist but many other economists with a sense as well. It seems that markets woke up after a supposedly tense primary dealers meeting, which the Treasury denied- incidentally I find the Treasury and my beloved Besiktas similar in the sense that they both like to use their web sites to deny media rumors with Soviet-era one pagers that end with "we present this to the attention of the public"- "kamuoyunun dikkatine sunulur" id you speak Turkish.

Anyway, the bond traders I spoke to told me that locals do not want to take maturity risk at such low carry. Besides, there has been some foreigner sale as well. In any case, the latest Inflation Report also suggests that we have come more or less to the end of the easing cycle barring unexpected events.

On the positive side, the traders I talked to do not believe IMF is priced at all, pointing out that the recent decrease in reserve requirements supports this view. This means that, if there is a deal, bonds are sure to react strongly, not only because such a deal would affect the debt calculus profoundly, but also because it'd come as an unexpected shock...

Weekly Hurriyet Column: Wheels in the sand

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. No cheesy title this time around, just a little play on words that caused confusion at the editorial, resulting in a the title "Brazil puts wheels in the sand" in the hardcopy version- the web version is OK, as the editors had to change the title after they submitted the article to the web.

As for the article, a really good commentary appeared on the Financial Times the same day as my column- definitely recommended reading, especially if you liked my pieces on the changing role of the IMF. I had never thought of this way, but as the authors suggest, rather than stating the obvious, that such measures will not work, the Fund should channel its energy into coming up with ways that they will. This fits in IMF's new role as well. It seems the Fund springs underneath every stone these days:)...


Brazil stole all attention last week with its 2 percent tax on portfolio inflows, igniting a discussion on not only whether it will work, but also on whether other countries will follow, with Turkey’s name coming up among the candidates.

On the first question, it is important to note this is not the first time Brazil is trying to put sand in the wheels. It had introduced a 1.5 percent tax in March 2008, only to drop it shortly after the Lehman collapse. Just as the previous attempt had not stemmed the real from rising, it is safe to assume that the measure will not have much effect, as the size of the tax is small compared to the underlying forces of appreciation.

Brazil’s problem is that the real could be strengthening not only because of capital flows, but also because of a permanent shift in the country’s terms of trade. While there is room for policy action for the former, at least theoretically, there is no easy fix to the latter other than a rise in productivity, which is definitely more easily said than done.

Terms of trade improvement or not, capital flows emanating from developed country central banks and looking for a new home with high returns had been with us since March, but have gained considerable pace in the last couple of months. According to Emerging Portfolio Fund Research, which collects data on dedicated emerging market (EM) fund flows, flows to EM bonds and equities have already surpassed 2006 and 2007 highs.

These loose cannons wandering around have, in turn, led to asset price booms in EMs across the globe and reawakened the familiar EM drama “fear of appreciations”, as central banks try to prevent their currencies from appreciating through intervention. With the resulting increase in foreign exchange reserves only partly sterilized, the domestic money supply expands, resulting in credit growth and unsustainable rises in asset prices. Looking at the forest rather than the individual trees, this process is also impeding the global rebalancing act needed to put the world economy back in track.

The Turkish case has been different from this textbook scenario in some small but important aspects. To begin with, the lira has performed worse than peers, having lost around 15-20 percent to comparison currencies such as the real, the South African rand and the Hungarian forint. Moreover, flows into equities and bonds have slowed down considerably in the last few months, with anecdotal evidence and banks’ off-balance sheet activity suggesting that much of the action is now in derivatives such as swaps. As for the Central Bank liquidity injections, they have almost exclusively channeled into bonds, and the resulting rally has been a boon not only for the banks holding the Treasuries but also for the Treasury issuing them.

Highlighting these differences is enough to make the case that Turkey is unlikely to enact a similar tax, but a simple comparison with Brazil yields more insights. For one thing, Brazil’s current and fiscal accounts are in better position than Turkey’s, making the former less in need in of capital inflows. Perhaps more importantly, interest rate differentials are also working in Brazil’s favor. While Brazilian officials have hinted that they are in no hurry to hike rates, with the country set to weather the recession with a slight contraction and inflation worries likely to emerge in 2010, the next direction for rates is up rather than down. The Central Bank of Turkey, on the other hand, has at least 50-75 basis points of cuts in its sleeve.

