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Turkey, IMF talks go to the wire

Turkey, facing a multi-billion dollar financing shortfall, will resume efforts to reach agreement with the International Monetary Fund on a stand-by facility later this month after an IMF mission departed Ankara on January 27 without a final settlement The last such program, which expired in May 2008, was only the most recent in a series going back nearly 10 years that has been nearly universally viewed as an "anchor" for instilling the financial discipline necessary to implement successive economic reform agendas.

As recently as the end of last autumn, it seemed unlikely that any new agreement would come before Turkey-wide municipal elections at the end of March, due to the government's unwillingness to remind the public of austerity policies running back six years, agreed by Turkey in order to receive assistance in surmounting the country's 2001 financial crisis: policies that would only be reinvigorated in response to a new agreement with the IMF.

However, a projected government financing shortfall of US$30 billion in 2009 will oblige it to reach another such agreement sooner rather than later. Major budget cuts affecting all ministries, but especially those concerned with social welfare, were already being announced at the end of December.

Meanwhile, industrial output has fallen steadily for nearly half a year, the largest cumulative drop in nearly seven years and accelerating from month to month. Gross domestic product growth in 2009 is likely to be near zero or negative.

The international financial consensus is that any stand-by agreement under $20 billion would be have a negative effect on investor confidence. Such an agreement is necessary also because, even after the decision of the country's Constitutional Court last year not to outlaw the ruling Justice and Development Party (AKP) of Prime Minister Recep Tayyip Erdogan (despite affirming that it was in fact a focal point for anti-secular activity), there is still both the perception and reality of continuing high political risk in the country due to social divisions concerning the role of religion.

Indeed, the bringing of the Ergenekon conspiracy case, alleging the existence of a clandestine, terrorist, ultra-nationalist organization tied to members of the country's military and security forces, is viewed as the current regime's counterattack against the Turkish "deep state", although such an interpretation requires much greater nuance.

For example, some of the military generals implicated by the prosecutor have advocated a reorientation of the country's security policy in a "Eurasianist" direction away from the West: so there is one interpretation that, at least in this regard, there is a community of interests between the political executive and the military general staff.

The current reading of high political risk will therefore certainly extend beyond the municipal elections at the end of March, the results which will be taken as a reading of confidence in the current government. Since the AKP received 47% of the vote in a general election in 2007, any result in the municipal elections that falls under that threshold will be interpreted as a diminution of confidence on the part of the electorate.

While internationally the country's political risk remains high although slightly reduced, domestically there is the impression of waiting for the March elections before any further shoes drop. The Turkish stock exchange, for example, has stabilized somewhat since I last reviewed it here (see Turkey in free-fall, 15 November 2008) with the ISE-100 index oscillating in the mid-20,000s and the ISE-30 in the mid-30,000s.

It is not entirely irrelevant to note that within a week after I wrote, suggesting that the ISE-100 might have to decline as far as into the mid-20,000s to find support, it fell to an intraday low of 20,912 on November 21 before recovering and running to the 28,000 level a month ago.

Since then the ISE-100 has oscillated in the mid-20,000s, and the chart suggests that this trading range between 24,000 and 28,000 could easily extend through the medium term, at least until the municipal election results are known next month.

Likewise, the ISE-30 fell on November 21 to 28,000, down more than 62% from its mid-October 2007 high, before recovering in a pattern similar to the ISE-100 to close just over the 33,000 level. It now occupies a trading range between roughly 32,000 and 36,500.
In the short term, the market, and the Turkish economy with it, will be whipsawed between the expected conclusion of the IMF stand-by agreement on the one hand and, on the other, the results of the end of March municipal elections.

In the longer term, neither of these events will resolve the present level of political uncertainty. They may even exacerbate it, and there is no prospect that the election results, whatever their outcome, will have any calming effect.

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URL:  http://www.robertcutler.org/blog/2009/02/turkey_imf_talks_go_to_the_wir.html
First published in Asia Times Online, 6 February 2009;

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