Tuesday, 17 July 2018

Helpful interference

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Turkey has long been in negotiations with the IMF for a loan that will take the pressure off its public finances and give it more options in dealing with the global downturn. But failure to reach an agreement before now has led many to conclude that the government does not really want a loan, or is unwilling to accept the conditions that would be attached to it. But does it have any choice? Solomon Teague reports.

Rightly or wrongly, there is a stigma attached to IMF assistance. Like asking for charity, it is seen by many as a sign of failure. Even at a time when so many economies are failing, admitting to the need for outside help can be seen as tantamount to economic incompetence. For a party that has been in power since before the onset of the crisis, that is a bad message to convey.

This is an issue that has been recognised by world leaders, and is one of a number of items that those who wish to reform the IMF argue must be addressed – a process that began to be tackled in London at the G20 meeting in March. Yet such reforms will take time, which does not help Turkey.

Outside aid has become a huge political issue in Turkey, where the ruling AKP party had taken the view that accepting an IMF loan would weaken its chances in regional elections at the end of March. In early 2009 a debate raged in Turkey regarding if and when the IMF deal would be closed: most believed once the regional elections were held the government would agree terms with the IMF.

Some expected the government to continue searching for other sources for the money. “If the government thinks it can raise US$20bn from elsewhere it may not sign an IMF agreement,” said Gunduz Findikcioglu, chief economist and head of research and investor relations at Turkiye Sinai Kalkinma Bankasi in Istanbul. To this end the government has almost certainly been in negotiations with other sources of financing, for example with Saudis or wealthy Muslims in Germany and elsewhere in Europe.

It has already raised around US$7.5bn with a tax amnesty, repatriating assets held offshore, said Martin Blum, head of EEMEA economics, fixed income and FX research at UniCredit Group. It is also working hard to develop its contacts in Africa, Latin America and the Middle East, to strengthen business ties and create opportunities for Turkish entrepreneurs.

“Turkish entrepreneurs are good at taking risk,” said Asli Akdeniz, regional coordinator at DEIK, the Foreign Economic Relations Board in Istanbul. “They are often the first into new places, which you saw in Afghanistan. Now you are seeing it in Africa and Latin America too.”

Luxury or necessity?

At the core of the IMF debate is to what extent Turkey needs the IMF’s money. “We don’t have to sign an IMF agreement but it would be good to have one,” said Tolga Egemen, head of corporate banking at Garanti Bank. “It is dangerous to only sign one when you have no choice. It is better to take precautions. You get better terms, and it boosts confidence, making it less likely it will be needed.”

If the money really is not desperately needed then the AKP’s official position – that the IMF deal is desirable as long as it is offered on favourable terms – looks credible. Conversely, the more urgent the country’s need for the money is believed to be, the less defensible the government’s stalling appears. This is especially true for those that see the IMF’s conditions as sensible guidelines upon which economic policy should in any case be based – reining in spending, for example.

It comes down to a tension between the long-term interests of the country, which are probably best served by taking the IMF’s cash and fulfilling its conditions as they relate to capping public expenditure, and the short term political interests of a political party that is looking to retain and extend its power. It might even be politically expedient to take the loan now, as then the expenditure cuts that will be vital to keep the country solvent can be blamed on the IMF and the conditions of the loan, rather than framing them purely in terms of prudent economic management.

As this report went to press there had still been no announcement regarding an IMF deal, but one was expected very soon. Although the G20 summit in London made provisions for a new credit line facility that could offer loans on more favourable terms than have been available in the past, Blum doubts Turkey will go for such a package.

From a macro vulnerability perspective Turkey is in a position between the stronger and weaker emerging economies, he says: its need for external financing is not as large as some other Central and Eastern European countries, like Hungary, for example, which have larger external financing gaps. On the other hand it is more needy than the likes of Poland, which has greater relative FX reserves, among other things, and is therefore more likely to qualify for loans from the IMF on better terms.

The G20 summit has transformed the IMF’s finances, giving it around US$750bn to allocate in loans, up from around US$250bn before. This means Turkey is more likely to get a bigger overall package, if it wants one.

The size of the loan Turkey might take is another topic of considerable debate in Turkey. Some have argued it would be best to take the smallest loan from the IMF that it can, while still ensuring it is able to meet its balance of payments commitments – probably around US$20bn. This would minimise the stigma of taking IMF money and, the argument goes, send out a strong signal to the markets and the public that Turkey’s finances are in relatively good shape.

Others have argued that Turkey should negotiate the biggest loan it can to give it maximum flexibility, and ensure that it is able to cope with whatever economic deterioration comes in the future, both internally and globally. The logic behind this argument is that unneeded money does not need to be drawn, so there is little harm in taking it – and for this reason, Turkey is likely to push for this. The upper end of the scale of money likely to be negotiated from the IMF is around US$45bn.

