Emre Deliveli

Spring has arrived, and along with it "green shoots." I am not talking about horticulture, but the new buzzword for signs of recovery from the crisis. While I have my own green shoots as well, I think it is way too early to start rejoicing.

Take Fed Chairman Bernanke’s remarks on signs of stability in the housing market. Rising house prices for the last two months (a first since 2006) might not be reflecting much more than the temporary slowdown in foreclosures, as banks are waiting the details of the government’s take on the problem. Similarly, while the sense of freefall could end soon, as Obama economic advisor Summers has recently notes, the decline itself shows no signs of stopping; it is only its rate that is decelerating. Inventory depletion and deleveraging, my other two conditions for revival (the first being housing stability), still look far away.

However, markets were not acting on such fineprint last week. Rather, fears of nationalization and worries about the bank stress tests to be disclosed next week were exacerbated by IMF’s new estimate of financial losses at $4,100 billion. In fact, the Fund was the nasty party crasher, as it also released significant downward revisions to its growth forecasts.

While the world has been preoccupied with the Fund’s growth downgrades in its World Economic Outlook, or WEO, report, I saw my own green shoots in its analysis of when the recovery would start. This section of the WEO suggests that the worst of the global recession may be behind us, while at the same time hinting that the recovery will be slow and painful.

I could see even more green shoots in the least likely of places, the latest European purchasing managers’ indices. While the largest monthly rise in the index’s history provided much-needed relief after the gloomy Fund forecasts, I would not make too much out of this noisy headline number. However, a closer look reveals widespread inventory depletion in manufacturing, the sort I have been looking for in the U.S. Oddly enough, Europe may be about to start the ascent to recovery as well.

The government disclosed the Pre-Accession Economic Program, or PEP, last week, providing a much-needed update to its outdated economic projections. Economist reaction was worthy of the profession, varying between those who found the new figures very realistic to completely unrealistic. But the truth is not so black and white; like a good Spaghetti Western, there was the good, the bad and the ugly in the new numbers. To start with the good, I am glad that despite the acronym, the government forewent pep talk on the growth side. Being one of the first to go for a significant contraction (5 percent) for 2009, I am pleased at the government’s admission of the inconvenient truth by projecting growth at -3.6 percent this year. But, contrary to conventional wisdom, which is going for negative growth next year as well, the government’s 2010 projection of 3.3 percent is in line with my own forecast of 2 percent to 3 percent.

Before being accused of unfounded optimism, I have to note that Turkey would have to significantly underperform peers if it were to shrink while the global economy recovers next year, which is more or less the consensus baseline scenario.

Similarly, expecting negative growth is in sharp contrast with the prospect of a large IMF program, as much of the impact on growth would be felt next year. I have to say that I do have my doubts on some of the details of the PEP growth figures, such as a sharp rebound in private investment and a large contribution of net exports. But when the numbers add up, the government’s numbers for next year are not out of whack at all.

If the growth projections classify as good, unemployment would certainly fit into the bad category. The government’s forecast of 13.5 percent at year-end is not only totally fictional; it is also in sharp contrast with its own growth predictions. Last week’s employment statistics, which showed unemployment at 15.5 percent in the December-February period, have revealed that firms have started laying off workers with great abandon in the first two months of the year. Even under optimistic scenarios, the vast army of the unemployed, currently at 3.5 million, is on its way to surpassing the population of the capital. Even more worryingly, due to the inherent asymmetries in hiring decisions and Turkey’s own structural problems in the labor sector, the rehiring process will be painfully slow.

If the unemployment outlook is bad, the fiscal picture is downright ugly. While the projected IMF-defined primary (net of interest payments) deficit of 0.6 percent is more optimistic than my own projection of 1.5-2 percent, the real issue lies elsewhere. In fact, I would not be that worried if the government did indeed run a larger deficit this year, especially if the extra money went to good use. However, the surpluses for the next two years, 0.5 percent and 0.6 percent respectively, are not viable from a debt sustainability point of view, as rough calculations show that a surplus of 2.5 percent would be needed to keep debt in a sustainable path.