Brazil put sand in the wheels when it felt those wheels were turning too fast. Turkey cannot put any sand in the wheels because its wheels are stuck in the sand.

Tourism finally puts a smile on my face, or does it?

September incoming and outgoing tourist figures were released today. As before, to see the the time trend, I compared the yoy figures of the last four Septembers:

Unlike in earlier months, the yoy figures are not that different from last year, but last September was right the middle of the crisis, so I would not make too much out of this. But one thing is for sure: Although in an absolute sense, the crisis seems to have passes tangent to Turkish tourism, to use the PM's Econospeak, high growth rates in tourism came to a sudden halt with the crisis. In fact, as I argued in a Hurriyet column back in August, once you take this braking effect into account, Turkish tourism has not fared much better than other Mediterrenean countries such as Spain, Greece or Croatia.

EconNews Roundup

Dogan fine worries US investors and Turkish economist(s):)

A neat piece on the changing composition of Turkey's exports.

Mehmet Simsek prepares markets for the inconvenient truth: No IMF deal. But wait until the next large Treasury auction (early next year) and more IMF rumors will drive a rally:)

Last but not the least, I should I am glad David chose one of my more civilized quotes from my summary of the Meetings.

The forecasters must be crazy

At yesterday's CBT bimonthly expectations survey, October inflation expectations came out at 1.20% mom. I just did a couple of quick calculations myself, and I am getting a forecast of slightly over 2% mom. Funnily, the effect of the end of the price cuts (some of which will spill over to November) and the electricity price hikes by themselves contribute almost 1% to inflation, so expectations are way off the target. You can see CBT President Yilmaz's warning yesterday at Eskisehir that October inflation could be high as a shot at steering expectations in the right direction, and I suspect that the CNBC-E survey, which is asked solely to bank economists, will be much more rational.

Yearly inflation will most likely shoot below 5%, as October inflation has come in at a sultry 2.6% mom last year. Then, we'll probably see inflation shoot up rapidly in the final months of the year, as there are no more base effects, ending the year at just below 6% (and shattering my otherwise immaculate number of the beast forecasts- but don't worry, I'll have my revenge next year).

Construction finally completed, blog open for busines...

I finally managed to find a couple of hours to archive the remaining couple of dailies I did at the IMF-World Bank meetings as well as last two week's regular weekly (Monday columns). If you follow me from the paper, you already saw these, but in any case, I should remind once again that comments are always required, never appreciated (or was it the other way around):)

Speaking of comments, one of my readers told me, on condition of anonymity, that he was at a meeting with bank CEOs recently and the financial center project was mocked upon. It is nice to know that I am not that crazy or pessimist after all....

As for my articles on the Fund's new face and clothes, I should say that after conversations with friends in the Fund and a bit more reading, I am even more convinced that we'll be seeing huge changes before the next Annual Meetings. But I should add that I bring up the issue with economists I trust, only to find that they are extremely pessimistic, and some of these guys are ex-Funders. The good thing is that if the Fund fails to deliver, there won't be much of a disappointment.

Weekly Hurriyet Column: Saving private savings

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. I thought I had lost my ability to come up with cheesy titles, so it is comforting to see that I am slowly getting back into shape- although it is definitely a good WWII movie, I think it is a bit overrated.

Although I love my editors at the paper, one thing we can not agree upon is referencing. I like to give full academic-style references to any papers I am referring to, while they do not like footnotes too much. Of course, I could reference the papers in the article, but then given that I only have 600 words or so space, I am reluctant to do that. So to make it easier for those who want to go ahead and read the papers, I have included hyperlinks to the papers.

In addition, I should tell that a conference call I had with analysts from Dr. Doom's aptly named Roubini Global Economics Monitor really helped me organize my ideas, so a "thanks" is due to them as well.

Just to give you a bit of a background, this savings discussion is not new: It started during the summer when internationally-known Turkish economist such as Dani Rodrik and Kemal Dervis highlighted that Turkey needed to increase its savings rate; Cevdet Akcay's response came at that time as a response to those arguments.

