Signs of a healthier economy

ANKARA – Turkey’s economy looks like it could be picking itself out of the wreckage of profound crisis, but huge debt and a propensity to serve up political surprises mean no one can be too complacent. The phrase «virtuous circle» is popping up increasingly in investment bank research, pointing to a cycle of falling inflation and interest rates that is boosting growth. The lira, which hit an all-time low of more than 1.77 million to the dollar in March, has stabilized around 1.4 million, and some analysts even say it looks overvalued. The International Monetary Fund, which stepped in 18 months ago with a fresh $16 billion loan package, agreed this month to release a stalled credit line and defer looming repayments. Standard & Poor’s recently upped its rating on Turkish external debt to B from B-, and fellow ratings agency Fitch shifted to a positive outlook. «Things are looking quite good these days. The economy has gone into a virtuous circle, although it’s at the very early stages,» said Yarkin Cebeci at JP Morgan Chase in Istanbul. «As long as domestic sentiment remains strong we see no immediate danger… But if things went wrong it could turn into a vicious circle.» Turkey was already on an IMF loan drip when a banking crisis in late 2000, compounded by a political row a few months later, panicked the markets and plunged the country into the doldrums. The newly floated currency dropped like a stone. Gross national product (GNP) shrank by 9.4 percent in 2001. In that context, current indicators look pretty encouraging. Annual inflation, running at more than 80 percent in early 2001, came out at 27.4 percent in July. Most analysts say there is a decent chance of meeting a year-end target of 20 percent. The central bank has pruned key interest rates twice in the past six weeks, slicing off six percentage points to 32 percent. Benchmark domestic debt yields, close to 70 percent in March before the war in neighboring Iraq, are now below 40 percent. GNP growth looks well on course for its 5 percent target. But even the most bullish commentators agree there is still plenty of room for things to go wrong. Turkey’s total public sector debt amounts to some $185 billion, much of it short-term domestic debt. At least half of the total is denominated in foreign currency. This makes market confidence crucial. A sharp slide in the lira would push up repayments, and an exodus from the domestic bond market would make it hard to roll over short-term debt. Most analysts reckon the debt load is sustainable, but a few say the risk of another crisis in the medium term remains high.