Surging economy strengthens Turkey’s position with the IMF

ANKARA – A surging economy could embolden Turkey’s government to press for lower primary surplus targets when it discusses a follow-up to its $19 billion deal with the International Monetary Fund, analysts say. But some say a heavy debt burden means Turkey cannot afford to reduce this financial cushion, despite a 12.4 percent first-quarter rise in gross national product (GNP), which makes it one of the world’s fastest growing economies. «Public sector investment must rise to sustain strong growth in the next few years, and to do this the government will press to cut the primary surplus target,» said Ozgur Altug of Raymond James Securities. The current IMF package has helped Turkey emerge from a deep recession caused by a financial crisis that peaked in 2001. But IMF-backed fiscal austerity measures have squeezed public sector investment to extremely low levels, and growth has stemmed mainly from a surge in exports and consumer spending. The World Bank’s Turkey director, Andrew Vorkink, said last week the country would need fresh investment to sustain high growth, instead of relying on a rise in capacity usage. Government ministers have said they may try to cut the key public sector primary surplus target from this year’s 6.5 percent of GNP in whatever relationship they agree with the IMF when the standby deal expires next February. If they succeed that would leave more money in the kitty for investment. But the IMF has resisted pressure to lower the target, seeing a large primary surplus, which excludes Turkey’s hefty debt payments, as a guarantee that the country can continue to service and pay down that debt. The government has not yet said whether it will seek another loan deal with the fund, as most analysts expect and financial markets hope, or opt for a non-lending monitoring arrangement. Economy Minister Ali Babacan said last month it would be possible to trim the primary surplus targets, although the need to cover debt payments ruled out any dramatic cut. Yarkin Cebeci at J.P. Morgan Chase said that by boosting tax revenues, the current rapid growth would strengthen Turkey’s case for lowering the primary surplus targets. «The strong data will give the government the upper hand during IMF negotiations,» he said. Economists agree any reduction would probably be limited and gradual, with both Altug and Cebeci predicting a public sector primary surplus goal of no less than 6 percent next year. But some analysts say there should be no cuts at all. «The target must remain high, as the IMF asks, as long as real interest rates stay at their present high level,» said Taner Ozarslan of Pamuk Investment, predicting the government and the IMF would carry the 6.5 percent target into next year. Serhan Cevik from Morgan Stanley argued that far from cramping growth, Turkey’s fiscal restraint had fostered it. «Fiscal consolidation and the resulting reduction in interest rates have encouraged growth,» he said. Turkey has won widespread praise for its success in dragging down chronically high inflation, which for consumer prices fell to single digits in May for the first time in 32 years.