Turkey and the International Monetary Fund (IMF) announced March 10 a suspension of talks over a stand-by agreement that the two sides have been negotiating since 2008. Turkey's economic resilience throughout the global economic recession has allowed the Turkish government to drag out the negotiations for its own political benefit. With strong economic footing, Turkey's Justice and Development Party can refuse the conditions attached to the IMF deal and hold onto the political tools it needs to keep its domestic opponents in check.
Turkey's ruling Justice and Development Party (AKP) declared March 10 its decision to annul negotiations with the International Monetary Fund (IMF) for a stand-by agreement (an IMF arrangement that allows the signatory country to use IMF financing up to a specific amount in a one- to two-year time frame). Turkish Prime Minister Recep Tayyip Erdogan said in a speech that while Turkey will continue its annual consultation process with IMF to review its economic stability in Article 4 talks (an annual consultation process between IMF and member countries), the Turkish economy can stand on its own feet and thus does not require a loan from the IMF. Turkey's negotiations with the IMF began in May 2008 and have been dragged out since by the AKP government, primarily for political reasons. Turkey does not require this loan out of financial necessity. Instead, the loan would have been used as a source of accreditation to reassure investors of Turkey's economic stability.
Not Just Another Emerging Economy
At the onset of the economic crisis in September 2008, it was not clear that Turkey would be able to weather the impact of the global financial downturn. At that time, panicked investors first pulled their money from emerging markets, fearing that the greatest negative impact of the recession would be faced by new markets. They were, for the most part, correct. Emerging markets, like Hungary, Romania, Russia, Kazakhstan and Turkey were seen as potential trouble spots at the onset of the crisis. As a rapidly emerging economy, Turkey had experienced an average annual growth of 6.5 percent since 2005. After the global economic recession hit in the summer of 2008, Turkey's gross domestic product (GDP) plummeted by 6.5 percent year-on-year in the fourth quarter, according to TurkStat. The GDP decline in early 2009 was even worse than that which took place during the financial crisis of 2001. As the Turkish economy appeared to be sliding toward a 2001-style recession, investors feared Turkey would be hit the hardest among emerging economies, as an Organization for Economic Cooperation and Development report illustrated in 2008. But this was not the case. The sharp decline of GDP did not mean complete collapse of the economy as the country suffered in the past. The initial negative outlooks did not take into account the flexibility of Turkish businesses in pursuing alternative markets, the low exposure of the Turkish banking sector to foreign debt and the fact that the global recession was amplifying a quarterly economic slowdown in Turkey's industrial sector that was already under way before the recession hit. With the Turkish economy lumped in with other struggling emerging economies such as Russia, Ukraine, Romania and Bulgaria at the onset of the crisis, the Turkish lira's value started to drop against the euro in September 2008. But Turkey did not suffer from this depreciation as much as other emerging European economies for two reasons. First, Turkish exports became more competitive in the European market, which is the destination of roughly half of all Turkish exports. Turkish exports constitute 24 percent of GDP. Despite the drastic decline in Europe's demand during the recession, Turkish exports to EU countries dropped by only 10 percent compared to 2007 pre-crisis figures. Meanwhile, even though exports to those countries fell in 2009 as well (excluding December numbers), Turkish exporters have been diversifying the destination of their goods since 2003 by trading with other markets in the Middle East such as Egypt, Libya and Syria as a result of the Turkish government's foreign policy agenda to enhance Turkish influence in these countries. Moreover, when the financial crisis hit, a number of Turkish businesses that rely on the European market for exports proved able to quickly find alternative markets in other areas. For example, Sabanci Group's cement companies, Akcansa and Cimsa Cimento, recorded record profits of 200 tons in cement exports for 2009 because their merchants found clients in places like Togo and Cote d'Ivoire. (click here to enlarge image) Second, Turkey's external debt is roughly $67 billion (equivalent to 10 percent of GDP), whereas troubled Central and Eastern European economies are hovering at critical debt levels of 20 percent or more of GDP. Turkey's external debt of the private sector stood at 25 percent of GDP ($185 billion) in 2008, a manageable amount when compared to most troubled emerging market economies such as Kazakhstan (80.4 percent) and Bulgaria (94.1 percent). The relatively low level of foreign-denominated debt meant the Turkish lira's devaluation did not cause a panic in the banking system like it did in Central Europe, where domestic exchange rates moved against the holders of foreign-currency-denominated debts.
Weathering the Crisis
This time around, unlike the 2001 Turkish financial crisis, no major Turkish financial institutions collapsed and no government intervention was needed to repair the economy. In addition to more manageable debt levels, this also had to do with the fact that regulators have steadily increased the capital adequacy ratio (the minimum proportion of reserve money a bank is legally required to hold compared to its assets) to 20.4 percent in November 2009 to protect against potential surprises in the system compared to 17.5 percent of the same period in 2008. Also, having drawn lessons from the banking turmoil in 2001, Turkey's Central Bank and other financial regulation institutions had been granted greater autonomy in 2001 to better tame the country's chronic inflation and control its remaining banks by assuring the transparency of their respective debts. Other Central European markets had not addressed their lack of transparency, since those economies had never suffered a serious break since opening at the end of the Cold War. Conversely, banking sector reforms made in Turkey in 2001 seem to be bearing fruit. The nonperforming loan (NPL) ratio — a key indicator of the growth of bad debt in a bank's portfolio — remained only slightly above historical averages (5.3 percent in November 2009). Two financial agencies — Fitch and Moody's — recognized these strong indicators in December 2009 and January 2010 when they upgraded Turkey's ratings on the fact that the Turkish economy showed resilience against shocks of the global crisis and maintained its ability to access credit markets. The AKP can now claim credit for the country's economic health by showing the Turkish public the country no longer needs to negotiate a loan with the IMF. Moreover, it can avoid two problematic conditions that were attached to the deal: to grant greater autonomy and reduce government control over the Revenue Administration, and to reform budget allocation to municipalities. Having control over the Revenue Administration (which can investigate companies for tax evasion) is essential to the AKP's political agenda in keeping its business opponents in check, and the AKP relies on municipality networks to support its populist agenda and cannot afford to lose budget authority at the municipality level in the lead-up to 2011 general elections. While such a loan could have further reassured foreign investors of Turkey's economic resilience, the AKP apparently has concluded that Turkey's economy is strong enough to stand on its own and that a deal with the IMF is not worth the political cost.