Moreover, the supposed fiscal adjustment from this year to the next is actually a marketing gimmick; the extra tax revenues from the growth differential between the two years would be enough to ensure the difference. So, take my word for it: Those at the IMF Turkey desk were probably scratching their heads when they saw these fiscal figures, as they are definitely not Fund-stamped.

I am aware that this is rather unpleasant fiscal arithmetic, but reality does indeed bite. So, when expectations have converged on the IMF stand-by agreement as an already-in-the-bag $45 billion deal, it might be a good idea to get a rabies shot. The stand-by will no doubt be signed sooner or later, but markets will start grumbling if the agreement is still dragging along come mid-May, especially after the heavy Treasury redemptions on May 6.

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

Households are faring well, and so are the banks. As for the non-financial sector, there isn’t much to be afraid of. Before devout followers of my columns accuse me of a triple jump worthy of a world class figure skater, I have to say that the words above are not mine- rather they are my liberal translation of part of a speech made by Economy Minister Mehmet Şimşek last week. Honestly, if all the main parts of the economic engine are well-oiled, as the minister claims, then I believe I have been wasting my time (and yours) writing about a crisis that doesn’t exist. A closer look is in order.

To start with the non-financial sector, I find it almost Woody Allenesque that the Minister’s comments appeared on the same day industrial production reached new lows. While March capacity utilization has hinted that industrial production could have hit bottom in the first quarter, other leading indicators such as real sector confidence indices and both manufacture and imports of capital goods suggest that the recovery is likely to be slow and painful, as firms have been cutting back on investment plans. The fact that non-financials owe more than $150 billion of foreign currency debt, about two thirds of which is to Turkish banks, is further confounding the picture.

In fact, the real sector’s woes are, in turn, increasingly showing up in the assets side of the banks’ balance sheets as rising non-performing loans, or NPLs and tightening credit. It is true that there is a demand and supply side to every good, and credit is no exception. But it would be a bit far-fetched to dismiss all of the decrease in loans as a demand pullback- as would be explaining the large margin between deposit and loan rates with the appealing "greedy bankers" explanation. Moreover, in the current uncertain environment, banks are likely to ration credit as well, as economists Stiglitz and Weiss explained almost three decades ago - one of the works that brought the former the Nobel Prize in 2001. The idea is not that novel for today’s Turkish banks, as the upward trend in the concentration of loans as well as anecdotal evidence certainly point to rationing in the credit market.

Unfortunately, credit is not the only thorn in the so-called rosy banking picture. For one thing, banks have literally been banking on rate cuts in the last two quarters. While, contrary to conventional wisdom, they did not profit extensively from the bond market bottom-fishing in the last quarter of 2008, banks have nevertheless both taking part in and benefiting from the rally in bonds on the back of the Central Bank’s aggressive monetary easing. Even under an optimistic scenario, most of the gains have already been realized. In addition, even though it depends on important exogenous factors such as the IMF agreement and Central Bank actions, liquidity is likely to be tighter going forward.

Turning to households, it is true that Turkish consumers are not nearly as indebted as their Eastern European counterparts. However, "mean" figures that ignore the distribution of debt can understate the true nature of household strains. A cursory look at the Bank Association’s latest consumer & housing loans report, using data from the third quarter of 2008, reveals that low-income households are disproportionately more indebted relative to their income. Simple back-of-the-envelope calculations taking into account disposable income point to rising defaults among low-income borrowers. Given the relatively more blue-collar nature of the job losses, the rising unemployment rate will definitely be a catalyst. Needless to say, this would deal yet another blow to banks.

Given all this, I am really glad that households, firms and banks are all bracing the crisis well. What if they weren’t?


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

Solace may be the best word to describe markets last week. Signs that the U.S. economy might have hit the bottom, a boost from the G20 meeting and more lenient U.S. accounting rules for toxic assets all contributed to the relief that decreased risk aversion and lifted markets. But at the end of the day, these are just quanta, tiny pieces of data that do not change the big picture at all. Take the U.S. economy. I maintain my view, stated in this column at the beginning of February, that the U.S. will not start recovering before inventories are worked down, household savings rise or house prices stabilize and banks get rid of their toxic assets. Last week’s housing data were mixed at best. As for the toxic assets, I cannot help but wonder how the banks would be willing to sell those (the essence of the Geithner plan) unless they are coerced by the stick of mark-to-market accounting.

