Refusing the walking stick

After years of relying on financial support, Turkey’s economy is in good health, but unemployment is just one of the problems that must be faced.

Last month, Recep Tayyip Erdogan, Turkey’s prime minister, had the satisfaction of telling the International Monetary Fund (IMF) that, after careful consideration, his country would not be seeking a new financial support package from the lender of last resort.

Turkey did not need a “walking stick”, Erdogan said. His announcement brought to an end more than a year of inconclusive discussions.

The timing of Erdogan’s decision was seen in many quarters as the height of political chicanery. The Turkish government pulled the plug on the talks just after it had issued an unusually large number of bonds, at a rate that benefited greatly from (government-fuelled) speculation that Turkey would turn to the IMF.

It may, however, prove to be a historic moment. Turkey has relied on successive rounds of support from the IMF since the 1990s. Erdogan’s announcement was a bullish declaration of financial independence, and one grounded in economic logic. After a sharp recession induced by the financial crisis, Turkey’s economy is roaring back to health, adding weight to its argument that its accession to the EU would inject some much-needed economic competitiveness, dynamism and growth into the single market (see panel).

Economic growth

The Turkish economy, the 17th largest in the world, grew by 6% year on year in the fourth quarter of 2009, emphatically reversing the contraction experienced over the preceding four quarters. Growth estimates for 2010 vary from 3.7% of gross domestic product (GDP) to 6%. By way of comparison, the European Commission is predicting that the EU economy will grow by just 0.7% in 2010.

Turkey’s government made it through the financial crisis without bailing out a single bank – a success largely attributed to structural reforms imposed on the Turkish banking sector after a severe crisis in 2001.

The country’s fiscal condition is also respectable. Standard and Poor’s (S&P), a credit rating agency, estimates the 2010 budget deficit at close to 4.5% of GDP – lower than that projected for all but six EU member states.

Fact File

ECONOMIC TIES

Turkey and the EU share a customs agreement that partly integrates Turkey into the internal market. The agreement came into force on 1 January 1996.

It establishes free movement of goods between Turkey and the EU – except for coal, steel and agricultural products, which are governed by separate preferential market-access agreements.

The Turkish business community has complained that the customs union suffers from practical defects (eg, delays in countries negotiating parallel trade deals with Turkey to those they have with the EU) and that this leads to trade being diverted away from Turkey. “The customs union is not sustainable without Turkey becoming very rapidly a full member of the EU,” says Bahadir Kaleagasi, the permanent representative to the EU of the Turkish Industrialists and Business Association .

Turkish exports to the EU were worth €43 billion in 2008, while its imports from the EU were worth €50.5bn, leaving a trade deficit of €7.5bn.

The EU is Turkey’s largest trade partner, accounting for over 41% of the country’s external trade in 2008, according to European Commission figures. This figure is, however, falling, as the Turkish government pursues increased trade links with other countries in its neighbourhood.

Turkey is the EU’s seventh-largest trading partner. More than 10,700 EU companies have a presence in Turkey.

There are, nevertheless, some failures hidden behind Erdogan’s apparent successes. One of these is stubbornly high unemployment. Turkey’s unemployment rate was 13.5% in the first three months of 2010, and has rarely been less than 10% in the past five years.

Bahadir Kaleagasi, the permanent representative to the EU of Tüsiad, the Turkish business association, says that unemployment will be “one of the biggest challenges” for the Turkish government over the next decade.

There have also been complaints that, had Erdogan’s government shown stronger leadership at the height of the financial crisis, Turkey might have been spared such a sharp recession (its economy contracted by 8.4% between January and September 2009).

“The government tried to downplay the risk of a crisis in Turkey…but the markets reacted negatively,” Kaleagasi said.

Business has also criticised Erdogan for sowing uncertainty on the capital markets with his ambivalence towards the IMF.

Meanwhile, Erdogan still faces obstacles to achieving one of his most cherished economic goals: the raising of ratings on Turkish sovereign debt to ‘investment grade’. Turkey’s bonds are currently rated two notches below the minimum investment grade by Standard and Poor’s, and Moody’s, another credit rating agency, but only one notch below by Fitch, the third main credit rating agency. A Fitch analyst said last month, however, that the agency was unlikely to raise its rating until it is confident that Erdogan’s proposed constitutional reforms will pass without “significant political unrest”.

Turkey is enjoying a rapid recovery, but Erdog?an still has a very full economic and financial in-tray.