Politics and economics converge
In Alexander Zinoviev’s much-praised, The Yawning Heights, the first law of Ibanskian life – meaning the Soviet Union of the 1970s - appears to be “the well-known rule whereby people who want to make a change never change anything, while changes are only affected by people who had no intention of doing so.” Since the set of political possibilities is empty, all change comes a fortiori as by-products, and not as consequences of intentional actions. The second law states that “success achieved under any leadership must be success achieved by that leadership” and, finally, “for every disaster a guilty person outside the leadership can be found.” Now, the second and the third laws are kind of natural: Instances of such conduct and codification can be found anywhere and anytime. But the first is not an attribute that is so ubiquitously distributed. The real thread that links them all and binds them is that nobody actually believes in anything: In Ibansk, there is no belief closure. For the Soviet Union, in particular and inter alia, Timur Kuran labelled this feature “true lies”: Publicly announced preferences and privately held ones are different, even contradictory. Indeed, preference falsification seems to be a pervasive and strategically manipulated phenomenon in many parts of the globe. And it would not simply wash to say, “be – or behave - yourself ”, since “be yourself ” is a command that is self-defeating. As Emily Dickinson reminded us in her Complete Poems: This is an example of willing what cannot be willed. Being oneself – as in “be yourself ” - is an impossible undertaking since, according to Elster – in Political Psychology - it amounts to a confusion of internal and external negations. Being oneself - or trying to forget - are endogenously driven projects. For instance, trying to forget requires the representation of the absence of what is to be forgotten and, thereby, the presence of it. One may grant that anyone willing to engage in warfare is insane and that he should have the right to be exempted on psychiatric grounds. He only has to ask. But if he asks for exemption, then he does not want to go to war and therefore he is sane. He will therefore not be exempted from duty. In fact, the lore has it that, during some stage of the Vietnam War, U.S. military authorities had declared volunteers unfit for service, probably in the belief that volunteering at that moment was a clear sign of incapacitating mental instability.
Now, in Turkey, the first law of Ibansk has almost surely failed so far. Most instances of political actions can clearly be delineated back to motives and opportunities, and the will and power to carry them out. No wonder social and/or political engineering is a fine word in these lands, because it is true, more often than not. However, not all action plans work well for those who initiate them. The gist of the matter is all action plans work for some, even if they do not work for those who bear the flag. It is in this sense that everything is deliberately designed and rational. This is admittedly a working hypothesis only, but it is a promising one. Elections are coming up, and even if they aren’t around the corner, the political design targeting them has already begun to take shape.
Now, what will happen? On account of domestic matters alone, the picture is mildly accommodative. The divide is between the consumer and the producer as displayed time and again here. Other than that, the outlook is cautiously optimistic. The first set of evidence comes from the banking sector. What do banks do? Well, loans. In Turkey, the ratio of loan penetration (total loans/GDP) stood at 25 percent by the end of 2004. This was, admittedly, a very low ratio. At that time, that is at the exact crossroads where the banking outlook experienced a seachange, the CE3 average (Poland, Hungary, Czech Republic) stood at 45 percent, Egypt at 63 percent, Israel 110 percent. Only Russia (23 percent) compared to Turkey. From a globally maximising machine viewpoint, the loan book of the banking sector could easily double for Turkey to indeed catch up with Europe in, say, ten years. It didn’t happen exactly but despite relatively high GDP growth, loanto-GDP ratio more than doubled in 13 years. Indeed, this is what is going on. By the end of April 2017, the loan book steamed up to over $500 billion, compared to around $80 billion as of December 2004.