In a similar fashion, I do not believe that much came out of the G20 meeting. The summit fell short of a global stimulus package towards correcting global imbalances or concrete action against protectionism, Moreover, as I had feared, the gathering was diluted by measures towards tightening financial regulation; definitely important matters, but totally irrelevant to the problem of containing the global recession. But, as I had stated in a special piece for this paper last Tuesday, the smaller the expectations, the greater the bliss, so the 1.1 trillion package and the five-trillion stimulus (U.S. dollars) were more than enough to lift markets.

In fact, a closer look shatters this rosy picture: For one thing, the stimulus is nothing but the IMF estimate of the rise in G20 government deficit from 2007 to 2010. Moreover, at most a third of the package is new commitments, the rest being simply shinier wrapping. Finally, the bill is not as emerging-market friendly as you’d think. For example, only about a third of the $250 billion of special drawing rights (SDRs, IMF money that can be used as foreign exchange reserves) will be available for middle-income or poorer countries. Still, even the word of half a trillion dollars of new provisional IMF money, along with the announcement that the Fund was easing loan payments for borrowers, provided yet another boost for emerging markets. While Turkey’s external debt payments were reduced by $2.1 billion (18 percent of total) this year, it was the news that Turkey and the IMF had reached an agreement that buoyed markets.

In fact, Turkey could not have asked for better conditions: A good global environment, yet a better one for emerging markets and the best for this particular emerging market. In this setting, domestic data were unsurprisingly overlooked. But these quanta were nevertheless hiding bad omens. For example, economists concentrated on the 2008 GDP figures and March inflation, which they took as non-negative. But more important than these were the trade statistics: Official February turnout and preliminary March exports. Both pointed to a near-double digit yearly contraction in growth in the first quarter, which will probably confirmed by Wednesday’s February industrial production data. As for the IMF deal, call me a skeptic, but with the primary balance set to fall into deficit territory, I will have to see the ink on the agreement before I become convinced.

In the global tunnel, there is definitely some light. But for one thing, we do not know how far that light is- or whether it is the sunshine or the lights of an approaching train. As for Turkish assets, I know I am in the minority, but I kind of feel like Jack Nicholson walking into his shrink’s office and lamenting upon seeing the other patients: What if this is as good as it gets?


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

There is a busy domestic and international agenda next week, which could spit out quite a bit of surprises.

Inflation could go for another upward surprise on Friday, as my own analysis points to a turnout of around 1 percent, somewhat higher than market expectations of 0.8 percent. While they are rather crude preliminary indicators of the official figures, a nasty April Fool’s day joke from the Istanbul Chamber of Commerce indices would increase the likelihood of a higher-than-expected turnout on Friday. In any case, a 1 percent reading would leave yearly inflation roughly unchanged, whereas the I index, the Central Bank’s favorite measure of core inflation, could continue with its crawl downwards. But this month’s figure will not change my somewhat unconventional conviction that the Bank (as well as most analysts) is taking many inflationary risks for granted. In fact, I would not be surprised if inflation edges up to the upper portion of the Bank’s forecast range of 5.4-7.2 percent after hitting 6 percent by the end of the summer.

At the end of the day, however, even a higher-than-expected March inflation is unlikely to move markets or change anyone’s outlook. The burden of providing the weekly shocker will instead fall on growth and to a lesser extent the trade balance, both of which will be released tomorrow. With growth, it is not a question of whether the economy has contracted in the last quarter of 2008, the issue is by how much. Here, I again find the market expectation of 5.8 percent (year-on-year) a tad bit of too optimistic and would not be surprised if the yearly contraction approach double-digit territory.

Another surprise could come from the trade balance, but here the problem is one of measurement. The well-known link between oil prices and Turkey’s net energy imports has recently broken, making a good forecast of the trade balance rather difficult. In any case, at this point, I would pay more attention to the Turkish Exporters Association’s monthly export figures for March rather than the official statistics for February. I am keeping my fingers crossed that we will not fall to yet another April Fool’s day joke there.

