Emre Deliveli

The VolksWagen debate is irrelevant

29 Haziran 2009
The World Bank introduced its annual Global Development Finance report with short seminars in Ankara and Istanbul late in the week. I found the Istanbul leg a much more appeasing introduction than the markets’, when the growth revisions in the report led to sharp sell-offs amidst a mood of uncertainty on Monday. The seminar featured presentations by two of the principal authors of the report, Mick Riordan and Dilek Aykut, as well as one on the Turkish economy by İş Yatırım’s Serhat Gürleyen. The World Bank economists concentrated on their respective sections of the report, Aykut on private capital flows to developing countries and Riordan on global economic prospects. The tone of the presentations was one of muted optimism, with both emphasizing that while the impact of the current crisis had been much deeper and broader than previous ones, recovery was on the way. Unfortunately, this seeming dichotomy got journalistic instincts rolling, and other important messages got lost in the process.

For example, the presentations had some important Turkey implications. For one thing, among developing regions, Europe and Central Asia has been affected most from the crisis, with Turkey’s immediate vicinity of Eastern Europe worst hit. In fact, even the Bank’s 2009 Turkish growth forecast of 5.5 percent does not look that bad next to Lithuania, Latvia or Russia. More importantly, banking sector woes, the region’s Achilles’ heel, have not been an issue in Turkey, partly because of the painful lessons of the 2001 crisis. Another factor, highlighted by Gürleyen, is the households: With low indebtedness and long foreign exchange positions, they have been much more cooperative than their European counterparts. I believe that such strengths are some of the key factors behind the relative resilience of Turkish assets despite all the swords of Damocles.

In a similar manner, the Bank’s Ankara lead economist Mark Thomas set a tone of cautious optimism for Turkey in his opening remarks, with his argument of green shoots based on data as well as anecdotal evidence from the IFC, the Bank’s private sector lending arm. However, all data lag behind, and most recent figures hint that the spring recovery might have been largely induced by the tax cuts and therefore temporary. For one thing, the latest real sector indices indicate that destocking seems to have come to an end in May and investment continues to look dire. As for anecdotes, Kaan Sarıaydın, former head of Morgan Stanley Istanbul, who now gives talks to businessmen across the country, was telling me over coffee after the seminar that while Thomas’ story held well until June, the picture has been changing for the worse as of late. If so, the Turkish recovery could be shaping like a W or a very wide V.

But regardless of who wins the VolksWagen debate, it is important not to get complacent if Turkish markets continue to hold well or if the recovery turns out to be sharp.

For one thing, we all agree that a structural fiscal framework is needed, with or without the IMF. However, the crisis has surprisingly led us to tuck labor reforms underneath the carpet.

With unemployment very high and likely to improve slowly, measures to decrease the cost of hiring workers and making them more employable should be key.

In fact, the Bank has been involved with commendable work on labor market and educational reform as well as the informal sector. It is a real pity Thomas’ comments on these issues were largely ignored in favor of a pointless debate.

In fact, maybe a W recovery would be better for Turkey in the sense that it would serve as a wake-up call for the folks at the government and remind them to get off the complacency wagon.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.
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Building a new system with BRICks

22 Haziran 2009
Despite claims from the sage of Omaha that he had nothing to do with it, the dollar was buffeted last week by debates over its status as a reserve currency during the inaugural summit of Brazil, Russia, India and China, the so-called BRICs.

While the summit officiated a term created by Goldman Sachs chief economist Jim O’neill nearly a decade ago, it would be a bit ambitious to coin it the “epicenter of world politics”, as Russian President Dmitry Medvedev put it. While the summit had a noble agenda, including a fairer world order and more say for emerging markets, the dollar debate took the attention.

In fact, the argument is not that new. It first appeared in the height of the financial meltdown, and after being on and off, resurfaced again in the St. Petersburg Economic Forum early in the month. At the time, the Russian plan, which envisaged a set of regional reserve currencies accompanied by IMF’s special drawing rights (SDRs), did not get much attention, as Russia has traditionally used the forum to argue for the ruble as a reserve currency.