“The Heart cannot forget Unless t contemplates
What t decl nes”
The whole system changed, liquid assets to total assets fell rapidly. Despite the incredible credit surge, NPLs/total loans ratio is at 3.1 percent, much lower than the EM average. The twisted figure of the sectoral balance sheet has been on its way back to normal since H2 2003, with the share of loans continuously augmenting. The loan/deposit ratio, which stood at 51 percent by the end of 2004, has now reached 124 percent. The recent currency weakness has eaten into the deposit base, because TRY deposits could only grow by 1 percent in CPI-adjusted real terms. TRY deposits had reached 65 percent of total deposits, up from 42.5 percent in 2002; but they have been falling recently. NIMs have been resilient despite so many warnings to the contrary, and for just one example consider the ROAE. It had been on a par with the benchmark T-bill yield in 2015, not a good omen. Nevertheless, it is visibly higher now. CAR and free equity developments reflect that fact. Dollarization of assets is not as important as dollarization of debt, but in the end the banking sector can easily shore up loan growth that matches with an average 5 percent GDP growth, i.e. 15-18 percent total loan growth per annum. The reason lies in the risk profile, ‘the smoothness of the credit surface’: banks can pass a good part of the funding cost increases onto consumers. As long as they can do that, cost increases will not lead to a stop-go cycle: there will be slowdowns, and upturns, and that’s about it.
‘The log c of pol t cal surv val’
The second set of evidence comes from the real sector. Industrial production rose by 7 percent in the last 12 months. But sectoral performances differ widely. We expect 4.3-4.6 percent growth in 2018. The loss of international market share in textiles and clothing is very real. It is extremely important to notice that although growth will be lower on account of the base effect, the current account deficit will increase both as magnitude, and as percentage of GDP. The Euro/dollar cross is likely to move in the direction of further dollar strength towards the end of 2018, and this means the current account will post a larger deficit in dollar terms. European growth prospects are strong though, and the evidence on consumer credits indicates that domestic demand is livening to some extent in Europe. Unless unit labour costs rise further, Turkey’s international competitiveness seems bound to remain stable.
The third set of evidence comes from politics. What is the outlook, without unduly stretching political imagination? The prospects are dimly lighted in our opinion, and stress is bound to gradually build up. “The Logic of Political Survival” is the title of an interesting book by four distinguished authors, among them Bruce Bruno de Mesquita of NYU and the Hoover Institution. Political survival dictates many mandates, some going against the inner beliefs of many a magistrate. But it can be a useful instinct when privately held beliefs would lead many leaders astray, whereas should they let themselves be conquered by canons of time-honoured international power politics, they could stand firmer on the political soil. We seem to witness more of conformity to power politics, and that is at least understandable, since it is rational behaviour. On the other hand, not all conflicts can be readily resolved through a rational prism.
All in all, banking and finances look promising, the real side of the economy is as adequately supportive as required by the financial side, but the consumer doesn’t square with that outlook. However, the system is based on banks, not on capital markets. It is a credit-driven economy, and credit follows demand.
The financial sector has always adjusted rather quickly, but the real sector involves many decision-makers and is approximately a “large economy” with a huge number of price-takers, augmented by some big players. It is a Cournot-Walras economy. Convergence to a Pareto-efficient equilibrium in such an economy is not easy, though modelling is rather straightforward. My experience suggests that unless bank profits are squeezed, and liquidity dries up, the real sector responds and the consumer follows.
Global growth s p ck ng up
We have come a long way to express in a rather convoluted way the simple observation to the effect that evidence is mixed and some queries have bite. Nevertheless, global growth is picking up, and it is expected to reach 3.5 percent, compared to 2.7 percent of 2016, and 3.2 percent of 2017. So far, the Fed has already closed the gates and fixed its balance sheet at $4.5 trillion. Other central banks will follow suit, notably the Bank of England with an expected further 50 basis points rate hike in 2018. Even Japan nears the end of the easing cycle.
In the last 8 years, since Lehman, the extra liquidity supplied by central banks reached $ 14 trillion. This is ‘bad’ because returning back to normalcy implies a global interest rate increase. This is ‘good’ because the world economy gains speed. Economic history suggests that after so many years of near zero interest rates and ample liquidity, technology can jumpstart, and corporate profits head north. Sufficiently high growth, sufficiently high rates, and sufficiently foreseeable – not excessive - political noise can lead to an attractive mixture.