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Emre Deliveli

Behind Titanic in uncharted waters

5 Ocak 2009
I start the year by painting the Turkish economic outlook, using the global backdrop as the canvas, in the Impressionist style - with short, thick strokes - to quickly capture the essence of the subject rather than gory details.

To avoid Cassandra’s fate, I have chosen to support my outlook with last week’s data, which illustrate some of the main economic themes of 2009 as well as offer hints on what is to come.

First, the Central Bank of Turkey, or CBT, had taken what I deemed excessive risk when it cut its policy rate a surprising 1.25 percent. December inflation has proved the Bank right for now, and the CBT has won the first round at the poker table. However, further volatility in the lira could pass on to inflation, and despite the downward trend in core indices, prices still exhibit a considerable amount of inertia. While the December inflation outturn has almost secured another large rate cut from the CBT in January, it will be interesting to see the Bank play its hand down the road.

Second, November trade data showed that trade is plunging. While falling oil prices and indicators of a sharp slowdown in the last quarter make the contraction in imports hardly a surprise, the fall in exports is more than what economic models can account for and is in line with the rest of the world. In fact, there is increasing evidence that financing constraints account for a considerable part of the decline in trade across the globe. If this is the case for Turkey as well, the recently reported export credit package would be a welcome development. In any case, if exports fall sharply, the contribution to growth from external demand is likely to be smaller than the 0.5-1.0 percent expected by most economists, pulling down growth further. In this respect, trade volume indices, devoid of price effects, will be important for tracking the impact of trade on growth.

Borrowing program for the year
Finally, Treasury’s 2009 borrowing program was largely overlooked, but the fiscal/debt outlook is likely to be increasingly important for the dynamics of the economy. While the recent fiscal adjustments have led some to fear that fiscal tightening is on the agenda with the International Monetary Fund, the budget has just gained more realistic footing, as it was based on unrealistic assumptions such as a 4 percent growth rate in 2009. In fact, while limited fiscal easing is likely to be the case this year, more important will be the other side of the fiscal coin, i.e. debt. For one thing, the deficit is likely to have a limited negative impact as long as public debt ratios do not deteriorate. In a similar vein, with a high debt-rollover ratio, credit crowding out, one of the ghosts of Christmas past, looms ahead.

The global backdrop will nevertheless have important implications on how these three main themes and the rest of the economy will play out: The trajectory of oil prices would affect both inflation and the external balance. There is serious uncertainty regarding the effectiveness of Fed’s monetary policy and the fiscal stimuli many countries are undertaking. It is up for grabs whether emerging market, or EM, outflows will continue, when the U.S. will start showing signs of recovery, or how the expected sovereign bond glut will impact EM borrowing.

These questions, and many more, are left unanswered because we have never been here before. Truth be told, the world is sailing in uncharted waters, with Turkey towed behind. Just cross your fingers that we are not headed for an iceberg.

Emre Deliveli is an independent consultant and part-time lecturer at Izmir Economics University. His daily economics blog is at http://emredeliveli.blogspot.com/
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The humbling of the economist

29 Aralık 2008
In the last column of the year, it would be appropriate to summarize the major events and themes of 2008 in the Turkish economy, starting with a global detour to provide the background.

One major theme of 2008 across the world has been the humbling of the economist: Until as late as the Lehman collapse, many economists did not believe that the U.S. was experiencing its worst financial crisis since the Great Depression. Along with the U.S. financial crisis came a global slowdown.

Monetary policy response in the U.S. was swift, as the Fed became the lender of last resort for the world, while at the same time throwing anything short of the kitchen sink to get credit markets working again, and turning itself, in effect, into the world’s largest hedge fund in the process- the change in the size and composition in the Fed’s balance sheet is one of the big tales of the year. Other central banks were quick to follow in Fed’s footsteps and join the easing bandwagon towards year-end. In effect, gone is Walter Bagehot’s conservative central banker in Lombard Street, replaced by the desire to minimize tail risks. We have also seen the rebirth of Keynesian policies, as many countries have enacted fiscal stimulus packages. Having noticed the extent of the growth pullback, even the IMF Is not Mostly Fiscal anymore, as the Fund has been increasingly supportive of fiscal policy.