Finally, there is quite a bit of support for the reform argument in the latest Doing Business Report of the World Bank. In fact, one of the undersubscribed seminars at the Meetings was precisely on reforms. Although the official name of the Meetings is IMF-World Bank Annual Meetings, the World Bank part usually gets overlooked, and with the crisis and all that, this year would naturally be no exception. But I would have hoped that longer term issues in the Bank's sphere would not get as ignored. Anyway, a couple of newspapers/columnists did highlight recently Turkey's lackluster performance in these rankings in the past few years. I would not make too much out of the numbers per se, but anyone following the Turkish economy would agree that the government has been suffering from reform fatigue in the last two years.

'nough said; now to the column:


One of the big themes of the IMF-World Bank meetings was that global imbalances, widely seen as one of the underlying causes of the crisis, need to be corrected.

In fact, when you think about the great emerging market reserve buildup of the last decade, IMF’s efforts to broaden the flexible credit line and turn itself into a lender of last resort suddenly appear as a crucial part of this rebalancing act. A natural consequence of this process is that international capital flows will not reach the highs of the few years.

Such a transition and the new normal that is associated with it, which was outlined in an excellent article by bond investor Pimco’s Mohamed El-Erian at the end of last month, has important implications for the Turkish capital flows-induced growth model. Having opened its capital markets, secured customs union with the EU in 1996 and cleaned up its banks after the 2001 crisis, Turkey was in an excellent position to take advantage of the 2002-2007 liquidity glut.

Therefore, it was only natural that import dependency of exports rose considerably in the last decade, with 1996 and 2001 being inflection points. More surprising was the decline in the private savings rate, which Turkey’s demographics should have favored. Several notable economists I chatted with during the IMF-WB Meetings in Istanbul did indeed admit they were puzzled by the low savings.

Notwithstanding the fact that the theoretical relationship between demographics and savings is rather tricky, the impact of Turkey’s booming economy on its middle class has largely been ignored. YapiKredi economists Cevdet Akcay and Murat Can Aslak do show in a recent research note that the middle classes have been increasing their share of consumption in the past few years. A short drive around booming districts of Istanbul such as Umraniye and Gungoren, which have developed into buzzing consumption centers, confirm their findings.

Further evidence comes from a paper on the evolution and determinants of the savings rate by Murat Ucer and Caroline Van Rijckeghem. They relate the decline in savings to the post-crisis credit growth and housing price increases. While this means that the savings rate is expected to increase naturally in the next couple years, their detailed run-through of different policy options comes to the conclusion that there is no quick fix to the Turkish savings drought, especially in the short to medium-run.

Argentine economist Guillermo Calvo famously noted once that we do not know much more about Macroeconomics than accounting identities. In this case, the identity is the equality between the current account and the sum of the government and private sector savings-investment balances. If the global economy is indeed sailing to a new normal and increasing the savings rate will be a bit harder in practice than in academic papers, the onus of adjustment will have to be on the current account. This would mean less import dependency of exports, definitely much more easily said than done.

In the meantime, maybe we should also be questioning if the current Turkish growth model is really so undesirable or impossible to attain in the new normal. As Martin Wolf has been emphasizing, capital should be flowing to where it will have the most use. This is a point Cevdet Akcay has been making, as he questions export-led growth models.

But with a smaller pie, countries will scramble for scarcer capital by pushing ahead with reforms; at least, this was the impression I got from the IMF-WB meetings. In other words, it will be a world of survival of the fittest rather than party until dawn.

And those falling back on reforms may not find markets as forgiving as in the last decade.

The CBT doesn't surprise again....

Nope, I am not talking about interest rates, although the 50bp cut does not surprise anyone. More interestingly, the CBT cut lira reserve requirements (from 6% to 5%) right after saying it might do so in the one pager accompanying the rate decision. If I am not miscounting, this is the third time a "may" in the one-pager has turned into a reality the next morning.

BTW, the construction is still in progress, as I still have to archive my last three Hurriyet columns. Hopefully, I will be done with that over the weekend...

