It has to happen sooner or later. One of the financial world’s longest-running unrequited courtships appears to be heading for consummation this month. Turkey and the International Monetary Fund (IMF) have been through a series of flirtations and lovers’ tiffs since the dying months of 2008, when it became clear the Ankara economy was being dealt a pummeling as the financial system of the West fell apart.
Already saddled with an uncomfortably large budget deficit, Turkey’s problems began to accelerate as its exports slumped, especially exports of motor cars and consumer durables like fridges and washing machines. The numbers for the last quarter of 2008 and the first few months of this year make for grim reading. The overall economy shrank 6.2 percent between October and December as unemployment headed in the opposite direction, hitting just over 15 percent by the end of February. Concerns about refinancing foreign currency denominated loans were about the only other growth industry in 2009.
…and then the politics
Meanwhile the government of the ruling Justice and Development Party (AKP) was also worried about other numbers. It was elected in 2007 with a popular vote of nearly 47 percent and wanted to consolidate its grip on power in the municipal elections at the end of March this year. An agreement with the IMF on renewing, or even increasing, the $10 billion facility that expired last May was contingent on cutting public spending and increasing tax revenues. That was the last thing the ruling party had on its mind as it tried to replicate its national election results in the local government vote. It was also, arguably, the biggest single reason why the on-off love affair with the IMF has been more off than on lately.
The local elections saw the AKP come out as a clear winner, with less than its previous national support, but still an overall 40 percent of the vote. However, it lost control of one municipality and failed to make inroads into opposition-held territory, despite some tough campaigning and distribution of voter incentives such as food and household appliances.
Now comes the day of reckoning: the only thing virtually certain about the new deal with the IMF is that it will take place. A three-year agreement is more likely than the previous 12-month arrangement, and the amount involved could range anywhere from twice the previous $10 billion to as much as $45 billion.
It seems probable that tax cuts earlier this year designed to stimulate the economy — not to mention increase the pre-election feel-good factor — will be reversed. The absence of a new IMF deal had also seen the Turkish lira slide in value to around TL1.80 to the US dollar, especially in light of recurrent cuts in the prime lending rate by the central bank. With the elections over and the prospects of an IMF facility on the horizon, the lira has recovered to around 1.60 at the time Executive went to press.
For all the criticism levelled at the AKP for delaying a decision to bite the economic bullet, probably the only ill effect has been a period of uncertainty for the past few months, in the markets, with the currency and also in the manufacturing sector.
Most of the factors buffeting the Turkish economy are externally driven. Exports are down because the European Union markets for Turkish-produced goods have collapsed. Refinancing debts is problematic because of the global liquidity squeeze. And certainly none of the other political parties have a growth track record that can match the AKP’s since it first came to power in 2002.
Perhaps the biggest lesson being learned is that the “moderate Islamism” attributed to the AKP has less to do with its popularity than widely thought, and is also less “dangerous” than claimed by those who equally say it is not all that moderate. Once the numbers started going against the AKP — rising unemployment and slumping production — so did some of its support. But then gratitude has never been a strong factor in the voter’s choice.
Peter Grimsditch is Executive’s Turkey correspondent