In a similar fashion, the roller coaster ride in oil prices was totally unexpected; to see this, just look at forecasts at the end of 2007 and mid-year. Finally, 2008 witnessed the great capital plight: The inflows to emerging markets during the liquidity glut years were sharply reversed, which, combined with volatility, uncertainty, risk aversion and deleveraging, brought down high carry currencies like the lira, where the consensus view early in the year was that dollar versus lira was on its way to parity.

The Turkish economy in 2008
The Turkish economy had already entered a downward trend when it was faced with the global picture outlined above, with growth figures until the end of the third quarter, contrary to the consensus view, relatively unscathed by the crisis. In fact, the most puzzling aspect of the great Turkish slowdown so far has been the trigger-happiness of the economy. Producers and consumers alike have sharply pulled back during the second half of the year, much more than economic theory can count for. Obviously, all the political bickering has not helped, either. Unfortunately, preliminary indicators hint that global developments have started to take their toll on the economy through trade and financing channels in the last quarter, so expect the growth picture to turn ugly.

On the policy side, the unexpected hike in oil prices led the Central Bank of Turkey, or CBT, to reverse its premature easing mid-year, as the impact on inflation became apparent. To its credit, the CBT realized the worsening inflation outlook earlier than markets, but the Bank still had to revise its inflation targets. Recently, the CBT has initiated a strong easing cycle, encouraged by the favorable domestic and global headwinds for monetary policy. However, the CBT is taking more risk than the Fed and other central banks going down the same path, as we close the year with a challenging and uncertain inflation outlook.

In fact, 2009 brings a great deal of uncertainty, not only globally but also for Turkey. This will be a good place to kick off the new year next week.

Emre Deliveli is an independent consultant and part-time lecturer at Izmir Economics University. His daily Economics blog is at http://emredeliveli.blogspot.com/
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Casino Royale in the capital

22 Aralık 2008
The Central Bank of Turkey, or CBT, managed to surpass the Fed in engineering the perfect surprise rate cut last week. The statement accompanying the rate decision leaves no doubt that the Bank’s focus has shifted from inflation to growth, but a closer look is called for.

It may be argued that the Fed’s strong move on Tuesday paved the way for preemptive action by the CBT. However, the Bank was not acting alone: Nearly a dozen central banks cut rates this past week. If anything, it seems that the CBT has a good nose for detecting global trends, as it showed in joining the global rate reduction bandwagon with its surprise rate cut in November. In fact, with more and more emerging markets enacting fiscal stimuli and cutting policy rates, developed and emerging markets’ policy responses during a crisis are finally looking much alike.

It is normal for developed countries to be running countercyclical monetary and fiscal policies, but lack of a strong fiscal hand and fear of depreciations, among other things, have prevented emerging markets to ease money and use fiscal stimuli during downturns. But contrary to earlier episodes, the current crisis has started in developed countries, and emerging markets are now in a much better position to undertake expansionary policies.

Turkey, however, decouples from the relatively more comfortable part of the emerging world in two important aspects: First, while running tight fiscal policies for the past few years, it is still not in a comfy fiscal seat as some of the commodity exporters. Perhaps more importantly, the external financing gap and banks’ preference for liquidity could lead to a slowdown in the traditional monetary transmission mechanism, reducing the effectiveness of monetary policy. While a potential agreement with the International Monetary Fund could partially solve this problem, it will at the same time undoubtedly limit the scope for fiscal policy.