Weekly Hurriyet Column: A hitchhiker’s guide to the IMF-Turkey saga

Below is the unedited version of my column for this week. You can read the final version at the Daily News website. As usual, there is the cheesy movie reference, although I did not think much of this one.


With the IMF-Turkey saga looking more like a Brazilian soap opera everyday and market expectations changing by the hour, I will not like speculate on the deal, opting for a rough guide instead.

I should state my position upfront: I favor an IMF deal. But I do not think Turkey will sink without one; it certainly will not. It is just that a sans-program scenario will surely be more costly than one with program. This is a point Economics tsar Babacan has emphasized quite a few times as well. But when I say more costly, I am not only thinking about interest rates, which will definitely be lower than what Turkey could borrow from markets, but also about financing and credibility.

The recent normalization in Turkey’s Balance of Payments has led to a wide misconception that external financing is no longer an issue. It has been forgotten that the current and capital accounts summed up to a deficit of nearly 20 billion dollars from the Lehman collapse to the markets’ trough in March, which was mainly financed by the Central Bank, or CBT, running down reserves and UFOs, or unidentified financing objects. With an external financing requirement expected to approach 100 billion dollars next year, continuing with the same set-up is simply asking for trouble.

Even if all goes well on the external financing front, there is the risk that the banking system will not be able to accommodate the private sector’s needs. For one thing, with the high redemptions schedule, especially in the early months of 2010, Treasury borrowing could start to bite on lending. Moreover, the Central Bank’s liquidity injection into the system through open market operations has been running very high recently, ringing alarm bells that the liquidity shortage could be permanent this time around.

Rough banking sector balance sheet calculations and statistical analysis suggest that the annual nominal loan growth consistent with a 3.5-4 percent recovery next year would be 10-15 percent. If lack of liquidity in the system and allocation what is available into bonds clog the lending pipes, the CBT could have to resort to the dangerous road of buying bonds on the secondary market.

As for credibility, maybe it’s just me, but I just do not understand the argument that Turkey could do without an IMF program if fiscal discipline were sustained. Sure, it can if the markets buy it from a government who has a really bad recent fiscal track record, is facing elections in a year or two and therefore is completely time inconsistent in terms of fiscal policy. In fact, I doubt whether the markets would even buy a constitutional fiscal rule after the PM's candid remarks on his appetite for Central Bank independency. Anyway, the fiscal side of the Medium-Term Economic Program, or MTEP, has gone tangent to sustaining fiscal discipline, to use the PM's own Economics phrasebook, so this discussion is solely theoretical.

But things are not as bleak as they look. It is likely that the Fund is ready to accommodate Turkey more than ever. Evidence to this bold statement comes from the Fund’s aptly-named paper, Review of Recent Crisis Programs, which was presented at the IMF-WB Annual Meetings. While I summarized the presentation in my October 3 column, the key result regarding Turkey is that the fiscal easing allowed in the most recent 15 Stand-By Arrangements is only slightly tighter than that envisaged in the MTEP. Skipping such a good deal looks like a missed opportunity.

In the meantime, I am becoming extremely paranoiac when rumors of large IMF deals emerge just before large Treasury auctions. Maybe, I should reread the famous Lucas paper showing that governments cannot fool people as a tranquilizer.

Warning: Construction in Progress...

I fell behind blogging once again due to the IMF-WB meetings and a flu that followed- luckily, I did not get caught by the heat traps set by the Ministry of Health, and it wasn't of the swine variety...

Anyway, as I mentioned before, I wrote daily for Hurriyet Daily News during the meetings, so in case you prefer to read my columns here or in Facebook rather than in the Daily News web site, I'll be archiving them, according to the dates they were published in the paper, today...

Daily Hurriyet Column: Impressions a la Turca

The unedited version of my last column covering The Meetings is below; you can read the final version at the Daily News web site. Incidentally, the day the article appeared in Hurriyet, I ran into a couple of buddy from Boston who, I learned, happens to follow my columns. His one big critique was that the article was written from the viewpoint of an expat, not like a Turk. All I can say is that is that is indeed the case, I am really happy:) One of the best things I like about Hurriyet Daily News is that it is extremely objective. In fact, despite being part of a big media conglomerate currently at odds with the government over a tax issue of a few billion quid, it has been extremely objective towards the government as well. This might bring a "so what", but remember that this is Turkey; we are talking about a country where people become polarized because of football. Anyway, that's all I have to say about that:)


I am concluding my week-long coverage of the IMF-WB meetings with my impressions regarding Turkey.

