Addendum to Huriyet column: The evil IMF creating a crisis
The Usual Suspects
First, let’s start with who the usual suspects are, i.e. who rattled Turkish markets last week:
- The IMF: All the IMF-related events were detailed in the column.
- Global Developments: It is natural that Turkish assets are being affected by the U.S. debt ceiling and Euro Area debt issues. While these could account for some of the lira weakness today, neither issue was a factor last Thursday or Friday.
- Fitch: As mentioned in the column, Fitch issue a warning on Turkey’s current account deficit last week, but as I note there, it was the IMF paper rather than Fitch that affected Turkish markets on Thursday.
- The Central Bank Monetary Policy Committee: You could also argue that the tone of the MPC last week was deemed too dovish by markets.
- Erdem Basci: As I note in the column, CBT’s Governor Basci’s comments on open positions (not particular for Turkey) were interpreted as the CBT warning against a looming currency depreciation. Also, Basci was interpreted (I won’t say “sounded” because he did not sound like that to me at all) as saying that the Bank was comfortable about the lira.
- Government officials: I think the star was Zafer Caglayan, saying first that the current account in not a problem, and then responding to Fitch’s warnings as “Fitch has become a Fitch again”- Turkish speakers would know that replacing “f” with “p” would result in a word sounding like “bastard” in Turkish- that’s a wordplay even I wouldn’t dare. The papers are reporting Caglayan saying today that he has thrown the word “crisis” down the drain. Such ostrich mentality won’t help a bit, but neither will AKP topbrass Bulent Gedikli’s remarks warning consumers to save and not to consume.
So, here’s my take on the usual suspects:
As at the end of the column, you can see who I think the real guilty is…
The IMF G20 Report
While I concentrated on the IMF G20 report’s Turkey projections at the column, the report has other goodies on the Turkish economy: The fund notes that cyclically-adjusted balances are still negative in a number of economies (e.g. Brazil, India, and Turkey), even though demand is at or above capacity. In these emerging markets, the task is to avoid overheating and prevent the build-up of financial imbalances. Therefore, in these countries, there is room for further consolidation. This will take pressure off monetary and prudential policies and create fiscal space to respond to future shocks.
There is nothing radical in these remarks, except that statements like these were probably the reasons the ill-fated IMF Staff Report never made it to the public So the Fund has in fact releases the Staff Report:)
BTW, the IMF’s Turkey projections did not come from their multi-country models, as some Turkey economists were claiming; they came from the Fund’s Turkey desk. A multi-country model would never come up with such an accurate picture of the economy in the short-run (i.e. this year and the next) anyway.
BTWW, Roubini’s David Rogovic discusses the projections and the Turkey-related parts of the report at a recent blog post.
The Turkish Banking Sector
I explained in the column that Turkish banking vulnerabilities in the IMF Euro Area spillover paper were blown way out of proportion. Markets chose to concentrate on one single chart among 50, one that was a simple exercise utilizing one Turkish bank, as I note in the column.
But that’s not to say that that Turkish banks are immune from Euro Area woes. For one thing, Greek banks’ Turkish subsidiaries could be affected, but I think the worst that could happen would be change of ownership, as any cash/ transfers, interbank lending and the like would have to go through the banking regulator. Moreover, Turkish banks have almost no exposure to Greece.
But the more imminent danger is foreign funding for Turkish banks. The big chunk of the syndicated loans mature in the last quarter of the year, so if there are ongoing problems at the time, Turkish banks could face rollover difficulties. But who knows how the global environment will look like then?
A Couple of words on markets & traders
So if the IMF report was not really pointing to dangers in Turkish banking, how come markets became so jittery. Two observations are in order: 1. Your average trader will not spend an hour (or even a minute) reading the report; by then, it will be too late. He will (I will not retort to my usual “she” here, as we are talking about testosterone-packing traders) shoot first and ask questions later. Besides, as I note at the end of the column, once markets are unsettled by all these scary remarks coming from government officials, they will react at the smallest sign of trouble, whether it be a chart in a paper, a misquoted IMF rep or a misunderstood Central Bank president…
7 Responses to “Addendum to Huriyet column: The evil IMF creating a crisis”
First of all, what we claim is only " a partial explanation for the misguided interpretations". In our piece, we provide an alternative explanation given the very same numbers and we "claim" that our interpretation is the correct one regarding the assumptions behind IMF's forecasts.
As for the model, IMF's Turkey desk is not an independent unit and therefore should not be conducting forecasts on its own. The staff should be using some sort of behavioral equations and make sure that results are coherent with the global scenario that is definitely generated by their multi-country models.
If this is not the case, then there is no point in discussing the numbers and the intentions behind them since they are nearly exogenous by design and only reflect their version of "accurate picture" of the economy. These forecasts, like many others in the market, are subject to very high uncertainty and would inevitably suffer from methodological problems, if they preferred to use judgement excessively instead of a more formal econometric approach.
No, they don't use judgement. Neither they ignore the Fund's global forecasts. On the contrary, global projections will be an integral part of their projections. But if all the forecasts came from Multimod or something like that, there wouldn't be a need for country desk, would there. They use metrics + financial programming to ensure consistency.
In fact, it is a very laborious process, as the country desk's forecasts would have to be approved by the relevant department(s) as well. BTW, I am not just speculating, I went out of my way to confirm how the forecasts in the paper (not just Turkey) were obtained from my friends at the Fund.
Murat Ucer illustrates the logic behind the current account forecasts, which I used in a recent blog post: http://www.economonitor.com/emredeliveli/2011/07/…
As I said there, if those forecasts were mechanically being spit out by a DSGE model, they would not look that logical at all… I am not saying the Turkey desk just put numbers in; they did proper analysis and metrics. For example, the global growth from Multimod would enter their export supply equation, but they wouldn't get Turkish exports from Multimod….
Yes, we know that they do not use pure judgement. And I am also not saying that you are claiming the otherwise. Instead, I am just trying to prove my point by contradiction Anyway, we are aware of the IMF's forecasting process and that's exactly what we are (were) trying to draw attention to…
It seems we have a lot of instances of misunderstanding:) Some others were not really my fault, like the "Asterix incident", but for this one, it is probably my own dickheadesness:):):)
Do you think the recent comments by the government officials might be part of a 'soft-landing' strategy?
I don't think or so, but I am writing a blog post where I touch upon this issue, among other things. So give me an hour or so…
Finally answered your question: http://www.economonitor.com/emredeliveli/2011/07/…
Sorry for the delay; my excuse is explained here: http://www.economonitor.com/emredeliveli/2011/07/…