Turkey ponders rejection effect

Ankara – Turkey’s fragile economy, still recovering from its worst recession since 1945, looks vulnerable to fresh turbulence after the rejection of a US troop deployment request, depriving Turkey of a multibillion-dollar aid package. Financial markets, which expected parliamentary approval of the motion, were set for volatile trade today. They must weigh the implications of losing US grants and loan guarantees for Turkey’s crucial debt management and ongoing talks with the IMF on an existing $16 billion loan deal. «If Turkey had supported the USA, it would have been easier to make an arrangement with the IMF for the continuation of the standby arrangement,» said Baturalp Candemir, chief economist at HC Istanbul Securities. The IMF is currently assessing the country’s 2003 budget plans and economic reforms, which it says Turkey must pass before it can approve the latest $1.6 billion loan tranche. The importance of such support is heightened by fears about the impact of a war beyond Turkey’s southern border, which is expected to slash the country’s crucial tourism revenues, hit trade and push inflation higher as oil prices surge. Turkish leader Recep Tayyip Erdogan said yesterday his government was reviewing its options after Parliament’s decision and did not rule out an eventual second attempt to win permission. He also warned against allowing the issue to harm the economy. «No one should pay heed to speculation that would upset economic stability. We are determined to walk to the future with our nation in stability and confidence,» he said after a meeting with party officials. Turkey is only now finding its feet after suffering a financial crisis in 2001 which savaged its banking sector, swelling its domestic debt and plunging it into recession. Under the troop deployment deal, the United States had offered Ankara $6 billion in grants and up to $24 billion in loan guarantees in exchange for its support. Candemir said this money was important in managing domestic debt and would have been used to replace domestic debt with foreign debt, longer maturities and lower interest rates. Turkey has a huge domestic debt load of more than $90 billion and even small increases in the cost of borrowing have a major impact on the cost of managing that debt. Economic program crucial If the government decides not to resubmit the troop deployment motion to Parliament, it will have to work hard to meet IMF requirements on issues of structural reform and sustaining fiscal discipline. «In order to convince the IMF to continue with the standby arrangement, this government needs to complete the reform agenda,» Candemir said. The importance of the economic program was also stressed by Garanti Bankasi General Manager Ergun Ozen, who said a rise in interest rates and the lira exchange rate was to be expected today. «If the motion is not passed in any circumstances, the government must embrace the program closely… and give markets confidence that the program will continue in a healthy manner,» Ozen was quoted as saying by the Anatolia news agency. However, he said markets would react more calmly if there was a prospect of the motion being submitted to Parliament’s agenda when it reconvenes tomorrow. Turkey’s sensitivity to the possibility of war in Iraq is explained in part by its experience of the 1991 Gulf War, which cost the country dearly in lost trade and tourism revenues. Financial markets had last week been buoyed by the prospect of a deal with the United States and closed firmer on Friday in the belief that Parliament would approve the motion. Shares edged higher, bond yields dipped and the Turkish lira edged up to 1,597,000 to the dollar, hitting a fresh two-month high.

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