Pressure intensifies for Turkey accord with IMF

By Delphine Strauss in Ankara

Published: February 9 2009 23:43 | Last updated: February 9 2009 23:43

Turkey’s government risks losing credibility with investors and missing the best chance in years to tame endemically high inflation and borrowing costs if it backs away from talks with the International Monetary Fund, analysts warn.

An IMF mission left Ankara two weeks ago without reaching agreement about a new financing package.

It has not yet been invited to return, and ministers have made it clear talks will not resume until big differences are resolved.

For months investors have been counting on Turkey securing at least $20bn (€15.6bn, £13.6bn) in IMF funding. Many now wonder if Recep Tayyip Erdogan, the prime minister, who said on Monday Turkey could manage with or without the IMF, will commit to a deal requiring unpopular fiscal tightening.

“The government’s credit is running out,” said Ahmet Akarli, economist at Goldman Sachs. “People are not in panic but everyone is watching this much more closely than two months ago.”

The IMF accepts that Turkey’s public debt will rise this year, when it forecasts a 1.5 per cent contraction in GDP. But it wants a tougher fiscal rule and controls on municipality spending to restore the budget balance in later years.

Mr Erdogan is understandably reluctant to announce such a depressing growth outlook and difficult remedy just before local elections in March – especially as Turkey has to date weathered the crisis much better than eastern European neighbours.

“There is a feeling in the market that Turkey is holding out better in a troubled region,” said Christian Keller at Barclays Capital. Chris Scicluna at Daiwa Securities said Turkey’s tough negotiating tactics reflected “relative underlying strengths”.

The delay has had surprisingly little impact on asset prices or the lira – largely because most investors still expect a deal once elections are over. But to delay leaves Turkey vulnerable to any global upset or signs of trouble in its own economy. Analysts estimate it faces a financing gap of $15bn-$30bn in 2009 and say it will need IMF money to avoid a deeper recession or a lira slide.

If the government were to sign a deal only under duress, after a collapse in confidence, the IMF could impose more stringent terms, Mr Akarli warned. But he thought Turkey might “muddle through 2009” without external help.

Observers also worry the government’s promises of fiscal discipline ring increasingly hollow. Mr Keller said public finances had deteriorated before the crisis. Turker Hamzaoglu, at Merrill Lynch, said: “The government will be perceived as showing reluctance to run prudent fiscal policies.”

Without the anchor of an IMF programme Turkey could also miss a rare chance to bring inflation and interest rates decisively into single digits. Now inflation is subsiding despite the lira’s decline. The central bank has cut rates since November to a record 13 per cent.

Further cuts will depend on tight fiscal policy and an IMF deal. “This is a once in a decade chance to get real interest rates down,” Mr Keller said. “This must be the way to convince politicians.”

● New banknotes depicting a 19th century writer have sparked an online battle between supporters and opponents of Turkey’s socially conservative government, writes Delphine Strauss.

Critics of the ruling Justice and Development party, alert to any hint of deviation from Turkey’s secular constitution, are furious that the 50 lira note carries a picture of Fatma Aliye Hanım. She married at 16 and published her work, signing herself “a woman”, only after winning her husband’s consent.

The central bank says it chose to celebrate someone believed to be Turkey’s first female novelist because she was a prominent defender of women’s rights in the context of her time.

But others claim she favoured Islamic law and regretted the creation of the modern state founded by Mustafa Kemal Ataturk.