While it has certain advantages, the use of a national currency as reserve is bound to create conflicts of interest between domestic and global issues. Keynes had actually put forward the “bancor”, to be based on the value of 30 representative commodities, during the formation of the post-war monetary system in Bretton Woods, but the idea was rejected by, surprisingly, the U.S. While the global crisis has acquainted everyone with him, it turns out that this long-dead economist has other ideas in his sleeve that continue to thrall us.

On a more practical level, there aren’t enough dollar assets out there to satisfy the appetite of governments: Out of the $7 trillion of central bank reserves, two thirds to three fourths are in dollars, with the bulk in long-term U.S. government debt. In fact, more than one half all long-term U.S. Treasuries is parked in official bodies, definitely not a healthy concentration for any financial asset, for the issuer as well as the holders. No wonder the Chinese got jittery during the great upward move in yields.

However, setting up a new reserve currency is more easily said than done. Let’s take SDRs: Notwithstanding their limited use as country deposits with the IMF and the lack of a payment system set up with SDRs, illiquidity is the primary issue that needs to be surmounted before they could even be a candidate for a reserve currency. Issuance of SDR bonds by the IMF is definitely a step in the right direction, but the amount is miniscule, and it is not clear whether the bonds will be tradable.

Then, a second-best solution would be to decrease the role of the dollar, replacing it with other currencies. In fact, agreements within the BRIC to use their national currencies for trade transactions and Chinese currency swaps are steps in the right direction. However, these steps are very small, and while BRICs would indeed need to lead the way, they would have to sacrifice a lot more. For one thing, China, which holds nearly one third of the official reserves, would need to increase its consumption from the current one third of GDP to at least a half. As a more general point, BRICs and other emerging markets would have to shift their saving patterns for the correction of global imbalances and be able to swallow the appreciated exchange rates that come with the package.

A wise man once said that with great power comes great responsibility. It is obvious that BRICs have the power, and they have not been shy to show it of late. But until they have the guts to take on the responsibility that comes along with it, we are all stuck with the greenback, like it or not.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.

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Much ado about nothing by PM

8 Haziran 2009
Prime Minister Erdoğan disclosed a large stimulus package on Thursday. As is the norm for Turkish economists, comments on the package have covered the whole spectrum, all the way from declaring it a revolution to utterly useless. The package is based on three pillars: Finance for small and medium-sized enterprises (SMEs), labor market measures and investment incentives. Of these, the first has been long in the making and is therefore not much of a surprise. It involves the setting of a credit guarantee fund with 1 billion Turkish Liras from the Treasury, which will guarantee 65 percent of a loan, with the lending bank assuming the rest.

However, the firms undertaking the scheme should have no overdue loans, so the program will not be a great help for those SMEs already in financial distress.

Temporary state employment for 120,000 forms the essence of the labor market measures. While the government will definitely do better than assigning half of these workers to digging holes and the rest to filling them, the caricature of such policies used during the Great Depression, one should nevertheless not expect a lot from this.

On the downside, there is a real risk that these workers will stay on, especially if the government decides to go for snap elections. As for the other measures, most are unfortunately just rewrapping, i.e. policies that were already in place.

As for the new investment incentives, an overhaul of the outdated and inefficient Turkish incentives web has long been overdue. The announced steps, while far from perfect, are definitely a step in the right direction. Moreover, given the importance of private investment for growth in the medium-run, the idea does make sense. However the strains facing the corporates and the uncertain consumer demand are sure to put a break on the effectiveness of the program. In any case, with the time lag of new investment, the incentives are unlikely to boost the economy in the short-term anyway.

All in all, these measures are likely to support growth through domestic demand in the near term. However, I find it extremely disturbing that they were presented without the accompanying financing picture. In fact, we know neither how much these new measures will cost nor what, if anything, the government has in store for restoring the fiscal books. Such an approach not only bodes ill for fiscal transparency and predictability, but also runs the risk of losing any short-term gains of the measures in the medium-run. Even more worryingly, the PM’s answer to a question on financing hints that this is no inadvertent omission: "Do not worry, we will make all the payments."

