Tuesday was a red letter day for Turkey, at least in the eyes of prime minister Recep Tayyip Erdogan. A little more than 10 years after he ascended to power in the wake of a financial crisis, with a country in hock to the International Monetary Fund to the tune of $23.5bn, Erdogan was pleased to announce that Turkey was paying off the very last instalment of the loan, a tad more than $400m.
“Turkey is today bearing witness to history,” he exulted, pointing out that Ankara had been borrowing from the Fund since 1961 and arguing that the series of loans since then had forced previous governments to make “serious concessions”.
Moreover, Turkey is now confirming its status as a Fund creditor, not debtor, by lending the IMF $5bn. “We are now a country that the IMF negotiates with to borrow money,” Erdogan continued. “I wish to God that we will not become a debtor to the IMF [again]”.
Nor was that all the good economic news this week. Also on Tuesday, Turkey gave official notice that it would grant a banking licence to Italy’s SanPaolo to set up in Turkey with capital equivalent to $300m. It was an indicator both of the attractiveness of the country’s economy and of the government’s more open approach towards the banking sector – for a decade, it did not grant licences to any new banks at all.
And on Monday, the country’s current account deficit, its perennial economic problem, contracted a tad, to $15.9bn for the first quarter, compared with $16.3bn for the same period a year before. On a seasonally adjusted basis, March’s figures would yield a full year deficit of about $50bn. The figures are significant because Turkey’s current account is widely expected to grow again as domestic demand revives. Indeed, the period of current account contraction had been widely thought to be at an end.
But here come the health warnings. First, some economists worry precisely that it is hard to divine where the motors of more than mediocre growth will come from. (Last year, the economy managed just 2.2 per cent.) Second, as Ilker Domac at Citigroup pointed out in a note, foreign direct investment inflows for the quarter, at $1.4bn, were considerably lower than the $2.3bn racked up in the same period in 2012. And, he said, short term external borrowing in the same time of about $10.5bn was much higher than the $300m in the first three months of last year.
Despite the relatively favourable picture on the current account front in 1Q, there is a marked deterioration in the quality of external financing. Specifically, the FDI coverage of the current account gap in 1Q declined to 8.5 per cent from 13.6 per cent in the same period of 2012. This, coupled with the country’s excessive reliance on short-term external borrowing, leaves the currency vulnerable to sudden shifts in investor sentiment.
Indeed, as Benjamin Harvey and Taylan Bilgic wrote for Bloomberg, a surge in corporate borrowing has helped make Turkey a highly leveraged emerging market, with net external debt of $413bn, equal to about 51 per cent of GDP.
From now on, Turkey may be a creditor as far as the IMF is concerned but, Erdogan’s exhilaration notwithstanding, the country’s days as a debtor are far from done.
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