Turkey's growth spurt comes to an end

By Delphine Strauss in Ankara

Turkey’s seven-year growth spurt came to an abrupt end in the last quarter of 2008, official data showed on Tuesday, prompting analysts to redouble calls for the G20 economy to reach a swift deal with the International Monetary Fund.

Gross domestic product shrank 6.2 per cent year on year in the fourth quarter, more than expected, and grew just 1.1 per cent in the year as a whole, in stark contrast to average annual growth of 7 per cent since 2002.

Pollsters say the downturn, especially acute in manufacturing, was the main reason for the ruling Justice & Development party’s weaker showing in Sunday’s municipal elections – a setback that could spur the government into action.

Recep Tayyip Erdogan, prime minister, will meet IMF management in London this week, and has signalled talks over a financing package could resume soon.

Recent changes in the way the IMF lends to emerging markets may ease the negotiations, which broke down in February partly over a disagreement on how Turkey should improve tax collection.

Economists say Turkey is unlikely to qualify for the new, more flexible, lending facilities but even with a standard programme, it will be able to access more funding upfront, and further funds will not be conditional on structural reforms.

Separate data also showed that lower energy prices and weak domestic demand almost eliminated Turkey’s trade deficit in February. “External financing requirements will be less of a concern to international investors,” said Yarkin Cebeci, economist at JPMorgan.

However, if it is to tap IMF funds, Turkey will have to commit itself to restoring fiscal discipline, after a pre-election spending spree that meant February’s budget deficit already equalled the target for the full year. The cost of stimulus measures, including temporary tax cuts on sales of cars, household goods and property, is still unclear.

The central bank, which has cut its main borrowing rate by 625 basis points since November, published minutes yesterday saying it might be necessary to maintain its easing bias “for a considerable period”.

But it also said the government’s increased financing needs could make rate cuts less effective, and said stimulus measures would only work within a credible medium-term fiscal framework. Current budget plans are based on an official forecast of 4 per cent GDP growth in 2009, while most analysts expect a sharp decline.

Timothy Ash, economist at the Royal Bank of Scotland, said the growth data should convince officials “urgent action is required, particularly to shore up public finances”, adding that an IMF deal securing budget financing needs for 2009 would increase the scope for rate cuts.