Bouncing Back and Looking for More
OBG: How important is the IMF decision to extend the repayment schedule for Turkey’s USD11bn debt back to 2005? Will that decision help avert a financial crisis or merely delay the bottleneck in public finances for a year? Will Turkey renew its agreement with the IMF?
Babacan: As you know there are two ways of paying back the IMF loans, namely an expectations basis and an obligation basis. The countries have the option to pay one year early, or one year later. The former is referred to as the expectations basis, while the latter is called the obligation basis. The usual practice is for countries to request to pay at the obligation basis, right before the payment is due, and for the IMF’s executive board to approve the request.
Turkey’s repayments on an expectations basis stood at about USD9.7 and 10.1bn for 2004 and 2005, respectively. These relatively high amounts and the uncertainty about the expectations and obligations decisions brought a certain amount of uneasiness to the markets regarding the year 2004, which could be observed from the shape of the Turkish Lira yield curve as well.
The usual procedure would be for Turkey to request shifting fully the amount USD9.7bn, due in 2004, to 2005. But this would simply postpone the problem to 2005, not solve it. So we took a hybrid approach. We would move about one half of the payments due in 2004 to 2005 and, at the same time, shift around USD7bn from 2005 to 2006. The IMF executive board approved this in August 2003.
One important aspect of the new schedule is that we retain our right to move from expectations to obligations, for the unshifted part of the debt, as well as the USD3.6bn that is due in 2006 on an expectations basis.
We do not see any problems whatsoever on public finances in the coming years. Fiscal and monetary discipline will continue in the medium term as well, and the markets appreciate it. Both our domestic and international borrowing rates are rapidly falling far below their historical lows. Furthermore, the risk premia will keep falling as long as we can succeed in closing the reality-perception gap on the implementation of our sound and strong economic policies.
Regarding the future of the relations with the IMF, perhaps I should give the following example. Since the government took office in November 2002, Turkey has borrowed a total of USD1.2bn from the fund. Our repayment, on the other hand, is USD800m. So our net borrowing is quite small. Next year we will be a net payer to the fund. Our objective is to continue borrowing from the markets at reasonable costs, so that we will not have to borrow from the fund again. Our relations, of course, will continue after 2004 as well. We are one of the founding members of the IMF, and our consultations will naturally continue.
OBG: In 2002, Turkey’s economy grew by 7.8%, in large part due to a low base-line. This year, growth is expected to lie between 3 and 4%. It seems clear that the heady growth rates of 9% during parts of the 1990s are not sustainable. What is this government’s expectation for stable long-term growth?
Babacan: The historical average growth rate of the Turkish Republic is around 5 to 5.5 %. During the last 10 years, however, we witnessed a period of boom-bust cycles that pulled the average growth of the last decade down to about 4%.
In 2003, we witness a healthy recovery. According to the strong realisations of the first two quarters and the leading indicators of the second and third quarters, our official 2003 growth target of 5% is likely to be easily achieved, or even exceeded.
Given political stability, persistently low inflation, a comfortably low public debt to GNP ratio and a healthy financial sector, I believe a long run average growth rate of 6 % would not be surprising for the Turkish economy.
OBG: Efforts to lower inflation have been successful this year and last. Year-end projections of 20% for 2003 look like they’ll hold. Will this success change projections for 2004-2005?
Babacan: In fact as of October 2003, the likelihood of an inflation realisation below 20% by end-2003 has significantly increased. The central bank’s instrumental independence and the confidence in the government’s fiscal discipline have helped in this achievement. On the monetary side, the government and the central bank jointly announced an inflation target for the Consumer Price Index. The Central Bank is fully authorised and responsible for the implementation of monetary policy in achieving this target. The 2004 inflation target will be 12%; in 2005, we will target a single digit level.
OBG: You referred to parliament’s adoption of the 7th EU harmonisation package as a ‘sine qua non for healthy economic growth.’ In what particular ways do you see the package of laws promoting growth?
Babacan: The 7th harmonisation package was the last one on our EU checklist. By enacting these seven sets of laws, Turkey has completed all the legal requirements of the Copenhagen criteria. By the end of 2004, we will demonstrate full implementation of these criteria and thereby be able to start the negotiations for EU accession. Once full membership negotiations start, it is an irreversible process. It may take time, but every involved party knows that eventually Turkey will become a full member of the EU.
This decision will have a tremendous signalling effect in attracting foreign direct investment (FDI) to Turkey. The FDI flows to Turkey have typically been negligible up to now. Reasons vary from bureaucratic barriers to the macroeconomic environment. We have identified all the obstacles for attracting FDI to Turkey and are eliminating them one by one.
We view EU membership as an anchor for the persistence of structural reforms and for making Turkey a more sophisticated economy. From 2004 onwards, a favourable investment climate for the private sector, both domestic and foreign, will be the new engine of growth for Turkey.
OBG: Could you describe the government’s plans regarding the privatisation of Turkish Airlines and partial privatisation of Turk Telekom?
Babacan: As you know, both the telecommunications and airlines industries had difficult times worldwide in the last few years. Turk Telekom and Turkish Airlines are in much better shape compared to their sectoral peers.
The privatisation of Turk Telekom is proceeding according to plan. Following the decision of the Valuation Committee, the Council of Ministers (CoM) will have to approve what fraction will be put on block sale and what fraction will be reserved for an IPO. Once the CoM’s decision is taken, the Auction Committee will follow up the rest.
For Turkish Airlines, another seasoned public offering may be considered for year 2004. The Privatisation Administration is considering alternative methods as well.
OBG: In May, you were quoted as saying that political developments should have less impact on the economy. Has Turkey in your mind stabilised itself enough politically to have the economy react solely to economic factors?
Babacan: There are two aspects hidden in your question. The first has to do with the impact of political and economic shocks on the performance of the economy. The second is related to the maintenance of political stability itself.
Regarding the first aspect, the government views the free-floating exchange rate regime as a useful shock absorber.
We witnessed its merits during the Iraq war in March 2003. The exchange rate immediately responded with a depreciation of the Turkish Lira, while the central bank was able to contain short-term interest rates. Consequently, damage to both the real and the financial sectors were kept to a minimum. If you compare the situation with the peg of 2000 and its collapse in February 2001, due to a relatively minor quarrel between the prime minister and the president, the difference is striking.
Regarding the second aspect, I can comfortably say that domestic political stability has returned to Turkey. After so many years of coalition governments, a strong single party government, with faith in a fully functioning democracy and in a competitive free market economy, is in power. This picture is what Turkish citizens have been missing for the last three decades. Opinion polls indicate that since the elections, support for our party has increased significantly.