Before I go on, I should say I was very disappointed by the Turkish delegation’s presentations, with the possible exception of the Central Bank of Turkey President Durmus Yilmaz. With the world coming out of a major crisis, I would have expected the delegation to highlight Turkey’s experience with past crises, particularly the 2001 vintage that handed the country a sounder banking system. Also, despite the growing importance of the G-20, especially given the responsibilities it bestowed on the IMF at Pittsburgh, I would have thought the delegation would play to Turkey’s membership in the club.

Instead, the emphasis was on making a financial center out of Istanbul and the Medium-Term Economic Program, or MTEP. The attendees did not take the former seriously and did not care about the latter. Especially entertaining were Econ tsar Babacan’s efforts to present the MTEP as an exit strategy, boldly claiming that Turkey was the first country that had enacted one. That seemed to bring a smile to quite a few faces.

As for the MTEP, opinion was divided, with the Turkish delegation and foreigners, with the possible exception of the still-cautious Fund, hopeful and locals equally cynical. Policymakers relayed their disappointment with the harsh local critics, noting that it has been tough to get the PM agree to even this much. Perhaps so, but this is no reason not to highlight the fiscal deficiencies of the program.

As for the Turkish economy, the attendees were divided on the underlying cause of the Great Turkish Contraction: The IMF laid the blame on the greater weight of manufacturing on GDP; Turkey’s durables have indeed been hit hard by the crisis. Others saw it as a typical case of capital account/ financing issue.

The World Bank noted that the poor had been hit very hard by the crisis in Turkey, highlighting the results of a recent survey conducted by the Bank, UNICEF and Economic Policy Research Institute, or EPRI, a think-tank in Ankara. Although the fact that unemployment doubled in a year is worrying by itself, the more scary part is the Bank’s finding that the incomes have been falling among the poor and self-employed.

Speaking of EPRI, the absence of Turkish think-tanks in the Meetings was a shame. This is partly because EPRI is the only real Economics think-tank in the country, which highlights the level of the intellectual policy debate. Another casual observation was the lack of Turkish presence in key events without celebrity speakers, two of which I have covered in previous columns. The quality of questions by the Turks, covering the whole range from the shoe incident to sector-specific requests and the standard anti-IMF rhetoric, was equally appalling.

The IMF and EU dilemmas

Another small detail I noticed was the relative lack of interest in the host country. This is perhaps understandable, as most of the attendees had more pressing issues in their minds, and the Turkish delegation did not help either, but I saw this as the only positive Turkey development of the Meetings. After all, you are usually at the table in the Meetings because you are in trouble, and next to Latvia, Ukraine or the financial sector, even Turkey looks OK. The one issue that came up repeatedly was the possibility of an IMF-Turkey deal. While I will cover the issue in detail on Monday, the general opinion was that while an agreement is not necessary, it will probably be beneficial.

Another topic relevant to Turkey was the EC’s response to crisis-stricken countries in Eastern Europe and the Baltics. While attendees were positive on the level of support to EU members like Latvia, Ukraine vice PM Hryhoriy Nemyria, LSE professor Willem Buiter and others were extremely critical of the EC’s ignorance of their troubled neighbors to the East. Even with Latvia, evidence on the EC success is mixed, as the Fund had to take as given the constraint of the pegged exchange rate. Buiter thought letting the exchange rate go would not have worked, as the real and nominal exchange rates are independent in small open economies, but I think that accelerating adoption of the euro at a depreciated exchange rate would have addressed his concerns. The Fund would probably agree with me, although they would never criticize the EC publicly. The lesson for Turkey is that the EU could not and should not replace the Fund as an Economics anchor.

