Futures and the Fund


Economic News

22 Jul 2010
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When Turkey's finances crashed dramatically back in February 2001, intervention by the IMF was widely seen as having saved the day for the country's battered economy. Yet now - three years and around $18bn later - the Fund may be about to find itself nowhere near as welcome in the corridors of political Ankara.

The reason is that the prospect of EU membership negotiations starting up in the new year is making Turkey's economic leaders wary of entering into any new arrangements with the IMF. This is also but one of a number of recent signs of increasing confidence amongst Turkey's politicians and financial analysts that the country's EU membership is not a matter of "if", but "when".

A recent report by risk analysts Anka Risk Review points out that the current deal between Turkey and the IMF runs out next February, two months after the EU is scheduled to give its verdict on whether Turkey can begin membership accession negotiations. This is making Ankara wary of any new commitments to the Fund, with a decision on whether or not to renew stand-by arrangements likely by the middle of this year. With a $20bn debt burden to the IMF, new loans from the Fund would ease pressure in the short term on loan repayments, but would add to the long-term burden.

Meanwhile, if a date is forthcoming, most analysts expect a major and rapid boost to the country's fortunes, with a likely increase in the now-pitifully low levels of foreign direct investment (FDI), alongside a rash of deals between Turkish and European companies.

There is, however, increasing evidence that the latter is already picking up speed. In the banking sector, Italy's Banca Intesa moved last month to buy into Garanti Bank, while there are market rumours of other foreign bank deals in the offing.

Yet there is still some way to go before the EU makes a decision in Turkey's favour. Amongst EU states, France is widely seen as the chief obstacle to Turkey's accession, particularly after French Foreign Minister Michel Barnier had said earlier this month that France would oppose Turkish membership "under present circumstances". He did, however, modify this view later to say on April 21 that this meant it could not join right away. "We haven't started negotiations," he told France 3 Television, "and they could last 10-15 years."

Meanwhile, with the battle for political reform in Turkey by no means over, there are likely to be plenty of obstacles placed in Turkey's path by its own state apparatus, as witnessed by the Leyla Zana case this week and the continued protests from old guard politicians and generals over a deal on Cyprus. The outcome of this political battle looks likely, to most analysts, to go in favour of the reformists, but the fighting is by no means over.

And Cyprus itself is shrouded in uncertainty. With this weekend's referendum likely to see a "yes" vote from the Turkish Cypriots and a "no" vote from the Greek Cypriots, there is much speculation as to what will happen then.

Economically, many business insiders on the island see this as still likely to be positive for Turkish Cypriots. The future of the present economic embargo on the Turkish Republic of Northern Cyprus (TRNC) - the self-declared and internationally unrecognised northern third of the island - seems in doubt, with strong pressure likely for its lifting should Turkish Cypriots vote in favour of the UN plan in the referendum.

This would open up the north of the island to much foreign investment, as well as opening up world markets to Turkish Cypriot goods. At present, these have to be exported to Turkey before being re-exported elsewhere in order to get round the embargo. In addition, direct flights to airports in the north are likely to resume, boosting the Turkish Cypriot's staple tourism industry. This would all be good for the Turkish Cypriot economy, which has in recent years been in deep crisis. Average incomes in the Turkish Cypriot part of the island are around one-quarter to one-third of those in the Greek Cypriot part.

Meanwhile, tourism looks to be already receiving a boost in the form of foreign investment - largely from individual British and German families looking for holiday or retirement homes, but also increasingly from Turkish and Israeli property investors looking to develop larger hotel and leisure complexes.

Yet many analysts see a Greek Cypriot rejection of the referendum as likely to be only temporary. The pressure will be on for a revote in the Greek Cypriot south only, particularly from the EU once Cyprus joins on May 1. With some superficial modifications, the UN plan may be resubmitted later. Here, timing is everything, as the potential will naturally be there for Cyprus to trip up Turkey's EU membership bid in December if further concessions are not granted. How such a manoeuvre would go down with already angered EU officials is not certain though, with EU Commissioner for Enlargement Gunther Verheugen having already warned the Greek Cypriots that there may even be a case for recognition of the TRNC if they do not behave.

So, many political doubts remain, even if the economic sphere seems more coherent. This will make the decision of the Turkish government over whether to negotiate a new IMF deal all the more troublesome. Risk assessors look likely to have a busy few months ahead of them.

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