Bernard Kennedy in Ankara -
Optimism does not come naturally at a time of deep recession with unemployment rising, the volume of credit contracting, the budget deficit widening and trade figures running 25-45% lower than in 2008. However, economists reckon a deal with the International Monetary Fund will help Turkey weather the next stages of the global crisis better than other emerging markets in its region.
Over the past six months, the Turkish lira has been just as weak and volatile as other emerging market currencies, and Turkish equity and real estate prices have tumbled just as heavily. However, the hoped-for $20bn-25bn standby accord is expected to shore up tenuous external balances and reassure international investors. Ankara and the IMF have been at odds over fiscal parameters, local government spending and tax administration, but the Fund hinted in mid-March it was ready to make concessions. This paves the way for serious negotiations to start after Turkey's March 29 local elections.
The IMF also appears willing to countenance a small fiscal stimulus that's likely to include guarantees to encourage bank lending, a rise in official export credits and temporary reductions in some indirect tax rates. These steps may go some way to placating the country's industrial and commercial sectors.
Turkey's ability to bargain with the IMF may reflect its strategic importance to the West - it is one of the first countries to be visited by US President Barack Obama - as well as the success of the IMF's Turkish programmes between 2001 and 2008. "Turkey remains the IMF's poster-child, with added geopolitical importance for key IMF shareholders, and would be loth to walk away in its hour of need," comments Timothy Ash, head of emerging market research at the Royal Bank of Scotland. "The fact that Turkey still owes the Fund some $5.3bn from previous agreements also makes the IMF more willing to 'roll'."
With or without an IMF deal, Turkey's relatively large domestic market, diversified exports, disciplined financial sector and low levels of government and household debt give it an edge over many of its emerging European neighbours. "When global liquidity tightens, all the economies which are dependent on external finance for growth react in the same way," explains Yarkin Cebeci, chief economist with JP Morgan Chase in Istanbul. Nevertheless, "Turkey has some advantages: it had its own crisis just eight years ago, so the banking system is in a much cleaner state compared to its peers, and everybody has been much more cautious about carrying short foreign exchange positions: in fact, households have long positions."
Turkey's soft underbelly is the non-bank corporate foreign debt, $25bn of which falls due in 2009 alone. But Cebeci points out that medium-sized Turkish companies have proved able to roll over foreign debt even at times when large institutions have found it difficult to borrow. This suggests that a significant part of the corporate foreign debt is "back-to-back" and effectively covered by the "huge amount of dollar deposits parked abroad" by local entrepreneurs.
Yapi Kredi Bank's chief economist Cevdet Akcay concurs: "It's possible to see some light somewhere it you give it a try." Indeed, inflation fell to 7.7% in February, accompanied by declining interest rates, and is set to fall further. Even the record 21.3% year-on-year decline in industrial production in January may be a sign the recession is bottoming, according to Akcay, who calculates that allowing for seasonal factors and effective working days, the figure represents a small improvement over December.
Something similar can be said for February's manufacturing capacity utilisation figure of 63.8%, which was unchanged from January, but which represented a smaller decline (of a mere 15.5 percentage points) on a year-on-year basis. Likewise, business and consumer confidence indices have been improving for two months, albeit from rock-bottom levels. Meanwhile, low commodity prices and the knee-jerk decline in imports led to a surprise current account surplus in January.
Amid today's global uncertainties, the timing of any run-up in asset prices remains anyone's guess. "All I would say is that when things start improving, Turkey will be one of the first to benefit," says Cebeci.
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