Easy does it

Turkey/IMF: Turkey has turned an apparent defeat into a temporary victory. Earlier this year, a haggling approach to negotiations with the International Monetary Fund left the country without a support plan in the midst of a global crisis. But economic disaster has been steered clear of – and the constraints that come with IMF packages have been avoided. Still, the Turkish economy remains fragile.

When Turkey backed away from talks in February, economists warned that the government risked losing everything by putting its credibility with investors on the line. What’s more, the country was missing the best chance in years to tame unremittingly high inflation and spiralling government borrowing costs.

The experts could hardly have been more wrong. Since negotiations were suspended, the Istanbul Stock Exchange is up 79 per cent to the level in January 2008, Turkish government bond yields have reach all time lows and the 5.4 per cent inflation rate is below the central bank’s end-of-year target. GDP is expected to increase by 2 per cent in 2009. A run on the currency is now improbable.

Recep Tayyip Erdogan insisted that Turkey could manage without IMF support. The prime minister might be tempted to pause for an “I told you so”. But he should think twice before gloating.

Turkey’s success is mainly due to factors beyond the government’s control. Equities and bond yields benefited from the global rally in risky assets. And the near halving of the inflation rate is due largely to the falls in the oil price and domestic and foreign demand.

Turkey has avoided cataclysm, but economic conditions remain extremely difficult. Industrial production contracted in June for the 11th consecutive month. The unemployment rate is at 15 per cent and rising.

Turkey’s central bank has signalled that measured cuts in the policy interest rate — already slashed by nine percentage points to a record low of 7.75 per cent — will continue for as long as there is no clear recovery in the economy. But deteriorating public finances — the deficit is set to be 5 per cent of GDP this year — will limit how far down rates can go. The authorities should proceed with caution — with or without an IMF loan.