The Meetings definitely put Istanbul on the map for a week, but I doubt Turkey made the most out of it…

Daily Hurriyet Column: Impressions from the Meetings

The unedited version of my fifth column covering The Meetings is below; you can read the final version at the Daily News web site. And for once, there is no cheesy title. As for the article itself: After a couple of strictly off-the-record conversations with IMF staff and what the Fund's top brass has been saying recently, I am now more confident that very profound changes are line up at the Fund. 2010 should be a year of Fund watching.


Now that the IMF-WB Meetings are almost over, it is time to summarize my impressions from the seminars I attended as well as interviews and casual chats with the attendees.

The Istanbul Consensus

An Istanbul consensus has emerged, but at the least expected of places: The economics outlook. Independent of the shape, almost all attendees expected a slow US recovery. They were more bearish on other developed countries and more on emerging markets, especially Asia. There was also agreement that the woes of the financial system are far from over. I could say that the views in IMF’s WEO and GFSR reports accurately reflect the median attendee opinion.

Most attendees did not see inflation as a threat in the short-run; if anything, a few voiced deflation worries. But there was serious concern on the timing of monetary and fiscal exit strategies. The nightmare scenario is that inability or unwillingness to unwind at the right time could lead to inflation and a rise in long-term yields in the US, leading to yet another recessionary spiral. Martin Wolf, Financial Times Chief Economics Commentator declared that in this scenario, the dollar would collapse, and he was not the only one. However, this doomsday is still far away; no one expects these issues to be a problem before 2011. Finally, I have not yet met anyone who thinks that markets are reflecting fundamentals, but there is unsurprisingly huge divergence of opinion on the timing or amount of the correction.

The Supervitory Challenge

The attendees were less sure on the direction of regulation and supervision. This was one most controversial and discussed issues, precisely because the attendees were aware of the challenges. For one thing, the implicit financial sector guarantees have been made explicit during the past year. Moreover, finance is too large, powerful and smart: Without more efficient regulation and supervision, there is the risk that officials will be captured by the sector or end up chasing their own tails rather than the tail risks they are supposed to look out for. There is also the risk of overregulation, which would kill off all the beneficiary aspects of finance without touching the real issues.

Then, there is the problem that everybody loves credit, especially politicians. And Chuck Prince was actually right: You have to dance as long as the music is playing. So if a party-crasher comes out waving flags, she’d better be right! Therefore, you need stronger and more independent central banks, but actually, the trend is towards the opposite direction in most countries. In any case, giving policymakers more targets than instruments will be not only politically, but also technically feasible. Finally, one of the main lessons of the crisis is the danger of contagion from international financial linkages, so a national agency might not be able to identify all risks.

There is then an unequivocal demand for an independent body that can monitor the world economy not be afraid to raise flags when required, but there can be no supply of this service at the national level because of political and technical constraints. I know I am in the minority, but that’s why I see life ahead for the IMF-FSB initiative that I outlined yesterday.

In fact, while it was already beefed up in the past year, the Fund is surely emerging even stronger compared to a week ago. I am sure many disregarded Dominique Strauss-Kahn’s comments that “these would be the meetings we would tell our children about” as PR, but an interview with Lorenzo Giorgianni of the Strategy, Policy and Review Department of the Fund and a few informal chats have convinced me to give the benefit of doubt to the self-described socialist managing director. In fact, I would not be surprised to see profound changes in a couple of years in not only the instruments and workings of the Fund, but also its building blocks that could go as far as changes to the Articles of Agreement.

This is all good news: If anything, the Fund is turning to its roots: Keynes’ main ideas in the process leading to the Bretton Woods was the creation of an international reserve currency, the Bancor, and a lender of last resort. Although even high-ranking Chinese officials were frank to admit that we are very far away from the former, the latter might be much closer than we think.

What does all this mean for Turkey? What were the main issues that came up regarding the Turkish economy? This is where I will pick up tomorrow, the last in my week-long daily coverage of the Meetings.