But even a real blow from growth will pale in comparison to a shock bomb from the international front. Here, while the international agenda is quite busy, with such heavyweight items as the European Central Bank interest rate decision, purchasing manager indices on both sides of the Atlantic, and last but not the least, U.S. non-farm payrolls, the real bliss or heartbreak could be the G20 summit on April 2. I have written a comprehensive analysis of what the G-20 should and will do for Hürriyet Daily News & Economic Review, which will appear tomorrow.

But to give out a few spoilers, a global fiscal response to the crisis without too many strict guidelines, at least doubling of the IMF’s resources and concrete steps towards preventing protectionism would make me more than happy. While we are likely to get these measures, though some in word rather than in deed, the G20 agenda is in danger of being diluted with a pointless grocery list. In any case, though the mood could definitely change until Thursday, the markets are not hoping for too much from the meeting at the moment.

This is in fact good news, as it means that a positive reaction is more likely than a negative one.

But market-reaction or not, Thursday’s gathering could be the last chance to avert disaster. If the summit does not lead to concrete steps, we could soon find out that the recent signs of recovery were just part of a false spring, a couple of days of sunshine in a long and dark winter.

We had another full economics agenda last week, with a couple of events worthy of a separate column, but each will get just one paragraph, as I have to recount my newly-found optimism in the Turkish economy. Surprisingly, the Central Bank did not surprise this time around, delivering the expected 1 percent interest rate cut. I am not worried about a real interest rate of 4 percent driving foreigners away from lira assets. It will not, as we are way past that mysterious threshold; and in fact, we have been seeing steady portfolio outflows since August, which have picked up in the last two months. Note that as a corollary, the relative stability of the lira following the rate decision can not be taken to mean that Turkey’s risk perception has decreased, especially as the lira has been supported by locals’ foreign currency selling. But I am worried about shocks from a stronger-than-expected exchange rate pass-through the rapidly deteriorating budget.

The February budget figures illustrated that higher expenditures, along with lower tax revenues on the back of a slowing economy, are working their way fast. Even without new economic packages, the primary surplus, whether you take the IMF-defined central government or consolidated public sector version, is on a fast downward trajectory and is likely to hit negative territory before summer. The deterioration in the budget, in turn, could put pressure on not only the debt stock, taking the rollover ratio to over 100% even with an IMF program, but also on the Fund itself, who might not be lenient on such major a fiscal expansion.

The road to salvation

So, how come I am convinced that the Turkish economy is on the road to salvation? While the new crisis package, which looked promising (but has not gone beyond the consumption boosters, as we still do not know how the government will start credit flowing) certainly lifted my spirits, now that I know there is a first-rate economist at the wheel, I am relieved. How do I know? To recount the story of John and Celine, who are lost flying in a balloon and go down to ask a passer-by where they are: "You are in a balloon", he answers. Celine comments: "His answer is perfectly right and utterly useless. He must be an economist".

Economy Minister Mehmet Şimşek’s explanation that unemployment was rising because more people were looking for work is worthy of a true economist. While this added worker effect has been well-documented and was prevalent, albeit to a somewhat lesser degree, during the 2001 crisis, correcting for seasonal effects reveals that non-farm employment has contracted 100,000-130,000 in the second half of 2008. Moreover, it would not be a surprise to see a contraction three times this amount this year. And even if the economy starts growing again next year at slightly below its potential, the pick-up in employment is likely to be extremely slow, as firms are likely to respond to the recovery with overtime rather than new employees at first.

Equally remarkable was the minister’s observation that much of unemployment was structural in that it reflected lack of vocations, providing the best summary of the World Bank Labor Market & Higher Education studies of a couple of years ago (email me for those reports), akin to Woody Allen’s sum-up of War and Peace as "taking place in Russia" and yet another indicator that we have a first-rate economist at the helm. Unfortunately, the minister’s solution of more education, albeit noble, is unlikely to do all those unemployed this year any good.

Similarly, the onus is on the prime minister to provide incentives rather than threats to employers to keep the workers employed. And to make sure the ones who are not are supported.


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

Reality does indeed bite. Before the ink had dried on last week’s column where I had hinted that growth was to contract more than the 1 to 2 percent currently expected, revisions to analyst growth forecasts began to appear, some which made it to the mainstream news media with catchy titles like "shocking revision to the economy".