Separate to the IMF agreement, but fundamentally linked, is a medium term fiscal plan – also expected at the end of the month – that will outline the AKP’s plans to rein in spending and eventually balance its budget. Recent IMF announcements show that the body is acutely aware of the short term pressures countries are under to support their economies, so the AKP’s short term plans are unlikely to be undermined by any IMF conditions attached to a loan. However, the IMF will want to see a plan for normalising public finances in the medium and longer term. The AKP’s announcement is therefore likely to be designed to demonstrate that, with cuts in expenditure and rules to limit the annual expenditure levels likely to feature.

Asleep at the wheel

Whether it is cynical politics or a failure to fully appreciate the magnitude of the problem quickly enough – and Turkey would not be alone in being guilty of that – the government was slow to acknowledge how the global downturn would affect the country. Although Turkey is blessed with a young population that provides a relatively robust market for its own manufacturing, it still relies heavily on export markets. Now its manufacturing sector has been left as the bloodiest casualty of the crisis in Turkey, contrasting starkly with its healthy banking sector.

Consequently, the government has come in for some criticism for its handling of the crisis, particularly about its lack of response. In the last six months there has been no major policy change and no indication that the government has a plan to alleviate the pressure building up in Turkey. This contrasts with most other governments, which – even if there is not always agreement about the response (should governments be throwing money at the problem or adopting a more frugal approach and cutting back on spending?) – have at least displayed some kind of vision for dealing with the crisis.

But the problems Turkey faces are not confined to its manufacturing sector. Turkish banks and corporates have been financed largely by international lending, and in retrospect it is obvious that the disintegration of this source of debt would affect its economy.

Exacerbating the problem is the fact that a sizeable portion of existing debt is coming up for refinancing in the second half of 2009. With the cost of borrowing significantly higher than it has been in previous years, many Turkish institutions will be squeezed when they seek to renegotiate the terms of these loans. And even where banks would like to keep exposure to Turkey, judging it to be in a strong position for the medium and longer term, their ability to do so looks increasingly restricted by political pressures to direct their lending to their home jurisdictions (see separate story, “Well prepared”).

Much appeared to hinge on local elections, in which the AKP did worse than expected, with around 38.8% the votes, compared to its rival CHP party with 23.1%. While the AKP’s grip on power in Turkey is strong, the party was desperate to breach the 50% barrier that would have given it an absolute majority, thus paving the way for constitutional changes and other more sweeping reforms.

But the disappointing election result does not diminish the AKP’s ability to govern as it has the same number of MPs. But it does deprive the government of the absolute mandate it sought to pursue its political agenda without the need to build consensus with opposition parties.

With the election results so recently announced it is impossible to determine how they will affect the AKP’s policy direction, or what broader impact it may have on the markets. In the weeks leading up to the election there was a feeling that important decisions were being deferred until it was out of the way and it was more politically palatable to take them.

The closure of factories that have seen their export markets disappear could be one example. One banker in Istanbul believes there was even an explicit gentleman’s agreement in place between the government and industry bosses to postpone such painful announcements until the elections had been conducted. Consequently, it may be that Turkey is only now starting to feel the full force of the downturn, but as this report went to press the evidence was not yet clear.

Although the election results were unexpected, it is not unusual for an incumbent party to get a beating when the economic picture is so gloomy. Neither is it unusual for local elections to be used as a forum from which the public registers a protest vote that it may not make in a general election, where the stakes are higher.

It is also unclear what impact the election result had on the prospective IMF deal. Immediately after the election a number of AKP MPs made conciliatory remarks that augur well for a deal, and the case can be made that the government interpreted the result as an indicator that it needed to take whatever action was necessary to resolve the country’s financial difficulties.

“An extreme election result either way would probably have been bad news for the markets – whether AKP had won around 20% or 60%. One extreme might have driven it to populist measures, the other to implementing controversial constitutional policies,” said Blum. The victory of around 38% was probably on the low side but ultimately a good result as it ensures it must continue to work with other parties but giving it enough clout to govern effectively.

Turkey remains in a reasonably strong macro economic position, relative to many of its emerging market peers, and even to some developed economies. Before the crisis hit, the big debate in Turkey was about EU membership and the satisfaction of provisional criteria to enable that process to begin. EU membership looks very distant today, yet Turkey still looks committed to reforming its economy and satisfying those criteria.

There is a feeling in Turkey that the process might be more important than the reward – that meeting the criteria to be eligible might be better for the country than membership itself. EU convergence is still alive in Turkey, as evidenced by the promotion of Egemen Bagis, a serious and respected politician with excellent EU contacts, as chief negotiator for accession talks with the European Union.

Maastricht requires public sector debt to remain below 60% of GDP. In Turkey it is around 30%, although the figure is ballooning well above the 60% level in many countries in the EU club. The consolidated budget deficit has been within 3% of GDP for three years now: many EU countries struggle to satisfy this criterion. The inflation target is still beyond reach, but in today’s financial environment, inflation concerns seem a thing of the past.

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