Posted by meb at September 17th, 2009

Economy Minister Ali Babacan announces the government’s long-awaited, medium-term economic program in Ankara, emphasizing that talks with the International Monetary Fund will go on from now on based on this program. ‘IMF financing is not a must,’ he says, but notes that the difference of opinion between the government and the fund has narrowed

The Turkish government has announced plans to lower budget deficits over the next three years, saying the proposals may form the basis for a new lending accord with the International Monetary Fund, or IMF.

Under the medium-term economic plan announced by Economy Minister Ali Babacan in Ankara on Wednesday, debt will rise as a proportion of economic output this year and next, before starting to decline in 2011. Future talks with the IMF may be based on the program, though Turkey doesn’t need the fund’s cash and hasn’t included it in the fiscal projections, Babacan said.

“If we can agree on a standby accord then that would be our preference,” Bloomberg quoted the minister as saying. “I don’t want to raise expectations, the foundation is the program we have announced.”

The program shows “IMF financing is not a must,” Babacan said, responding to a question. “Our assumption is that: If we make a deal with the IMF, the resources [to be received] will be resources that would be offered to the use of the market directly. [Thus] our domestic borrowing need will be reduced. Thus, we will use [foreign borrowing] in the amount we will have to borrow domestically and this resource will be one that the Turkish banking sector could distribute for private consumption and investment.”

The outlined program and the outlook of IMF officials represent a “bridging of the gap” on the situation of Turkey and the world, Babacan said. “Maybe it was not like this three or four months ago.”

Turkey has been negotiating with the fund for more than a year. Talks stalled as the government widened its budget deficit to revive an economy pushed into its deepest recession on record by the global crisis. Wednesday’s plan shows how Turkey will “gradually reduce” that borrowing, Babacan said, also promising legislation that will restrain future spending.

The ratio of public debt to GDP will rise to 47.3 percent at the end of this year and to 49 percent in 2010, Babacan said. The ratio will decline in 2011 to 48.8 percent and to 47.8 percent in 2012, he said.

“This path does not incorporate a fiscal adjustment that would be enough to satisfy the IMF,” İnan Demir, chief economist for Finansbank in Istanbul, said in an e-mailed report. “We are no more optimistic on the prospects of reaching a deal with the IMF after [this] announcement.”

The government has avoided saying whether it plans to sign up for more IMF loans, as talks with the fund foundered over spending plans. Central Bank Gov. Durmuş Yılmaz said Sept. 5 that Turkey can manage without IMF money, though sometimes “an external motivation is needed” to ensure fiscal discipline.

Turkey’s economy contracted 7 percent in the second quarter of the year after slumping 14.3 percent in the first three months, the deepest contraction since quarterly records began in 1987.

The slowing economy has eaten into tax revenue and forced authorities to spend more on pensions and unemployment benefits. The budget deficit in the first eight months was 31.1 billion Turkish Liras ($21 billion), compared to a surplus of 4.6 billion liras in the same period of 2008, the Finance Ministry said Tuesday.

This year’s overall budget gap will reach 63 billion liras, about six times the original target set before the crisis struck and equivalent to about 6.6 percent of GDP, Babacan said. The budget won’t start producing a surplus net of interest payments on debt, until 2011 under the new plan, he said. The plan foresees a primary deficit of 2.1 percent of economic output in 2009 and of 0.3 percent in 2010. There will be a surplus of 0.4 percent in 2011 and of 1 percent in 2012.

Government spending on dams and other infrastructure in Southeast Anatolia will not be cut under the plan announced by Babacan, State Minister Cevdet Yılmaz told reporters in the same meeting.

Turkey had been targeting primary surpluses of 6.5 percent under IMF programs after 2001.

The plan’s targets are “conservative and doable,” Yarkın Cebeci, economist for JPMorgan Chase, said in an e-mail. “I think the IMF will like them as well and I have become more hopeful on an IMF program.”

The IMF has called on Turkey to draw up plans to reduce the budget deficit and rein in borrowing. Failure to do so could impair growth because government borrowing would reduce the credit available to companies, John Lipsky, the fund’s first deputy director, said on June 19 during a visit to Turkey. “Realistic” budget plans could also help Turkey earn a higher credit rating, Moody’s Investors Service analyst Kristin Lindow said on Sept. 11. Moody’s rates Turkey’s debt at Ba3, or three steps below investment grade.

In an emailed report to clients, Timothy Ash, head of emerging markets economics at the Royal Bank of Scotland, said the program could “trigger a rating upgrade” for Turkey.

“What is clear now in our minds is that Turkey is underrated, at Ba3/BB-,” he said. “Turkey has been stress-tested through the current crisis and has come out stronger.”

But Citigroup economist İlker Domaç said the program “does not represent a strong effort aimed at placing the public debt to GDP on a declining path.” In an emailed report, Domaç said he finds it “difficult to believe that the IMF would be content with the size and the nature of the planned adjustment.”
source: Hurriyet daily news

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