By Lesley Wroughton - Reuters

WASHINGTON – The muted response by investors this week to the expiration of Turkey’s $10 billion agreement with the International Monetary Fund may be just the reaction the Turkish government needed to show it can live without the IMF.

After an economic crisis in 2001, Turkey set out to break from a history of high inflation and low economic growth, as it set its sights on EU membership.

But the restoration of its fortunes may have been helped as much by five years of global economic growth, as by improved macroeconomic strategy.

As the IMF’s three-year program wrapped up on Saturday, weakening economic growth in developed countries, and rising world fuel and food prices, threaten to dampen demand for Turkish products abroad and push inflation higher again.

Tighter global credit conditions are also problematic for Turkey which relies heavily on external financing to fund its investment and growth.

Debt markets on Monday were unfazed by the end of the IMF program, with Turkey’s five-year credit default swap (CDS) spreads, a measure of investor sentiment, unchanged at 250 basis points. CDS provide investors insurance against credit defaults or restructurings and wider spreads indicate increased concern about a country’s ability to pay its debts.

Turkey’s credit spreads have widened in the last 10 days, rising from 231 basis points, however they are well below the March 30 two and a half-year high of 297 basis points.

The Turkish IMF program was a success if judged according to economic objectives set out at the start of the program, according to IMF mission chief to Turkey, Lorenzo Giorgianni.

“In terms of the macroeconomic targets, the program has been a success,” Giorgianni said.

He said growth rates averaged between 6.0 to 7.0 percent while reserves are now almost twice the size envisaged

“If you look at macroeconomic indicators, there is certainly significant overperformance,” he said.

“Of course, if you look at where we stand now, the economy is coming off a good run and there are signs of fatigue.”

“All this is because Turkey has run into strong headwinds from global tightening of credit conditions, increasing food and energy prices, and also has been affected by domestic political events,” he added.

The IMF estimates that for every 1.0 percent decline in economic growth in industrial nations as a group, cumulative growth over a one-two year period declines by about 0.8 percent in Turkey.

But those effects could be mitigated by the strength of economic growth in other developing nations which is expected to offset weaker growth in Europe and the United States this year.

Turkey has become less reliant on advanced economies, as its market penetration in other emerging countries has increased to 26 percent from 20 percent, IMF data show.

Inflation is also beginning to rise again in Turkey. Under the IMF program, inflation fell to a 30-year low around 7.0 percent, but it crept up to 9.5 percent last year as global fuel and food prices soared.

“At the end of the day inflation is running well above the target set by the government of 4.0 percent, so it poses a challenge and a credibility issue for policymakers, and needs to be attended to,” the IMF’s Giorgianni said.

The central bank, he added, could adopt a strategy in which it allows inflation to exceed the target for a while to accommodate the first round effects of higher food and fuel costs, but then tighten monetary policy to keep expectations anchored.

“If the central bank follows these announcements and if fiscal discipline is preserved, I think there is an opportunity for inflation to stabilize and eventually decline to lower single digits which the government has set for itself,” said Giorgianni.

While the Turkish government feels proud of its economic achievement since 2001, a move by Turkey to to seek a follow-up IMF standby loan agreement could damage the mildly Islamic AK Party’s political fortunes as it continues to struggle with the so called “secularists” in Turkey’s political establishment and army.

Scaling down the IMF’s involvement in Turkey, by opting for twice-yearly IMF economic assessments, may be politically more suitable.

By the weekend, Giorgianni said there was no word from the Turkish government on how it planned to proceed, either without an IMF program or under enhanced IMF surveillance.