1、 CONTENTS POLITICS Politics of the IMF stand-by and how our summer calm has broken down And a smorgasbord of Qs on the PKK, EU, and normalization with Armenia ECONOMICS Todays GDP reading and exploring the MPCs next step Whats this business of the technical rate cut? A recap on the whereabouts of th
2、e IMF program, and Turkeys challenges GlobalSOURCE 641 Lexington Avenue 18th Floor New York, NY 10022 Phone: 212-317-8015 Dont Worry, Ali, Well Blame It On the Pashas and the IMF June 30, 2009 Atilla Yesilada and Murat Ucer EXECUTIVE SUMMARY The recent clash between the pashas and AKP clouds our s
3、ummer calm promise, but all-out war is not yet likely. However, the friction complicates Erdogans economic and social reform agenda going forward. Hell try, but get stuck soon, as every reform poses the risk of losing more votes than it gains. Then, a new brawl with the soldiers could be the excuse
4、to call elections in 2010. The efforts to peacefully disarm the PKK have stopped, but we cant decide whether the consensus in Ankara broke down, or recent Kurdish claims to Kirkuk were the cause. While accession to EU is barely alive, we dont expect a formal freeze at the year-end. Finally, Ankara w
5、ill renege on her promise to make peace with Armenia, but make it up to the U.S. in other ways. There was little surprise in todays GDP reading, despite the larger-than-expected shrinkage. For now, we stick to our forecast of 5.5% drop for this year as a whole. Given its dovish bias, the MPC may try
6、 to prolong the easing cycle on the back of growth data, but rate cuts seem to be losing effectiveness and risks of inflation inertia seem to be re-emerging. This is so, possibly because fiscal position remains very weak and IMF program negotiations keep dragging on. There was little tangible develo
7、pment on the latter since the Babacan-Lipsky meeting, but it all boils down to whether PM Erdogan will be convinced to deliver a credible adjustment at a very tricky juncture. In this Monthly, weve taken a look at these issues in a Q 8-weeks MA) Q: What is next for the Monetary Policy Committee? Tod
8、ays GDP reading probably provides some justification for further easing, even though much of the drop was expected; output has now stabilized, and the MPC is supposed to look forward, not backward. But given its dovish bias and the adverse political reaction this figure will likely draw, the MPC may
9、 try to prolong the easing cycle longer than market consensus - which can be more or less summed up as the MPC stopping after one more cut, possibly on the order of 25 bps. After all, the output gap looks wider than at any time in recent history and thanks to that, the MPC can put on a brave face, a
10、nd continue to argue that secular disinflation is still afoot.33Output gap is our calculation by applying HP-filter on quarterly seasonally-adjusted data. 9 15171921232527Jun-99 Jul-00 Aug-01 Sep-02 Oct-03 Nov-04 Dec-05 Jan-07 Feb-08 Mar-09Seasonally adjustedTrend adjustedOutput Gap (million TL)Q: D
11、o you approve of this stance? Lets start by giving the MPC some credit - much of the easing to date was clearly justified. Even to exceedingly cautious and nagging observers such as ourselves, it became clear early this year that the world had turned real ugly - the growth outlook was deteriorating
12、rapidly and inflation would drop sharply thanks to collapsing commodity prices, low exchange rate pass-through and a large output gap. In that sense, regardless of the motives behind the cuts, the MPC must be congratulated for starting the easing cycle as early as November. But the Committee has gon
13、e a bit too far in my view, judging from the fact that rate cuts seem to be losing effectiveness and risks of inflation inertia seem to be re-emerging. Put differently, there are clear limits as to what monetary policy can do for growth in an environment where fiscal position keeps deteriorating and
14、 a coherent macro framework is missing. In such situations, monetary policy authority could easily assume the task of “accommodating fiscal deficits” and compromise its credibility, instead of aiding growth. This is one reason we think interest rates in the secondary market have been hovering around
15、 12%, despite another full percentage point drop in the O/N policy rate since April, and credit growth remains subdued despite the 800 bps decline in the policy rate (some 600 bps real) since November. Inflation inertia is also a risk in our view, which is best manifested in CBT surveys inflation ex
16、pectations that differ considerably from the Banks forecast on that horizon. It is not too surprising therefore, that the markets find the current policy stance unsustainable in the sense that they place the O/N rate some 125 bps above its current level in 12-months from now. 10 4,04,44,85,25,66,06,
17、46,87,27,68,08,48,89,29,610,0May-06 Aug-06 Dec-06 Mar-07 Jul-07 Oct-07 Feb-08 May-08 Sep-08 Dec-08 Apr-0912-month ahead24-month aheadInflation Expectations (%)Q: What is this “technical cut” possibility that the markets have been talking about? The Central Bank cannot build F/X reserves in the curre
