By Delphine Strauss
Published: November 25 2009 16:32 | Last updated: November 25 2009 16:32
When financial leaders converged on Istanbul for the October meetings of the International Monetary Fund and World Bank, Turkey took pride in becoming the first country to host the gathering twice. An even greater source of pride was the fact that it had finally broken free from the IMF's tutelage, after a half century as a serial recipient of funds and advice, lurching from one bail-out to the next.
While the global recession drove many countries into the IMF's embrace, for Turkey it became a chance to assert new independence in economic management. Ankara might yet agree a new loan on its own terms but, as Recep Tayyip Erdogan, the prime minister, put it, there was no need to lean on an IMF "walking stick".
Thanks to previous reforms, Turkey entered the downturn with a solid banking system and strong public finances, helping it avoid a familiar pattern of capital flight, currency collapse, rampant inflation and spiralling interest rates.
Instead, with a stable currency, falling inflation, and bond yields near record lows, the central bank was able to cut interest rates by more than 10 percentage points in a year to mitigate a brutal contraction in the real economy. Banking sector profits for the year may reach TL20bn ($13.5bn), 50 per cent higher than in 2008.
Ratings agencies have signalled they may upgrade Turkey's sovereign rating – a move long priced into markets. Fitch cited its "relative resilience to the severe stress test of the global financial crisis" and Moody's said it was "better prepared … than would have seemed possible, given its dependence on external financing."
Yet Mr Erdogan's ruling Justice & Development party (AKP) must still convince outsiders it can maintain stability without external anchors. Inflows of foreign capital fuelled rapid gains in prosperity in the years up to 2007, largely because investors were reassured by IMF oversight, and by Turkey's application for membership of the European Union.
Now, Mr Erdogan is determined not to let the IMF dictate fiscal policy, and the prospect of EU accession is so distant that it has ceased to interest investors. Instead, the AKP is pressing on with reforms to extend rights for Kurds and other minorities that, while much-needed, have stirred political tensions. Paradoxically, some risks may be increasing just as the worst of the crisis passes.
Ali Babacan claimed credit at the IMF meetings for becoming one of the first economy ministers to commit himself to an exit from fiscal stimulus, with a medium-term plan to stabilise debt in 2010 and cut the budget deficit from 6.6 per cent at the end of this year to 4 per cent by the end of 2011. But economists say reliance on higher tax revenues and a lack of detail on how fiscal rules will be formulated or spending controlled reduce the plan's credibility.
The Treasury expects to roll over almost all domestic debt payments next year, a ratio that would increase if there were any fiscal slippage, external shock or mishap with privatisations.
Tevfik Aksoy, analyst at Morgan Stanley, says the record lows in real interest rates have sapped enthusiasm in the bond market, with inflows of only $1.3bn from non-residents between March and September.
If government debt issuance proves higher than planned, domestic banks will be the main buyers, reducing their ability to lend to the private sector and fuel recovery.
"The absence of an IMF deal would not imply a funding crisis but would likely imply a slower recovery in private sector credit growth," says Christian Keller, economist at Barclays Capital.
Banks are in any case unlikely to return to aggressive lending at a time when bad loans are still rising and low central bank interest rates will reduce their margins.
Economists expect gross domestic product to contract by some 5.5 per cent over 2009 as a whole, and grow by 3.5 per cent in 2010 if there is no IMF support – a sluggish recovery by Turkish standards, and not enough to bring relief from double-digit unemployment.
Fiscal pressure is also delaying some reforms the government thinks desirable. Mr Babacan has said plans to promote Istanbul as a financial centre cannot yet include tax cuts. Draft legislation on renewable energy is also delayed because of doubts over the cost of price guarantees for solar energy.
Yet the continued strains on public finances and corporate cash flow may mean new activity for M&A bankers and private equity investors in 2010.
The need to raise revenues is prompting the government to re-launch long-delayed privatisations of energy distribution grids and lay plans to privatise profitable power stations.
Istanbul municipality wants to sell the fleet of ferries plying the Bosphorus; there will be a second attempt to auction off the national lottery, and Mr Babacan has signalled plans to start the privatisation of state-owned Ziraat bank.
Suzan Sabanci Dincer, chairwoman of the lender Akbank, predicts there will also be a wave of restructuring, as groups weakened by the downturn seek scale to compete.
Ferruh Tunc, senior partner at KPMG's Istanbul office, thinks private equity buyers are close to finding a new price level for deals, after a year in which sellers' expectations far exceeded what they were willing to offer.
In the last month, the UK firm Bridgepoint has acquired a stake in the vehicle inspection company Tuvturk, while a private equity arm of HSBC is among investors in the ground-handling company Havas after a stake sale by TAV, an airport operator that needed to cut debt to pursue rapid expansion.
As always, the biggest risks to all this activity are political. At present, companies are benefiting from the AKP's hyperactive foreign policy, as it promotes closer trade ties with neighbours as a means of bolstering regional stability.
Domestic politics, however, remain fraught. The AKP's big clashes with the military and judiciary in 2007 and 2008 had subsided into lower-level rumblings. But tensions have risen sharply in recent days after a string of anonymous letters alleging military schemes to discredit the AKP, and a row about government-authorised wiretapping of secularist-minded judges and prosecutors.
A record tax fine against the billionaire media owner Aydin Dogan is a sign that political tensions are spilling over into the corporate arena.
"Turkey's modernisation process is likely to be highly volatile and prone to intense power struggles between competing interest groups," writes Ahmet Akarli at Goldman Sachs.
Without a "benevolent" power such as the EU to smooth the process, he adds, "it may prove difficult to avoid frequent political setbacks and, in the extreme, acute social conflict, leading to extended periods of uncertainty."