With the release of the International Monetary Fund's (IMF)'s report on the fourth and fifth review for Turkey's standby agreement, the state of the country's finances has come under fresh scrutiny by market observers, with ongoing concern over the size of the current account (CA) deficit. Strong economic growth coupled with high oil prices helped account for growing red over recent months, according to the report. But alarmism would be misplaced following closer inspection of the CA issue and overall resilience of the economy, say local analysts.
The size of the current account deficit is nonetheless causing concern, with analysts expecting a whopping $31bn by the end of 2006. Yet, Turkey's success at enduring the global run on emerging market economies in May and June has been notable, thanks to such macro economic buffers as the floating exchange rate, independence of the central bank, gradual shift away from "hot money" to an increased FDI-weighted portfolio, disciplined banking regulatory agency and the closely associated strength of the banking system and independent budget process. True, the economy was amongst the hardest hit by tightening global liquidity conditions in the middle of the year. However, many believe the situation could have been much worse - a reflection of the economy's increased ability to absorb external shocks. Accumulating external reserves has also been key in protecting the Turkish economy from external hiccups and storms.
Some observers say that Turkey's market is unlikely to experience a serious crisis under the present administration due to the government's disciplined monetary and fiscal policy. Raising savings, be it through reform of insurance law or mortgages, is one way that the government would be able to address the current account deficit. The all-important inflow of foreign direct investment (FDI) into the economy remains essential too.
Many observers accredit Turkey's restructured banking sector for helping to stabilise the economy, with consolidations and mergers and acquisitions ensuring increased competition between constituent players, not to mention much needed revenue for state coffers. Many are following preparations for the privatisation of Halkbank, Turkey's second largest public bank, the terms of which are expected to be announced in November or December. Meanwhile, Ankara has also indicated that Ziraat Bank, Turkey's market leader, will also be sold off. This will follow on the back of a string of mergers and acquisitions in the banking sector, with Citibank recently acquiring a 20% stake in Turkey's private giant Akbank. In 2005, Fortis and General Electric Consumer Finance (GECF) also moved into the country, with the former taking over Disbank and the latter taking a 50% stake in Garanti Bank. BNP Paribas' acquisition of a 50% stake of TEB Financial Investments also seized headlines last year.
Thanks partly to the introduction of the Banking Regulation and Supervision Authority (BRSA), Turkey's banking sector has undergone a dramatic change since the 2000/2001 recession. "Balance sheets are now much stronger than before, with high capital adequacy ratios and seemingly manageable open foreign exchange positions of banks," according to a July IMF report.
Although important, acquisitions and privatisations on their own are not enough to fill the CA gap in a sustained manner, with long-term income perpetuating investments key to balancing the budget, according to former World Bank Turkey representative Andrew Vorkink. Though not expecting a further economic crisis, Vorkink underlined the risk of failing to balance Turkey's books. "If an international disruption occurs, people will wonder how Turkey will finance the gap and will get nervous," Vorkink said during an interview with the local press. "But if Turkey continues to attract funds, not only internationally but also through domestic savings, then the ability to finance the gap is OK because the alternative is to cut the deficit, which will cut growth."
Meanwhile, Ankara is more than aware of the political considerations that are likely to impact investor confidence. It was not only the widening current account deficit that made Turkey vulnerable in May and June, but also some delays in implementing structural reforms, in pensions and tax, for example, and some delay in the privatisation of state banks - all flagged by the IMF report. The delay in appointing a new governor of the Central Bank following the departure of Sureyya Serdengecti, the President's veto of the government's pension reform law and the assassination of a high court judge in May did investor confidence little good either.
Now, political and economic analysts are closely following developments on Cyprus - with Brussels demanding that Ankara lift trade restrictions against Nicosia by mid-December - a demand that Ankara currently rejects. Turkey's commitment to EU membership and the ongoing accession process, is after all considered as a form of insurance that Ankara will continue to push ahead with economic, political and social reform even if the pace may fluctuate.