Bernard Kennedy in Ankara -

To the majority of Turkey's tycoons and stockbrokers, the continued delay in the signing of a credit agreement with the International Monetary Fund (IMF) falls little short of madness. But there are also those who see method in Prime Minister Recep Tayyip Erdogan's refusal to say either "Yes" or "No".

Nobody doubts that it's the premier who has the last word. "The technical preparations have been made and there doesn't seem to be any big problem," says Ankara-based Erdal Saglam, leading economic columnist for the influential national daily Hurriyet."But he's a typical politician - he doesn't want to cut expenditures. I think it's as simple as that."

The 2005 standby accord - the last in a decade-long series - expired a year ago. With the crisis and recession of 2001 long buried, the government felt justified in loosening its purse strings to speed up infrastructure projects and reduce the tax burden on employers. Talks on a follow-up agreement resumed in the autumn after global conditions caused exports, output, the Turkish lira and asset prices to tumble. Since then, Erdogan has periodically accused the Fund of insisting on excessively stringent policies. On one occasion, he charged it with "wringing our necks."

The prime minister was widely expected to change his tone once the March 30 local elections were over. An agreement to resume talks was duly announced on the sidelines of the G20 London summit in early April. Erdogan also pleased the financial markets by appointing Ali Babacan chief economy minister and Mehmet Simsek finance minister in his sweeping May 1 cabinet reshuffle. On May 10, however, the premier was back to form: "If you put a template in front of us and say 'sign it', our administration is not the kind of administration that will sign such a template," he told a TV interviewer. Accusing the Fund of "saying one thing in the evening and one thing in the morning", he left no doubt it was the size of the budget that was at stake: "If we make such a large cut, we will have trouble with our investments... The moment we stop investing, there will be no employment."

Getting impatient

The Turkish Industrialists' and Businessmen's Organisation (TUSIAD), which represents big business, is becoming impatient. The failure to finalise an IMF accord quickly, it states in its most recent macroeconomic survey, "has had a negative impact on the basic indicators for 2009." The survey goes on to predict a 4.1% contraction in GDP and a budget deficit of 5.6% of GDP - and this only if the IMF deal comes to fruition.

Levent Durusoy, chief economist of YF Securities in Istanbul, says the government has been able to put off the IMF deal due to the rebound in the capital markets and an improvement in external balances. Despite net repayments of bank and private sector foreign debt, Durusoy acknowledges, a sharp fall in the current account deficit, sales of gold and the repatriation of wealth from abroad have relieved the pressure on the lira. However, he warns that this pattern might not persist. Moreover, the crux of the matter is no longer the balance of payments, but the state of public finances in light of the crumbling tax revenues. "Without the IMF, I don't think even the revised budget deficit target of 5% of GDP can be met in 2009 and I don't think the government will have any interest in fixing it in 2010 or 2011 either. Don't forget, 2011 is also an election year. Our debt dynamics are still fragile to some extent because of the short maturity and high interest," he says.

Although the central bank has been reducing its overnight borrowing rate (most recently to 9.25% on May 14) as inflation has fallen to 6.1%, Durusoy speculates that the government's growing borrowing needs could eventually cause market rates to back up.

Alleviating the recession?

For the time being, the bond, stock and currency markets still appear willing to wait for the IMF to display its much-vaunted new flexibility - or for Babacan, the ex-foreign minister who supervised previous IMF accords as Treasury minister from 2002 to 2007, to win the premier's ear. But not everybody is equally worried. Given the rapid contraction in the current account deficit, Emre Yigit of Global Securities believes an IMF deal may not be necessary. He also fears such a deal could become counterproductive. "A large amount of foreign currency from the IMF would be likely to strengthen the Turkish lira excessively, causing the current account deficit to expand again," he explains. "In this context, a flexible credit line on which Turkey did not have to draw unless absolutely necessary would be fine, but a large standby accord of anything from $20bn to over $40bn would be difficult to digest."

As for the fiscal side, Yigit argues that the side effects of an excessively bitter pill could be worse than the condition Turkey is trying to cure. "If the IMF is indeed proposing a neoclassical formula of limiting spending and reducing the budget deficit, we could end up with a deeper recession this year than we need to have - perhaps a 5.5% contraction instead of 4.5%. What's the point of having the ability to use countercyclical economic policy - and Turkey has earned this ability through prudent policies in recent years - if you don't use it?" he asks.

Yigit acknowledges that fiscal policy will have to be tighter in 2010 and 2011 if the improvement in debt ratios is to resume, but expects the economy to be growing again by then. "We can come to that when the time comes," he says, adding, "In six months' time, not having an IMF deal might appear to be a sign of economic strength and a wise decision to have taken. This is a minority view at the moment but this is the way the wind is blowing."

In that case, Erdogan may be right to keep us all guessing.

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