Making sense of the Bank
To support its policy stance, the CBT has been emphasizing the weak demand, the growing output gap and the limited exchange rate pass-through. Moreover, in the current environment of deleveraging, it will be global risk aversion, not lower rates, that will drive foreigners away. However, the CBT is also grossly understating the risks to prices. Inflation in Turkey is still mainly a domestic phenomenon, with service inflation continuing to be sticky, and last month’s flat producer prices reading could as well be due to the plunging oil prices rather than the weakening exchange rate pass-through. In addition, disruptions to capital inflows and liquidity could magnify the second-round inflationary effects from a weaker lira, which is yet another risk the Bank chooses to downplay. It also makes sense for the Central Bank to try to make up for foreign exchange liquidity with lira liquidity, but even if this works, rising domestic liquidity could put further pressure on the currency and prices.

While I understand the rationale of the Bank and even sympathize with it, the CBT is increasingly reminiscent of 007 at the poker table in Casino Royale: Extremely self-confident and willing to take excessive risk. It can be argued that you should be willing to be reckless when you are fighting global recession or global terrorists, as sometimes that’s the only way to walk with the chips from the poker table. But you may also end up emptying your pockets, with the Bank’s two recent policy reversals - in 2006 and early this year - being cases in point.

Emre Deliveli is an independent consultant and part-time lecturer at Izmir Economics University. His daily economics blog is at http://emredeliveli.blogspot.com/
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Growth likely to disappoint

15 Aralık 2008
As you are reading these lines, the Turkish Statistical Institute, or TÜİK, is to release the GDP, or Gross Domestic Product, turnout for the third quarter of 2008 and employment statistics from August to October. We already know that the economy is slowing down fast, but as always, the devil will be in the details. More importantly, the fourth quarter will end up being much worse, as my favorite key indicators of growth, released just before the Bayram, attest to.

Industrial production is widely used in Turkey as a leading indicator of growth by economists, and the dismal October figures released Dec. 5 hinted of a shaper slowdown in the fourth quarter. It is never wise to make too much of one month of data, but the November capacity utilization figures, also released on the same day, suggest that the weak trend in industrial production is likely to continue. Moreover, the weakness in industrial production is across the board, as the slowdown has spread from sectors that depend on domestic demand to more external sectors since the end of the summer, when the first signs of the slowdown emerged- see my blog entry tomorrow for more on this.

The details of today’s growth release are likely to reveal that growth in the third quarter has mostly been a product of Turkey’s internal factors. But with the developed countries slowing down fast, Turkey has started to feel the effects of the pullback in global demand in the last couple of months. In this respect, TÜİK trade volume indices, also released Dec. 5, show that both exports and imports are sharply contracting. While TÜİK also releases trade figures, the indices, free of price effects, paint a more accurate picture for the real economy, and therefore while usually overlooked by economists until now, they are likely to be followed more closely in the future. Again, we should not make too much of one month of data, but for now, the data tell us that not only external demand is unlikely to contribute to growth significantly in the fourth quarter, the continued contraction in capital and intermediate goods imports paints a discouraging picture for growth going forward.

To contract or not to contract
Looking forward, while most economists are expecting a small positive growth between 0 to 1 percent in 2009, negative growth cannot be overlooked, either. At the end of the day, we are likely to see that our fate is increasingly taken off our own hands and tied to the fate of the global economy. The trillion-dollar question everyone is asking is whether the U.S. economy is about the hit bottom and is likely to recover in 2009 with the help of Fed’s quantitative easing and the fiscal stimulus. If that is the case, Turkey may indeed end 2009 with small positive growth, with the economy starting to show signs of recovery in the second half of the year. But if you agree with Dr. Doom (the NYU professor Nouriel Roubini who has so far been essentially right in predicting the global crisis) that even tougher times are ahead for the world economy, you should not be surprised to see Turkey grow less than -1 percent next year.

But the fact is that, negative growth or not, the Turkish economy is to grow significantly below its potential, not only this year, but also in 2009. In this challenging outlook, we are looking for a tough year for the Treasury and the Central Bank. This is where I will pick up next week.

Emre Deliveli is an independent consultant and part-time lecturer at Izmir Economics University. His daily Economics blog is at http://emredeliveli.blogspot.com/
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