Daily Hurriyet Column: The Dark Knight of crisis prevention

The unedited version of my third column covering The Meetings is below; you can read the final version at the Daily News web site. As you can see, the cheesy titles are continuing unabated. As for the article, another issue I did not spell out explicitly in the article is the familiar carrot and stick problem. Suppose the IMF went to Turkey and said "Look, we see such and such vulnerabilities in the financial sector and the financing of the current account". The Turkish authorities may say, "Wow, we had no idea, we'll take precautions right away" and really do something, or they say the same thing and do nothing. And there is nothing the Fund can do about it... One way to enforce the carrot would be for the Fund not to reveal the actual vulnerabilities it finds (too much of a fire problem), but how disclose which countries are reacting to its findings more than, say 50%, but I am just thinking aloud at this stage.


The IMF has not only been tying to be more responsive to crisis-stricken countries, as I outlined in my weekend column, it has also been charged, along with the recently-beefed up Financial Stability Board (FSB), to identify vulnerabilities, warn of risks and prioritize policy recommendations. The two institutions were mandated to collaborate in conducting aptly-named early warning exercises (EWE) back in April, and the long-awaited initiative was unveiled at an undersubscribed seminar Sunday afternoon.

There is not much point in going over the details of the different mechanisms set in place. Suffice it to say that I have found the framework not a step, but rather a whole flight of stairs over the ill-fated early warning system (EWS) models of the nineties, which did a great job in predicting past crises but a very poor one in forecasting future ones. Not only the framework is much more sophisticated, it also takes into consideration the critiques of the likes of Nassim Nicholas Taleb, not only by concentrating on tail risks, i.e. Black Swans, and comovement of assets during crises, but also by adopting a more heuristic approach through making use of more qualitative indicators such as consultations with academics, market participants and policymakers. In fact, the Fund stresses that this is not an exercise in timing of crises, but one of alternative scenario analysis.

Since the whole philosophy of the exercise has changed, it is not much of an argument to declare the efforts pointless based on the Fund’s past forecasting performance. As Jeffrey Frankel of Harvard University recently noted, the crisis has already caused profound changes (and is likely to result in even more) in Macroeconomics thinking, so if anything, the IMF-FSB initiative should be applauded for being one of the early adopters.

But this does not mean that the EWE will be able to prevent all the crises all the time. Even if you have the perfect set-up, you just have to live with the fact that crises, by their nature, are unpredictable. The EWE efforts seem to have gone to great pains in incorporating lessons from the ongoing crisis, but the next major global turmoil will probably be entirely different in nature. But even if we end up getting an analogous crisis, it won’t be a walk in the park, as Jean-Pierre Landau from the Banque de France eloquently put:

First, there is the problem of signal extraction. The reason many could not see the crisis coming is the same reason Americans did not see Pearl Harbor coming despite all the indications. The signals that look so obvious in retrospect come bundled with a lot of clutter that make jumping to conclusions difficult. Moreover, even if the EWE extracts the right signals, whether to prick a bubble now or later is in fact a social welfare decision. I would not be surprised if an elected government would try to delay the adjustment as much as possible.

Then, there are the political issues: Even if the duo makes the right call, it will be very tough for a democratically-elected government to stop when the music is still playing. At the extreme, one can argue that the initiative may not have a viable future: For one thing, as the normal returns and the EWE starts raising false alarms, the exercise will lose its value added, as Peter Garber related from his own experience devising similar models at Deutsche Bank. While the framework can be adjusted to minimize erroneous whistleblowing, a major missed crisis will lead to the duo’s demise. Moreover, policymakers can never know for sure if there would have been a crisis if they had not heeded IMF-FSB’s advice, as Martin Wolf noted. They might see the nonoccurrence of crises not as the EWE working but proof that the exercise has outlived its use.

There is also the matter of communication: Economists have been aware of self-fulfilling crises and multiple equilibria for the past two decades. Simply put, the only thing worse than shouting “Fire!” in a crowded movie theater when the curtain is burning is to scream at the first sign of smoke, when in fact it is only the projectionist cooking. If you choose little or no communication, then you run the risk of losing credibility for lack of transparency and being accused of not having changed.

All these concerns are valid, but at the end of the day, someone needs to do this dirty work, and barring the operational glitches they too are aware of (after all, this is a work in progress), the IMF-FSB is in the best position to be the silent guardian, watchful guard that the world needs right now. In short, a dark knight…