18、nt environment (in fact, its been losing reserves since September), and therefore cannot create money through F/X operations. This makes liquidity shortage “permanent” in the sense that the Bank provides funding to banks continuously in the (weekly) repo auctions.4In its policy document, the Bank is
19、 basically proposing two remedies aimed at resolving this problem. First, it says it could execute a technical rate cut, which would work to reduce the average funding cost of banks that are experiencing lira shortage (because the repo rate, which hovers close to the borrowing rate, becomes the benc
20、hmark rate, and the new borrowing rate is set 1.25 bps below that). Second, it promises, when necessary, to “hold repo auctions with maturities up to 91-days and purchase government securities to prevent funding being concentrated in one-week maturities”, because “funding of the liquidity shortage o
21、nly by repo auctions with one-week maturity may have adverse effects on longer-term interest rates and the credit mechanism”. As weve noted in earlier reports, we see these primarily as attempts to help the market carry government debt in an environment where the Treasurys borrowing requirement is h
22、igh but capital inflows remain weak. So, we believe that from a practical point of view, the technical rate cut may be necessary in the coming weeks and months, though predicting its exact timing remains elusive. 4See Monetary and Exchange Rate Policy for 2009 (December 16, 2008), section on Liquidi
23、ty Management, paragraphs 45-47, in particular. 11 -15-10-5051015Jan 2, 08 Apr 1, 08 Jun 30, 08 Sep 28, 08 Dec 27, 08 Mar 27, 09 Jun 25, 09Open Market Operations (billion TL; 10-days moving average)Q: Do you see a problem with the technical rate cut, or what the Bank is trying to do? Of course, what
24、 has been laid out above would be a very dangerous path to take in the absence of credible fiscal adjustment and a strong IMF program,. In that case, this technical adjustment - and all the assurances to provide longer term funding for banks - could be interpreted as a resumption of lending to the g
25、overnment, or a giant step toward monetization of debt - and backfire badly. Q: Where are we on the IMF program? The quick answer is, no one knows. But let me try to quickly sum up our views on this nauseating topic. I humbly think the IMF program negotiations have stalled not because the IMF is “me
26、ddling in Turkish politics” or “placing unreasonable demands” on the country, as Prime Minister Erdogan sometimes insinuates. Things stalled because there is disagreement as to how Turkeys currently unsustainable fiscal policy stance will be credibly reversed. The good news is that Minister Babacan
27、seems to agree, having said a few weeks ago, “Turkey had to come up with a credible plan to turn the primary deficit into a surplus within a reasonable time frame”, and speaking of an encouraging “convergence of views” in the aftermath of his meeting with Mr. Lipsky, IMFs second in command. The bad
28、news is that, as weve stressed in our earlier writings, questions such as the size of the required swing in the primary balance, its exact time frame, and supporting revenue and expenditure measures backing it (discretionary and otherwise) have to be addressed in a mutually agreeable fashion, and we
29、 do not seem to be there quite as yet. 12 In terms of (admittedly rough) figures, we believe Turkey needs to cough up something like a TL40 billion (or some 4% of GDP, assuming a working GDP figure of TL1 trillion) adjustment during the programs time horizon, which would probably be no less than 2 y
30、ears. True, some of this would come from recovery itself, but more than half would have to come from discretionary measures, as our back of the envelope calculations suggest. The key question therefore seems to be the following: How likely is PM Erdogan to deliver this demanding adjustment at a very
31、 tricky juncture of a collapsing economy and approaching general elections? Q: What would convince him to sign up? PM Erdogan probably has one thing in mind regarding the economy: to bring back vigorous growth as soon as possible. We just saw a 14% contraction in the last quarter, prospects remain f
32、airly uncertain, and on top of these, we probably have not seen the worst on the unemployment front. So, it is understandable that the orthodoxy “tighten fiscal policy to place debt on a sustainable path” should sound totally bizarre to a politician in his position. Then again, Turkey has “twin gaps
33、.” On domestic public debt front, it is stuck with a rollover ratio far in excess of 100%, and on the external financing front, it has a sizeable gap for late 2009 and 2010, even in a modestly widening CAD scenario (see our last Quarterly of June 3). At the end of the day, PM Erdogan is a clever and
