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Friday, 18 April 2014

Going, going... gone?

Turkey’s protracted negotiations with the IMF for a loan are looking increasingly fruitless, with some already convinced that the negotiations are as good as dead. The sovereign had shown little enthusiasm for a deal, which it argued it did not really need. But some are concerned that the situation leaves Turkey vulnerable if conditions take another turn for the worse. Solomon Teague reports.

Turkey has spent much of this year in negotiations with the IMF for a loan that many suspected it didn’t want, and some insisted it didn’t need. Early delays were blamed on Turkey’s regional elections last spring, for which the government was reluctant to weaken its hand by accepting what would have been perceived by some as charity.

There was a feeling in Turkey that once the elections were behind it, the ruling AKP party would soften its resistance to the loan and do the deal. But the elections came and went, and no deal materialised. Now it looks like no deal will be done, though the door remains open to new negotiations if global economic circumstances change.

And some still do believe that a deal could be struck: ““We think the IMF-World Bank meetings to be held in Istanbul in early October should help accelerate talks for the new IMF programme,” said Fatma Melek, chief economist at Akbank.

In the short term, the absence of an IMF deal is not universally perceived as a problem. The market’s response has been underwhelming, which can be seen as a vote of confidence for Turkey’s ability to finance itself without IMF help.

But Tolga Egemen, head of corporate banking at Garanti Bank in Istanbul, warned it might create concerns if and when the mood in the global markets turn negative. “When the weather is good, as it is now, the absence of an IMF agreement will not harm us,” he said. “But it makes us more vulnerable in case of worsening weather conditions.”

Others go further: “The capital flow to emerging countries is likely to remain low for the foreseeable future due to global deleveraging,” said Melek. “In this respect securing lower cost financing for the longer term will be critical in order to offset the negative impact of the global liquidity shortage on the Turkish economy.”

Turkey’s attitude to the IMF deal illustrates a problem the IMF still has in how it is perceived. Historically there has been a stigma associated with taking an IMF loan. This has been an issue the IMF has been keen to address, in a bid to have more countries take loans as a preventative measure, to avoid the far more expensive and potentially contagious destabilising affects of complete economic collapse. Mexico and Poland are among the countries to have accepted IMF loans on these terms.

“The crisis changed the game,” said Nigel Rendell, senior emerging markets strategist at RBC Capital Markets in London. He said that the markets have become adept at distinguishing between strong emerging market sovereign names that need the extra breathing space afforded by an IMF loan and the real basket cases – those that cannot continue to function without IMF help.

Far from carrying a stigma, an IMF loan now in some cases arguably gives the market comfort. “A programme supported by the IMF could be useful as it would help secure investor confidence in the market. It might also prevent an increase in risk premium in international borrowing and also reduce the pressure on the Treasury’s domestic debt roll over in the markets,” said Melek.

Necessity has therefore become the new benchmark by which IMF deals are judged. Turkey’s refusal to proceed with an IMF deal was perhaps a failure to recognise this shift of attitudes. Or it could be an indication of political realities at home, independent of the market view. Either way, it has left itself with little room to manoeuvre if its economy deteriorates.

The AKP has publicly insisted that its negotiations failed because the terms being offered were not favourable to Turkey – though the IMF has markedly relaxed its lending criteria since the onset of the financial crisis. Certainly, Turkey would have been forced to reduce its budget deficit, making some potentially unpopular decisions in the name of fiscal tightening.

“The main risk for the Turkish economy is the deterioration of the public balances,” said Melek. “Some fiscal easing is understandable during the crisis but sustainability of the public finances is also crucial. Markets are expecting the announcement of the medium term fiscal program to signalling that the government will continue to pursue fiscal discipline once the impact of the global crisis subsides.”

But he predicted the AKP will commit to ensuring fiscal discipline, as, he noted, it has done in the past. That “is the critical factor in sustaining lower inflation and interest rates in the forthcoming period,” he added.

The risk is that if an IMF deal does not materialise, AKP will have bet Turkey’s future on the world economic outlook remaining stable for the sake of its political popularity. How good a bet that is, nobody can be sure.

“Financial markets are very fickle,” said Rendell. “It wouldn’t take much for the environment to deteriorate again, and it could occur very quickly.”

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