Fund’s straightjacket creates doubts, says Ash
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Hurriyet Daily News
Oluşturulma Tarihi: Haziran 29, 2009 00:00
ISTANBUL - Timothy Ash of the Royal Bank of Scotland, who just visited Turkey, says the downside of an International Monetary Fund deal would be the conditions it may bring. Turkey’s energy imports remain an ’Achillesheel,’the analyst says.
Timothy Ash, the head of Emerging Europe, the Middle East and Africa research at the Royal Bank of Scotland, made heads turn when he compared the sovereign credit ratings of Turkey and Latvia, a country that is expected to post nearly 20 percent contraction in gross domestic product this year. Latvia’s Baa3 rating was affirmed by Moody’s, placing the country three notches ahead of Turkey, which is rated Ba3, a below-investment grade note.
Having visited Istanbul and Ankara between June 17 and June 19, Ash discussed the Turkish economy with officials, analysts and businesspeople. After his return to London, Ash shared his experience with the Hürriyet Daily News & Economic Review.
Noting that for some rating agencies, "political risk" is the main factor for the Turkish economy, Ash said he still finds it difficult to understand why Egypt is rated two notches above Turkey. "There is no way that political risk is higher in Turkey than in Egypt, while Turkey should presumably get some credit for its European Union candidate member status and its NATO membership," he said.
In his meetings in Turkey, Ash did not observe any "split" within the economy management on whether to sign a deal with the International Monetary Fund or not. "I think that they are genuinely weighing up the pros and cons of doing an IMF deal now," he told the Daily News. "The plus is that IMF money should help cover the budget’s financing needs, reduce the threat of the crowding out effect, and help the Central Bank further cut interest rates, thereby promoting recovery."
Strings attached
But the downside to an accord is that it comes with "conditionality," Ash noted. "Such conditionality might in itself un-nerve markets, while it does limit policy options. The question also is in this highly uncertain global environment, how credible would the macro assumptions be that would underlie an IMF program and if the actual outcome diverges significantly from the program, how flexible will the fund be in adjusting the program. Experience elsewhere suggests [the IMF] is not that flexible. An IMF straitjacket is an IMF straitjacket."
Turkey’s energy import bill remains an "Achilles’ Heel," the analyst said. "I think Turkey will continue to run a structural current account deficit because of this, as recovery comes back on stream."
Still, having a wide current account deficit is "not necessarily a big problem, depending on how you fund it," Ash said. "Experience over the past six months suggests that Turkey's current account financing has been relatively robust."
Ash predicted that as inflation goes lower, the Central Bank might cut its borrowing rate to as much as 8 percent. "But the budget financing issue still remains important herein," he said. "An IMF deal would give the Bank more scope to reduce rates, as it would help cover budget financing needs."
Commenting on the government’s preparation to prepare a medium-term economic program, Ash said such a program should uphold fiscal discipline. "Turkey's existing commitment to hold public sector indebtedness low is also important," he said. "The fact that the public sector debt to gross domestic product was cut to below 40 percent at the end of 2008 has greatly helped Turkey manage through this crisis relatively well compared to its peers. Still I think there is obviously lots of scope to reform public finances, particularly in the areas of improving tax administration and in the quality of public spending."
Having visited Istanbul and Ankara between June 17 and June 19, Ash discussed the Turkish economy with officials, analysts and businesspeople. After his return to London, Ash shared his experience with the Hürriyet Daily News & Economic Review.
Noting that for some rating agencies, "political risk" is the main factor for the Turkish economy, Ash said he still finds it difficult to understand why Egypt is rated two notches above Turkey. "There is no way that political risk is higher in Turkey than in Egypt, while Turkey should presumably get some credit for its European Union candidate member status and its NATO membership," he said.
In his meetings in Turkey, Ash did not observe any "split" within the economy management on whether to sign a deal with the International Monetary Fund or not. "I think that they are genuinely weighing up the pros and cons of doing an IMF deal now," he told the Daily News. "The plus is that IMF money should help cover the budget’s financing needs, reduce the threat of the crowding out effect, and help the Central Bank further cut interest rates, thereby promoting recovery."
Strings attached
But the downside to an accord is that it comes with "conditionality," Ash noted. "Such conditionality might in itself un-nerve markets, while it does limit policy options. The question also is in this highly uncertain global environment, how credible would the macro assumptions be that would underlie an IMF program and if the actual outcome diverges significantly from the program, how flexible will the fund be in adjusting the program. Experience elsewhere suggests [the IMF] is not that flexible. An IMF straitjacket is an IMF straitjacket."
Turkey’s energy import bill remains an "Achilles’ Heel," the analyst said. "I think Turkey will continue to run a structural current account deficit because of this, as recovery comes back on stream."
Still, having a wide current account deficit is "not necessarily a big problem, depending on how you fund it," Ash said. "Experience over the past six months suggests that Turkey's current account financing has been relatively robust."
Ash predicted that as inflation goes lower, the Central Bank might cut its borrowing rate to as much as 8 percent. "But the budget financing issue still remains important herein," he said. "An IMF deal would give the Bank more scope to reduce rates, as it would help cover budget financing needs."
Commenting on the government’s preparation to prepare a medium-term economic program, Ash said such a program should uphold fiscal discipline. "Turkey's existing commitment to hold public sector indebtedness low is also important," he said. "The fact that the public sector debt to gross domestic product was cut to below 40 percent at the end of 2008 has greatly helped Turkey manage through this crisis relatively well compared to its peers. Still I think there is obviously lots of scope to reform public finances, particularly in the areas of improving tax administration and in the quality of public spending."