If that is indeed the case, no wonder the IMF is being kept off the table. But the government should know better: With this mindset, it will be only a matter of time before fiscal patching will start straining the private sector both through quantity (crowding out private sector) and price (higher interest rates) in a sense which would make the recent lending freeze and last week’s bond shakeup pale in comparison.

The Central Bank could keep the dice rolling for some time with liquidity injections, technical rate cuts and the like, but without capital flows resuming, it doesn’t look pretty.

The government is continuing with its laundry list of measures rather than a comprehensive medium-term program or an IMF agreement.

But then again, this has been its approach to the crisis from the very beginning: Throwing in anything but the kitchen sink without any sense of prioritization, impact analysis or a fiscal roadmap. If anything, no one can blame the government for inconsistencyÉ

Emre Deliveli is a freelance consultant. His daily

Economics blog is at http://emredeliveli.blogspot.com/.
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Twin deficits: A tale to end in tears

1 Haziran 2009
Economy Minister Ali Babacan’s recent meetings with economy columnists and market economists confused me yet more on the fate of the IMF-Turkey soap opera, on which I continue to write half-heartedly, knowing that while you are probably sick of reading about it, thinking about it reveals important dynamics of the Turkish economy. The participants were equally divided on a no deal and a deal right before the October World Bank-IMF meetings in Istanbul. The minister contributed to the uncertain atmosphere by declaring both that there wasn’t a consensus in the government on a deal and that a deal was being worked on. However, one thing is certain: The government has decided to keep the Fund at a literal stand by, only to be called upon when deemed necessary. But necessity could come under many guises.

With the yearly figure expected at 1-2 percent of GDP, the once-feared current account deficit has turned into a ghost of Christmas past. Notwithstanding the optimistic tourism revenues and oil price assumptions underlying this projection, it is clear that the deficit will stay at low levels. However, financing could still be an issue: The Balance of Payments has so far been balanced out thanks to the relative resilience of corporate borrowing and the puzzling errors and omissions item, part of which are probably repatriated deposits from abroad. With these likely to be weaker going forward, a significant reserve rundown should be expected without an IMF deal. September and October, with hefty external debt repayments, will be the key months.

On the fiscal side, the government seems to have been encouraged by the Treasury’s ability to manage the high borrowing, with a deficit of 66.6 billion liras (no pun intended) and a rollover ratio of 120 percent in the pipeline. However, congratulations should go the catcher, not the pitcher: With bonds starting off from a low base in their balance sheets, credit demand falling and risk rising while deposit growth holding up and regulatory changes allowing them to shift their Treasuries to hold-to-maturity portfolios, the banks would have turned to bonds even without Central Bank’s (CBT) excess liquidity through open market operations and aggressive monetary easing. Of these, only liquidity is here to stay, so even with an IMF deal, it is a much less bond-friendly world out there. As a more general point, notwithstanding the relative strengths of the Turkish economy in the region, the lira does not offer the attractive risk-adjusted returns it once did.

My only consolation is Finance Minister Mehmet Şimşek’s declaration that the government is working on structural fiscal measures such as revenue administration, municipality expense control and a fiscal rule, which would help keep the deficit under control for this year and ensure the sustainability of debt dynamics.

However, the recent actions of giving yet another tax break to municipalities and authorizing the Grain Board to issue special government securities make the Minister’s remarks sound like an April Fool Day’s joke.

The latter, which is also clever accounting as it will not show up in the budget books, brings to mind the aftermath of the 2001 crisis, when similar issuance by the CBT and banks had resulted in a significant deterioration of debt dynamics that took a few year to sort out. In any case, I still have to figure out why the government would go for a virtual IMF program without the credibility (and the money) of a real one.I am not sure which of the factors above will break down first. But when one does, we are likely to see the unfolding of a drama that will leave not only the viewers but also the participants in tears.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.
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The curse of the emerging world

