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Turkey: knock, knock, knocking on the IMF’s door

Güldem Atabay Şanlı
The International Monetary Fund and Argentina finally sealed a three-year stand-by agreement accompanies by a record-high loan package of $50 billion, or 333 percent of Argentina’s quota, on June 20.  

Half of an initial $15 billion will be used to support Argentina’s budget. As usual for such agreements, the remaining $35 billion will be made available over the next three years, based on performance, and will be subject to quarterly reviews by the IMF’s executive board. Given the political turmoil in Argentina, whether such a three-year program will last or not remains to be seen.

The IMF has changed since the global financial crisis. The stand-by agreement with Argentina mentions safe-guarding the livelihoods of the country’s poorest citizens, though the basic recipe it offers is not profoundly different than in past decades.

Such news swiftly brings Turkey’s troubled economy into focus.  A similar stand-by agreement between the IMF and Turkey, following a decade without an agreement, has been the talk of the town. Argentina’s peso and the Turkish lira have been leading all other emerging-market currencies with their loss in value.

So just what is it that brings Turkey to mind when it’s Buenos Aires, not Ankara, knocking on the IMF’s door for financial help?

Turkey had its own financial meltdown back in 2001 because of a bankrupt Treasury funded by the central bank, messy fiscal accounts, a high public debt to GDP ratio, above 60 percent inflation and of course a damaged banking sector.  Backed up by IMF loans and an economic program designed to fit Turkey into the global order, as per the rules of the game, the scheme was owned and followed during the governing Justice and Development Party’s initial years of 2002-2008.  Thus, Turkey managed to sail through troubled times. Crowned with full European Union membership candidacy in late 2004, Turkey was able to attract so much foreign funding that it cemented the AKP’s position as a very strong single-party government.

The years 2008-2013 marked the aftermath of the global financial crisis and helped the economy in Turkey to grow at wild levels through excessively cheap and abundant liquidity. This period made it possible for the AKP administration to gain more political power. Any awareness about its lack of economic vision without the IMF was buried under the piles of cash that flowed into the country, as was the case with many other emerging markets. Thus, began the economic problems that have now turned into serious macro imbalances.

President Recep Tayyip Erdogan’s mission of singling himself out as the sole political authority in Turkey became easier as the economy rode high. This, in turn, hurt the democratic, economic and social fabric of the country. Most pertinently for the economy, it meant the loss of the central bank’s ability to take decisive action on the inflation front and led to a significant spike in annual price rises from a low of 4.6 percent in 2008 to 12.2 percent today. As is well known in economic theory, high inflation speeds up the deterioration of country’s economy across the board and Turkey’s economy is of course no different.

The tide has turned so much since this post-crisis period of abundant liquidity that the Turkish economy is at an unfortunate crossroads once more. Whoever emerges as the victor in Sunday’s presidential and parliamentary elections has to quickly make a choice on how to deal with serious economic problems that have been put in the deep freeze since early elections were called two months ago.  In fact, the early elections were called just because of the mounting economic problems in Turkey.

The first item on the agenda following Sunday’s elections will be how to reverse an impending economic contraction in the third quarter of 2018. The 500 basis-points in rate hikes that investors forced the central bank to take this year, despite objections from Erdoğan, are set to reverse economic growth. The 11 percent expansion in domestic consumption in the first quarter of 2018 will effectively go down the drain. Whether the growth/inflation relationship will turn into stagflation in 2019 or will be smoothed out through credible economic policy choices and positive expectations management remains to be seen.

Turkey’s inflation problem will become even more tangible following the elections, even after the 500 basis-point rate hike. With inflation heading towards 15 percent in the summer months, spurred on by rising energy costs and the still weakening lira, the central bank’s inflation target is turning into a laughing stock. With the central bank’s credibility still on the line just four days before elections, Erdoğan once again said he planned to lower interest rates to help economic growth. In a speech to businessmen, he asked for the support of Turkish voters to show the world how rates could be lowered and growth rekindled.  Thus, should Erdoğan wins strong public support at the elections, there is no guarantee that economic orthodoxy will return to Turkey. In fact, the possibility will increase that economic policies incompatible with worsening global financial conditions will be followed.

As the President is fixated on strong growth based on domestic demand, one needs to pay serious attention to the quality of Turkey’s growth. Turkey managed to achieve its extraordinary GDP expansion in the post-2008 years (except for 2009 and 2015) through excessive foreign borrowing that was not channeled into productive investment.  So mnay housing and giant-sized construction projects were financed through ample cheap money raised from abroad that, as interest rates rise across the globe, the Turkish economy will struggle to keep growth afloat in the years ahead. This same type of growth also keeps import increases well above exports, feeding the current account deficit, which is now equal to a whopping 6.5 percent of GDP. Thus, a new growth model should be constructed based on productivity with a medium to long-term perspective.

A long-term anchor that had reduced Turkey’s risk premium significantly and helped to instigate rapid economic rebounds in troubled times was Turkey’s fiscal discipline, secured via the 2001-2008 IMF program.  Becasue the strong growth that Erdoğan has in mind requires more and more state spending when global liquidity is drying up, the slow but sure deterioration in Turkey’s fiscal quality is becoming evident. Widening the tax base has always been the idea, but Turkey’s budget is still financed with indirect taxes which tend to slow down as the economy grows more slowly. Pre-election spending splurges ahead of elections have become a natural recurrence, as have investments in mega infrastructure projects backed by Treasury guarantees. Political appointments to many posts requiring high quality oversight also combine to make the future for the fiscal accounts rather bleak. In fact, from a budget deficit below one percent only a couple of years ago, Turkey’s deficit to GDP ratio is heading to above three percent by the end of 2019.

ΜΠΕΣ (ΕΔΩ) ΤΩΡΑ

Then comes external debt, Turkey’s toughest problem. It is not yet clear how much impact efforts by Turkish corporates to restructure their foreign loans, amounting to more than $225 billion, will have on the banking sector.  To ease the burden on both sides, the upcoming government needs to find a very fast and effective solution to this problem because the lira will keep losing value in the years ahead.
Turkish private sector external debt

Turkish corporate sector open position

The post-election era will be the time for Turkey to face the real challenges of its economy. Accepting and solving the problems will require awareness, energy, skill and financial resources. It has taken $50 billion for Argentina to buy time, credibility and the kind of vision to be able to survive in the Federal Reserve’s tightening years.

Now that Turkey could be “knock, knock, knocking on the IMF’s door”, how different would a possible stand-by agreement be this time when the burning problems are not the public sector accounts but rather the private sector’s?
Πηγή: https://ahvalnews.com/imf-turkey/turkey-knock-knock-knocking-imfs-door

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