Experts urge Turkey to move forward with IMF agreement

Indices show country’s finances are under serious risk, analysts say

Turkey’s Prime Minister Recep Tayyip Erdogan (c), France’s Junior Transport Minister Dominique Bussereau (r) and Germany’s Minister of State for Europe Gunter Gloser attend the signing ceremony of the Airbus-Turkish Aerospace Industries (TAI) aileron contract for the A350 in Ankara yesterday. The contract awards the full single-sourced aileron work package for the Airbus A350 XWB to TAI.

By Ibon Villelabeitia - Reuters

ANKARA – Turkey must swiftly agree upon an International Monetary Fund (IMF) deal and apply an aggressive stimulus package to avoid its economy tipping it into recession.

A slump in Turkey’s economic growth and rising risk aversion by foreign investors have battered the lira and stocks.

But Prime Minister Recep Tayyip Erdogan’s government has resisted joining other emerging markets in seeking IMF help to protect the $700 billion economy from the global financial crisis.

With Turkey facing local elections in March, analysts say the government appears reluctant to extend an IMF deal that expired in May for fear of having to make painful spending cuts. Further dithering over an IMF agreement and what critics say is government denial of the severity of the crisis given domestic politics risks undermining economic stability.

“It is essential the government signs an IMF deal and it should be done as soon as possible,” said Ali Ihsan Gelberi, an analyst at Istanbul-based Garanti Bank. “If not, it risks seeing more capital flight, the lira will keep losing value against the dollar, access to external financing will be very difficult and growth will be affected. Without the IMF agreement, Turkey will not be able to put the economy in order,” Gelberi said.

Buttressed by successful IMF deals, the ruling Justice and Development Party (AKP) has overseen strong economic growth after the 2001 financial collapse: Foreign investment flowed, inflation was tamed and the banking sector rallied.

But as the global crisis hammers emerging markets, Turkey’s economy appears vulnerable – GDP growth is seen at the low end of 2-4 percent in 2008; exports have slumped; inflation has crept back into double digits and unemployment is now almost 10 percent.

Turkey’s current account deficit – the country’s longtime economic Achilles heel – is seen as rising to $50.4 billion in 2009 and the funding needs of the private sector are estimated at around $90 billion.

Analysts, including Moody’s, the leading sovereign analyst for Turkey, have begun sounding alarm bells, saying Turkey could enter a recession in 2009 unless it agrees to an IMF program. “There is a very serious risk of negative growth in 2009. The government must move on,” said Ahmet Akarli, a London-based analyst for Goldman Sachs. “The IMF deal should have been signed months ago. It is already too late.”

But Industry Minister Zafer Caglayan said on Wednesday Turkey did not face the prospect of a recession in 2009, adding that the 4 percent growth target was still valid.

The Organization for Economic Cooperation and Development predicts 1.6 percent growth in Turkey in 2009.

The abrupt end of Turkey’s bonanza of nearly 7 percent annual growth over the last five years has coincided with what critics say is a slowing of the government’s reform agenda. The AKP won reformist credentials after 2002 for achieving macroeconomic stability after years of mismanagement and opening accession negotiations with the European Union. But EU reforms have slowed and critics say the AKP’s pro-business credentials appear increasingly adrift. TUSIAD, the leading forum for Turkish business, has criticized Erdogan for saying the worst of the crisis is over, and urged the government to push ahead with a stimulus package to jump-start growth.

“The prime minister and his economic czars are, of course, very busy with crisis denial,” Yusuf Kanli, a frequent critic of the government, wrote in an opinion piece in the Turkish Daily News on Wednesday. “They should spare some time and watch TV news demonstrations of workers... sacked from work across the country,” Kanli wrote.