25 Mayıs 2009
In a matter of days, my contrarian argument that the IMF agreement was not a done deal has morphed into the consensus view. The hopes of the few optimists were shattered after Central Bank, or CBT, President’s admission of a Plan B last week; the very same Durmuş Yılmaz had noted that an IMF deal would be a good idea only three weeks earlier. I remember first voicing my doubts over the deal chatting with a bond trader mid-March, right before the CBT delivered the expected 1 percent cut. The trader was extremely bullish on Treasuries, given that the CBT would continue with rate cuts and the stand-by would materialize shortly after the local elections at the end of the month. Fast-forward one month, and the bond market was indeed rallying strongly in mid-April. After all, now that the government had revised its macro targets, an IMF deal was imminent. With expectations of another 1 percent cut (the Bank ended up delivering 0.75 percent) and the rosy global environment, no wonder Treasuries rallied.

If anything, the inconsistencies in the revisions, especially on the fiscal side, should have hinted that something was amiss. In fact, I was irked enough to question the wisdom of crowds, risking of looking like a complete fool. Each day after that has brought more people to my camp, with Yılmaz’s comments and the plethora of analyst reports popping up in my mailbox right afterwards sealing the matter. However, notwithstanding the bond pullback, Turkish assets held quite well. To understand this interesting phenomenon as well as the government’s IMF strategy, we must look at the bigger picture in the emerging world.

The rise of the emerging markets

In fact, Turkish assets have not been that spectacular when compared to other emerging markets, or EM, for the last couple of months: It is the emerging world as a whole that has been performing well. Part of this reflects the continuation of the global green shoots scenario: Never mind that U.S. banking woes have yet to resolve and housing prices, where all the mess began in the first place, have yet to stabilize. In fact, with these two hanging in thin air, my only necessary condition for revival that is satisfied is the inventory depletion. Yet despite many major economists thinking along these lines, the optimism continues unabated.

To give markets some credit, one place where there is marked improvement is the credit front. With central banks throwing everything but the kitchen sink, funding costs and counterparty risks have returned to pre-Lehman levels. Similarly, risk aversion, while still high, has fallen remarkably. With markets flushed with liquidity and carry trades once again profitable, hedge funds and the like have turned to EM. With all the conditions that drove EM to negative territory in the first quarter reversed and the reemergence of decoupling (what The Economist calls version 2.0), no wonder EM are once more in vogue.

This emerging market-friendly environment is actually Turkey’s curse, as it is causing the government to drag its feet towards the Fund. Never mind that Turkey is, despite the PM’s claims that the crisis would pass tangent or just brush past in the worst-case scenario, in the bottom tenth percentile in terms of growth performance, not only at last year’s numbers, but also according to the IMF’s 2009 projections. Without a coherent fiscal framework that will put the much-needed structural reforms in place and take care of debt sustainability, the crisis may not pass easily, either- despite the PM’s declaration on Friday.

It is really fun to ride the emerging market wave- until a great white spots you and bites right through your board. Once you end up missing a leg or an arm, it is not much use to cry for the lifeguard.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.
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Cheerleading’s unbearable lightness

18 Mayıs 2009
Last week, I provided an introduction to the rationale behind the "all is well, send the doc away" camp. However, I failed to mention that this philosophy is in fact the latest reincarnation of the macro cheerleading that has been going on for some time. This perennial optimism rests on three pillars: That we have seen the bottom of the contraction, the external gap is shrinking and fiscal deficit can be financed easily and cheaply. We received more data on each of these this past week to form a better evaluation.

Monday’s April Capacity Utilization did indeed hint that economy’s trough could have been at the end of the first quarter: Industrial production might have bottomed out in March, as the capacity utilization numbers point to a slight recovery in April after adjusting for working days and cyclicality. However, with the tax cuts ending in June and the uncertain environment, a W-shaped recovery cannot be ruled out at this stage. W, U or V, the recovery is likely to be slow and painful.As for the external gap, Monday’s March release reveals that the current account deficit continues to shrink on the back of a slowing economy and lower energy prices. But the cheerleading squad insists on overlooking some bad omens: First, while single successful rollover stories, like a bank achieving 100 percent a couple of weeks ago, adorn headlines, corporate rollover ratio is down to 63 percent. Second, the fall in tourism revenues is gaining pace. In this respect, I am in awe that the cheerleaders are pointing to the robust summer reservations, most of which are not confirmed until the last minute.