34、 pragmatic politician. Once markets stop accommodating and IMF program and quick global recovery hopes wane, incentives could change, convincing him that a 2-3 year well-funded SBA is in Turkeys best interest. Then again, this is not an easy choice to make, and thats why we, as the Global Source Tur
35、key team, cannot rule out snap elections. Q: Do you see the appetite in banks to carry additional debt for much longer? We do in the near term, as long as there is hope (of an IMF program or global recovery, or both) and nothing better to do such as lending to corporates (which is still not happenin
36、g). True, there are a few loaded months ahead in the domestic debt redemption calendar, which look particularly tricky. August is one such month - others are (like the Mark Twain joke goes) October, February, and March. But banks are generally liquid. They have been gobbling up bonds in recent month
37、s, but as a percent of their deposit base, they are still at reasonable levels, and more importantly, the Central Bank has been giving all the assurances that it would continue to act as the lender of last resort, without collateral, and at a not so punitive cost. 13 4146515661667176Dec 26, 03 Oct 6
38、, 04 Jul 18, 05 Apr 29, 06 Feb 8, 07 Nov 20, 07 Aug 31, 08 Jun 12, 09Banking Sector Bond Holdings / Deposit Stock Ratio (%)Q: What do you make out of governments new regulations on FX borrowing? We know that Turks have registered deposits of around $30 billion at BIS banks, and when Turkish corporat
39、es/small businesses borrow from foreign commercial banks, they typically put up these deposits as collateral. In addition, some $40 billion of the Turkish external debt comprise loans extended by Turkish banks branches abroad to corporates/small businesses here. By allowing businesses with no F/X ea
40、rnings to borrow locally, the government is trying to stop one mechanism why this is done (the other is tax arbitrage), and hence reduce Turkeys recorded external debt. It is probably hoped too, that the reduced need for collateral may free up deposits abroad and create an incentive for businesses (
41、or their owners) to repatriate them home. Our reading of extending the wealth amnesty is in a way complementary to all this, targeting those who built up wealth abroad through capital flight or other illicit practices. Call me paranoid, but I get nervous when I think that one major motive behind all
42、 this could be to explore options that could substitute for a formal IMF program. Q: What is your main concern going forward? The world is panicking about growth, so is Turkey. A major challenge is to re-think the growth-fiscal policy nexus. This is a challenge for the world, but more so for Turkey.
43、 The government cannot continue trying to stimulate the economy by compromising fiscal discipline, because it doesnt have proper institutions in place to reverse it. Emerging doubts over the sustainability of public finances on the other hand, is sure to hurt growth eventually. Unfortunately, neithe
44、r the political context nor the intellectual climate is too supportive to this sort of thinking. This makes fiscal laxity and mediocre growth a worrisome but fairly probable combination, looking ahead. 14 2004 2005 2006 2007 2008Production and PricesGDP (in billions of TL) 559 649 758 843 950 GDP (
45、in US$ billions) 392 483 529 647 733 GDP (% real growth) 9.4 8.4 6.9 4.7 1.1 GDP deflator (in percent) 12.4 7.1 9.3 6.2 11.5 Unemployment Rate (%) 10.3 10.3 9.9 10.3 11.0 15.8 / MarCPI (12 month, ave) 8.6 8.2 9.6 8.8 10.4 CPI (12 month, eop) 9.4 7.7 9.7 8.4 10.1 5.2 / MayWPI/PPI (12 month, eop) 15.3
46、 2.7 11.6 5.9 8.1 -2.5 / MayFinancial IndicatorsUSD / TL (eop) 1.340 1.345 1.409 1.162 1.525 1.528 / JunExchange Rate Basket (ave) 1.599 1.508 1.620 1.543 1.599 1.853 / JunReal Exchange Rate (1995=100, eop) 143.2 171.4 160.1 190.3 168.8 167.3 / May(12-month; %) 1.8 19.7 -6.6 18.9 -11.3 -6.1 / MayAve
47、rage T-bill rate (secondary market) 24.5 16.3 17.8 18.3 19.4 12.5 / JunReal (deflated by 12-m ahead inflation expectation) 13.0 8.9 10.5 11.1 10.7 5.3 / MayO/N Borrowing (simp, eop, %) 18.00 13.50 17.50 15.75 15.00 8.75 / JunISE-100 (eop) 24,972 39,778 39,117 55,538 26,864 36,949 / Jun(12-month; %)
48、34.1 59.3 -1.7 42.0 -51.6 5.3 / JunFiscal IndicatorsCentral Government Budget Balance (billion TL) -29.2 -6.9 -4.6 -13.7 -17.1 -0.6 / Mayas % of GDP -5.2 -1.1 -0.6 -1.6 -1.8 Central Government Primary Balance (billion TL) 27.3 38.8 41.3 35.0 33.6 4.4 / Mayas % of GDP 4.9 6.0 5.4 4.2 3.5 Consolidated
49、 Government Primary Balance (IMF Def., billion TL) 27.8 28.3 36.0 29.2 21.0 3.8 / Mayas % of GDP 5.0 4.4 4.7 3.5 2.2 o/w: Central Government 3.9 3.7 4.4 2.6 1.9 3.8 / MayCentral Government Debt Stock (billion TL) 316.5 331.5 345.0 333.5 380.3 411.2 / Mayas % of GDP 56.6 51.1 45.5 39.6 40.0 Total Net Debt of the Public Sector (as % of GDP) 49.0 41.6 34.0 29.5 28.2 .Domestic 35.7 35.2 30.0 28.1 26.1 External 13.4 6.5 4.0 1.3 2.0 Monetary AggregatesTotal Credit Stock
