Odds and Ends on Turkey
As I noted in the previous post, I am taking it easy for a while, so here’ s some odds and ends from the past two weeks. You may think of this as an addendum to the last two Daily News columns:
Turkish Politics:
In the column about my London impressions, I mainly talked about economics. But I have also exchanged ideas about politics with quite a few bird-watchers (I know, I know, it is a lame joke) in London as well. It seems that the politics opinion has shifted as well. Several people I spoke to noted of the imprisoned journalists and the made-up evidence in the Sledgehammer trials.
More interestingly, one man single-handedly seems to have been responsible for a large part of this change of heart: All the people I met with had read at least one piece by Harvard Kennedy School professor Dani Rodrik, who has been blogging, along with his wife, on the trials since his father-in-law was arrested. A good example to another of those who have finally got it, in Dani’s words, is Newsweek.
The Turkish foreign policy, which was admired quite recently, has also started getting some arrows of late. But there are those who are still quite positive as well…
Global Recession on the Horizon:
In this week’s column, I mentioned the updated forecasts as “evidence” that the Central Bank of Turkey was right on target on its global slowdown worries. In fact, the forecast revisions were a response to quite a few indicators, other than the obvious ones like the turmoil in financial markets, worse-than-expected data and realizations on the amount of fiscal restraint the U.S. and some other economies would have to undertake. For example, the fall in the Baltic Dry Index and global oil demand were also strong signs of the global slowdown.
The interest rate lobby:
As I have mentioned in my posts several times, the response of the government to the growing criticism has been one of “the best defense of offense”. Learned ministers like Zafer Caglayan have called the critiques “the interest rate lobby”, i.e. Londoners who want to make money with higher Turkish interest rates. In fact, the admiral went as far as to call the ratings agency Fitch bastards (it was a clever wordplay, I must admit, but I did my duty as an economist by telling this to someone who knows the Fitch Turkey analyst very well).
At the time, I remember thinking that it would have been a great newspiece if someone had asked the so-called interest rate lobby how they felt about all this. I just found out that my own newspaper had done exactly that in a great piece. I wasn’t surprised to see Tim Ash, one of the most criticized analysts by the government, as one of those interviewed, as he and Taylan, the economics editor who wrote the article, know each other. Anyway, Tim makes a great point, which I have underlined as well. The so-called interest rate lobby was extremely supportive of the government’s policies for over a decade, even when the Central Bank was cutting off their bread & butter by lowering rates, if you were to follow the admiral’s logic. By the way, if I were FinMin Simsek or Babacan, the more savvy econ. ministers out there, I would give Caglayan and his likes a “Finance for Dummies” book for Christmas Bayram. They would then learn that one does not need rising rates to make money out of T-bills:)…
Central Bank Communication:
The Central Bank is continuing with its enhanced communication policy. I learned this week that Governor Erdem Basci had spoken to yet another TV channel. In fact, if you can understand Turkish, the whole thing is on the Central Bank’s website.
While some believe a Central Bank president should never talk, loyal readers know that I believe communication should be an effective part of any Central Bank’s toolkit, but it is especially vital for a Central Bank like the CBT that is implementing unorthodox policies. I have argued for a long time that the CBT was doing an awfully bad job in the communication department, especially in the early days of Basci as Governor, so I am glad that is changing. And personally I kind of like Basci’s style of semi-academic policymaker.
But as I noted in this week’s column, I think he should not make comments about the exchange rate. Another columnist who thinks like me is Fatih Ozatay; most of his columns for the past week or so so have explained why- so have a look if you can read Turkish.
BTW, for those wondering why no one in the Central Bank other than Basci ever speaks, that is not a weird Middle Eastern hierarchy thing. According to CBT Law, only the Bank’s Governor is entitled to talk for the CBT. I learned that when I asked a senior Central Banker, with whom I was chatting occasionally, to answer my attacks on Turkish monetary policy with a column at the Daily News, preferably right next to mine. I have never been afraid of exposing the opposing view….
Appraising the Central Bank:
Since my London impressions two weeks ago, there has been quite a shift in CBT’s credibility in the eyes of London Turkey-watchers. The mood started to swing especially after everyone started to expect a global slowdown. As a result, the people I have been chatting with for the last week or so are much more positive on the Central Bank’s policies than the ones early in my London days.
Fellow London blogger (for the next three days- she is not quitting blogging, but I am leaving London -sigh) and friend Emerging Market Musings, or EMM, summarizes some of the early criticisms against the Central Bank in a great post.
As she notes, similar to in my column for this week, the Bank was right on target on the global slowdown. But that doesn’t mean that its response was the right one. Here are some pointers:
- The Bank continues to target too many objectives with limited tools. Before, it was aiming for both the quantity and the price of money at the same time. Now, we see it is going after interest and exchange rates in an economy open to capital flows. Impossible trinity anyone???
- As a follow-up point, EMM interprets the rate cut as the Bank trying to prevent excessive capital flows. Ceterus paribus, that would have been the case, but they also narrowed the corridor for overnight rates, noting that the decision was to attract short-term flows by decreasing the volatility in the overnight- the rate cut, on the other hand, was justified as a response to the global slowdown.
- EMM is actually right: The Governor defended the rate cut as the logical choice under two distinct cases: If money flowed to EMs (QE3 scenario), it made sense to discourage that with lower rates, but if it didn’t, the lower growth environment would justify lower rates. I mean, I could easily make a similar case for raising rates under all circumstances:)…
- Despite (3), I think the Bank was betting on QE3 with the rate cut. And besides, even if QE3 had materialized, renewed flows to EMs as a result was quite a strong assumption, especially if risk-aversion did not improve.
- Besides, as EMM notes as well, regardless of the CBT’s ability to foresee the global slowdown or the overheating debate (the economy was bound to cool off sometime, so it was a battle the CBT wuld eventually win), the current account deficit remains as the Democles’ sword on the Turkish economy.
In any case, as markets have learned the hard way, it is not much use fighting the Central Bank. But that goes for the CBT as well: I don’t think it is a good idea to fight the markets on the exchange rate, either- as I mention in this week’s column.
I guess this is more or less what I have to say for the moment. I wasn’t planning such a long and detailed post 12 hours after I returned to blogging, but I have kind of emptied all that had accumulated in my blogging brain:)….
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