A darkening picture in tourism

In any case, the simple fact is that we are past mid-May, and almost all the major destinations are noticeably less crowded compared to last year. I know that, writing from Marmaris this week, I am at a minor observational advantage, but tourism statistics are really not that difficult to observe in real time.

All in all, when you add the numbers up, 7-10 billion dollars of IMF money seem to be necessary to cover the external gap, even after assuming that the IMF deal will be supportive of debt rollover and capital flows. As for the fiscal deficit, even the incurable optimist could not but notice the one-off or temporary factors behind Wednesday’s benign April headline figure: Rolling over of tax receipts from March, dividend income from state banks and GSM license fees. In fact, the IMF-defined primary balance, which excludes the latter two, is around 0.2 percent of GDP, down from 1.9 percent at the end of last year. More worryingly, the deficit is likely to continue to worsen. The almost-consensus view is a year-end bill of around 60 billion liras, one and a half times the government’s projection. While such a large amount could be acceptable this year, the never-ending IMF saga is proof that the government is unwilling to undertake precautionary measures to ensure debt sustainability in the following years.

In terms of financing, the Treasury does not seem to be hard pressed except for the heavy redemptions in August and October. However, failure to sign an agreement with the IMF is likely to lead to more fiscal questioning and finally sting via an increase in the country-specific risk premium. In that scenario, I would not expect a sudden rise in yields, but a gradual creep upwards.

With the Central Bank approaching the end of its easing cycle and real yields at record lows, I also hold onto my rather contrarian view that there is limited opportunity for further downward move there.All this cheerleading is good even if you are not long Turkey; if anything, it keeps the morale high. But like all artificial stimulants, once the effect wears off, an awful lot is going to feel really down.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.
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All is well, send the doc away

11 Mayıs 2009
A couple of weeks ago, I had discussed whether there was any basis for the green shoots a la turca scenario, i.e. whether the economy was on the way to recovery. At the time, the answer was a resounding no. Last week’s March Industrial Production release, despite the 20.9 percent yearly contraction, was interpreted by analysts and media alike as positive, with the lower-than-expected figure showing that the pace of the contraction was slowing down.

However, a closer look proves otherwise: Once you adjust for the number of working days and cyclicality, the monthly contraction in March turns out to be no less than the previous month. If anything, these latest figures have all but ascertained a double-digit slowdown in the first quarter.

But these statistics are lagging behind more than a month. Therefore, I will be looking for hints of recovery in today’s April Capacity Utilization outturn. An across-the-board improvement there would confirm signals from the real sector confidence indices that inventories are finally being run down, a necessary condition for recovery.

Even without clear signs from producers, there are other reasons to be marginally optimistic. Consumer credit seems to be thawing, albeit at a very slow pace. Yet it is way too early to make too much out of this, as it could also be a last-ditch attempt by cash-strained consumers. It is, after all, all quiet on the commercial credit front, although the latest Bank Loans Tendency Survey points to easing conditions from the supply side. The much-awaited credit guarantee fund could lead to more slack there.

Markets have been providing ample ground for optimism as well. The lira has held reasonably well, and demand at last week’s Treasury auctions was significantly more than expectations on the back of a record-low inflation print and favorable global sentiment.

Bond markets are supposed to intimidate, as Clinton adviser James Carville famously noted once. Obviously, he has not been to Turkey: With the banks literally banking on rate cuts and another 0.50 percent cut on the Central Bank’s menu for Thursday, bonds just wet appetites here.

Moreover, the slowdown has tamed the country’s chronic current account deficit, as we will ascertain again with the release of the March turnout this afternoon. Therefore, if the external gap is shrinking, thanks to the recession, and the Treasury can borrow easily and at low cost, compliments of the Central Bank, who needs the IMF? This reasoning has started to surface here and there, and, in my opinion, is even more dangerous than trying to pretend that the Fund is around the corner.

