[R-G] Turkish Politicians Argue over Need for IMF Help as Crunch Bites

[Yoshie Furuhashi]

<http://www.ft.com/cms/s/0/fcf32a0a-a48e-11dd-8104-000077b07658.html>
Turkish politicians argue over need for IMF help as crunch bites
By Delphine Strauss in Ankara
Published: October 28 2008 02:00 | Last updated: October 28 2008 02:00

A political squabble has broken out in Turkey over whether it should
turn again to the International Monetary Fund for help, amid growing
evidence of the negative impact of the global financial crisis.

The country's most recent $10bn (£6.4bn, €8bn) IMF deal expired in
May, and despite the rush by several European countries this month for
support from the Washington-based body, Turkish politicians initially
said Ankara could do without outside help.

"We cannot darken our future by bowing to the wishes of the IMF,"
Recep Tayyip Erdogan, prime minister, said at the weekend - comments
that suggest an IMF deal would require cuts in budget plans presented
only last week.

But Durmus Yilmaz, central bank governor, said yesterday that IMF
support would be "useful" to give confidence to international markets
- although it would ultimately be a political decision. "At this stage
we do not need IMF cash . . . but there is uncertainty about what we
will face in the coming term," he said, according to the state-run
Anatolian news agency.

The governor's comments are a sign of the times in a country that is
no stranger to financial turbulence and where fears are growing of an
economic slowdown as foreign capital dries up.

A history of homegrown currency crises means many people watch
inflation and exchange rates more closely than the weather forecast.
To them, the convulsions in global markets look wearily familiar. In
2001, two fifths of Turkey's banks failed after a spree of
irresponsible - at times corrupt - lending. Taking them over and
recapitalising them cost a crippling 30 per cent of gross domestic
product and the economy plunged into a deep, if brief, recession.

Now, thanks to that restructuring, Turkish banks look conservative and
well-capitalised compared with their shaky US and western European
counterparts.

But that will not spare the country a sharp economic slowdown as the
foreign capital flows that funded five years of prosperity decline.

Politicians are reluctant to acknowledge the severity of the
situation, sticking to a forecast of 4 per cent growth for 2009. That
is much higher than independent forecasts, casting doubt on the
assumptions on which budget plans are based.

The IMF, in its latest forecasts, predicted GDP growth of just 3.5 per
cent this year and 3 per cent in 2009 - half the average over the past
five years. Slow growth would itself be a novelty for an economy that
has historically swung between boom and rapid contraction. But it is a
painful prospect for a country already struggling to create jobs for a
young and fast-growing population.

Serhan Cevik, economist at Nomura, said: "Turkey is one of the best
proxies for global risk appetite." The lira has lost a third of its
value against the dollar this month and equity values have halved from
their peak as foreign investors pull out of a liquid market.

The biggest immediate danger lies in Turkey's heavy external financing
requirement, a long-standing weakness that makes it vulnerable to
tight global credit conditions. Most analysts think it can avoid a
full-blown balance of payments crisis. But it will inevitably become
harder to manage a current account deficit running above 6 per cent of
GDP and increasingly financed by corporate borrowing.

The central bank has already begun daily foreign exchange auctions to
increase foreign exchange liquidity in the banking system. It is
likely to keep interest rates high - they are already at 16.75 per
cent - until the risk of a run on the lira has dissipated.

Even without the threat of imminent meltdown, the real economy is
suffering as high interest rates hasten the end of a consumer boom and
the slump in European markets hits an export sector concentrated on
cars and white goods. Real estate investors have pulled out of deals,
retailers are scaling back store expansions and carmakers are calling
halts in production.

Lower oil prices will cut Turkey's import bill, but will also mean
slower business for Turkish contractors in Middle Eastern markets.
Bankers in Istanbul say Gulf investors want to renegotiate prices in
deals discussed before the lira's plunge, which will also hurt
companies that borrowed heavily in foreign currency without effective
hedges.

Additional reporting by Funja Guler