I will not dare to suggest that I was the inspiration to those revisions; on the contrary, I am relieved that my back-of-the-envelope forecasting model is in line with undoubtedly more complete ones, all of them (at least the ones I trust) suggesting a contraction in the vicinity of 5 percent. Fortunately, the government has responded with a new crisis package, in fact its fourth if we take its word for it.

To my knowledge, the only crisis package before was the aptly named "Sack Act", which was ratified by the President at the end of February. The consensus view among economists was that the law, which was basically a bunch of half-measures thrown in together, would not amount to much towards alleviating the economic contraction. Therefore, I felt really relieved that there were two other crisis packages I was not aware of. But I have yet to find out what those first two were about.

Leaving the past aside, while the details are somewhat sketchy, the new package hints that more than half a year after the first signs of the slowdown appeared, the government has finally got the diagnosis right. The package concentrates on measures in getting the credit flowing and consumers consuming again, two of the three main channels that have transmitted the global crisis to Turkey - the third is the trade channel, but that is harder to deal with in a short timeframe, especially in the midst of a global recession.

Despite the right diagnosis, we are still a long way from getting cured. In fact, for the credit channel, we do not have an idea what kind of medicine the government is to offer. Other than vague statements such as "steps towards improving credit flow between finance and real sectors", there is not much else yet.

Top-grossing movies, or columns for that matter, deserve sequels. As my mid-February foray into bonds got the most reader responses so far (after disqualifying the hate mails to the political connections piece of two weeks ago), it is only appropriate that I repeat a similar exercise for the lira. Of course, the fact that it is one of the most popular conversation topics of the past few days is an added bonus. The sharp weakening in the lira last week brought all sorts of skeletons out: Even though the political agenda was quite light for Turkish standards, some put the blame on the politics.

Others were quick to jump on the remarks by TÜSİAD and Central Bank presidents on the dire straits of the economy. But maybe everyone was looking in the wrong cupboard after all: The secret to the lira may not be lying in last week’s weakness, but in its relative strength before that.

In fact, lira’s resiliency has been the main economic puzzle of 2009 for me so far, not only because the currency had been performing better than peers, but also I was being less and less convinced of a sound rationale for its strength.

It is true that Turkey does not share many of the woes of the Eastern European countries whose currencies plunged, and the country usually ranks in the middle in standard risk rankings that take into account factors such as the size of the current account deficit, debt to reserves ratio and the financing gap. However, Turkey was also experiencing more outflows than peers for the past few weeks, as data from EPFR Global, an outfit specializing on fund flows, reveal.

Enigmatic trend

The strong pace of outflows, despite repeated analyst assurances on the country’s strength, is an enigma in itself and could be due to forced selling, sort of a repercussion of Turkish markets’ relative size and liquidity when regional funds could not get out of the small markets. But regardless of the reason, contrary to conventional wisdom, flows have not been supportive of the lira, not in an absolute but also a relative sense.

In the past, it would have been the locals who would come to the rescue in times of lira weakness, selling foreign currency. While still present, that cushioning effect has been rather muted so far this year. It is yet to be seen whether locals have switched from profit-taking to wait-and-see, but local support could not have been the whole story.

One "culprit" that fits in nicely with the data is the repatriation amnesty law, which expired last Monday. While government sources have put the funds drawn at $7.5 billion to $9 billion, we do not have the currency breakdown to assess the role it played on the strength of the lira as well as its recent downfall.

In that sense, the lira’s moves next week and its performance relative to peers may provide important hints on what lies ahead for the currency. Repatriation effect or not, I believe that we have not seen the last of lira weakness for a number of reasons. While the familiar Big Mac index and more scientific measures of the real exchange rate do not show a significant misalignment, asset pricing and flow approaches suggest further weakening in the second quarter.

Furthermore, I believe that the well-known (and much written about) vulnerabilities of the economy are not fully appreciated and have therefore yet to be entirely priced in: The economy is to contract much more than the 1 to 2 percent currently expected, monetary and fiscal policy are making a dangerous mix and to top, corporate foreign currency needs are likely to increase pressures.If there is yet to be a trilogy, I fear I will have to call it "The Country Who Cried". That is one column I hope I will never have to write.

Emre Deliveli is an independent consultant. His dailyeconomics blog is at http://emredeliveli.blogspot.com/.