In addition to the fact that this strategy has the rather unpleasant side effect of crowding out private lending and delaying the recovery in credit markets, public finances are deteriorating rapidly and the fiscal gap will need to be plugged with IMF money to the Treasury at some point. Furthermore, the coherence of an IMF program is essential for debt sustainability, one of the pillars of economic stability in the early AKP years.

If the government is dodging the Fund because it plans for more fiscal stimulus, it should know that with the high debt rollover and a weak primary balance, it is mixing a poisonous cocktail. In a similar fashion, the Fund’s structural measures that the government is Ğ supposedly - vehemently opposed to ensure that it will not try to renege on its promises at the next general elections.

Odysseus tied himself to his ship’s mast to resist the lure of the sirens. I have known for some time that the government was not as wise. But I am surprised to see that the crew and the passengers are handing a knife to their captain- so that he can free himself and head for the cliffs.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.
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(Dis)inflation report and sloppy reporting

4 Mayıs 2009
I had commented on the inconsistencies in the government’s latest macro framework two weeks ago. I am not sure if they were envious of the attention, but the Central Bank has now joined the bandwagon of sloppy reporting with its latest Inflation Report. The feature of the report that got the most attention was the inflation forecasts, which were revised down to 6 percent for this year, 5.3 percent for 2010 (both mid-points of the Bank’s forecast range) and 4.9 percent for 2011. The 1 percent difference between my own year-end expectation and the Bank’s is just a matter of the alphabet: Bank’s outlook of an L versus my projection of a very wide V for the path of inflation. While inflation is expected to fall sharply in the next few months because of base-year effects, I expect it to creep upwards later in the year, while the Bank’s outlook is for inflation to more or less stay put after the sharp falls.

I would, however, not be too surprised if the Bank turns out to be right at the end. After all, they have infinitely much more research power than my team of three (me, my laptop and my Eviews statistical package). I would even be just slightly in awe if inflation continued to fall once global and domestic conditions cease to be supportive of disinflation even though I am even more skeptical of the Bank’s 2010 and 2001 figures. However, at the end of the day, it is not the numbers but the Bank’s policy stance that I am worried about.

The Central Bank’s main focus for the past few months has been thawing credit markets and reviving growth. To adopt such a stance, the Bank has effectively outsourced inflation targeting to exogenous events, betting that the recessionary domestic and global environment will keep prices at bay. In a similar fashion, the Bank is implicitly counting on the IMF program to take care of currency and fiscal risks.

Of course, other than the small detail that the IMF program still hangs in the air, this strategy involves major risks. For one thing, the easing has only exacerbated banks’ preference for bonds over credit. Moreover, rate cuts run the risk of slowing down locals’ foreign currency sales, which have been an important safeguard of the lira’s relative strength. Then, the corporate sector’s large foreign currency position would suddenly turn out to be a bigger danger than the Bank admits at this stage.

Despite all this, the part that seemed sour to me the most in the Inflation Report was the Bank’s analysis of output gap and inflation under different policy scenarios since November 2008. Such analysis could lead to dangerous questions: For one thing, it would be perfectly right to question, after reading the analysis, why the Bank had not pursued similar aggressive policy during when inflation had turned out to be higher than the Bank’s targets. For my part, I would have liked to see some justification for this asymmetric policy response.

Moreover, anyone who has delved into Economics at a somewhat rigorous level would know that such counterfactual exercises can be highly inaccurate. In addition, publishing such analysis in an Inflation Report runs the risk for misinforming the masses on the power of monetary policy, in effect raising the expectations bar and forcing the Bank to even more accommodative policy. Don’t get me wrong, I am all for transparency and information; I just think that putting the material of a working paper in an Inflation Report is not the way to go.

While the Bank’s actions could undermine its own efforts to combat the economic contraction, I have come to learn to live with this and even admire the Bank to a certain extent, as one admires a daredevil. However, it seems that the Bank is trying real hard to shoot itself in the foot.

Emre Deliveli is a freelance consultant. His daily Economics blog is at http://emredeliveli.blogspot.com/.
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