Erdoğan may succeed in avoiding Turkey-IMF programme

Turkish President Recep Tayyip Erdoğan says he will not succumb to calls by political opponents and investors to sign another loan accord with the International Monetary Fund, this time to help Turkey weather the economic impact of the COVID-19 outbreak.

Some analysts say Erdoğan may defy those warnings and avoid returning to the IMF – Turkey’s previous programme expired in 2008 – the Financial Times reported on Wednesday.

Investors have been concerned that Turkey’s foreign currency reserves are insufficient to make it through the next few months without outside help – they total less than half of the $169 billion of foreign debt coming due over the next 12 months. Those fears helped send the lira to a record low of 7.269 per dollar on March 7.

But the lira has strengthened since, boosted by a pledge by regional ally Qatar to increase a currency swap deal with Turkey to the equivalent of $15 billion from a previous $5 billion. The lira traded 0.3 percent weaker at 6.74 per dollar on Wednesday.

“I used to feel like the boy who cried wolf on Turkey – or I did when I first came. I learnt to become more circumspect,” said Roger Kelly, who works as an economist at the European Bank for Reconstruction and Development in Istanbul, according to the FT.

“I think there is a reasonable chance that ‘muddling through’ will save the day again as it has done in the past,” he said.

The FT said Erdoğan’s opposition to the IMF comes from the narrative he has created for himself of a strong leader who will not bow down to Western financial institutions. Erdoğan had also refused to sign an IMF deal when a currency crisis ripped through the economy in 2018. Instead, he flooded Turkey with cheap lending from state-run banks, sacked and replaced the central bank’s governor and slashed interest rates.

Around 70 percent of Turks are opposed to signing an agreement with the IMF, the FT said, citing a recent survey by pollster Istanbul Economics Research.

The lira has steadied after the Turkish authorities made it more difficult to short the currency by limiting the ability of foreign banks to trade with local counterparts in the offshore market. But foreign investment in Turkey’s capital markets has also taken a hit, making many investors wonder where Erdoğan will get the hard cash needed to sustain an economic recovery.

Turkey may yet lure back some foreign money that exited the country recently, said Özgür Güyüldar, head of equity capital markets at Raiffeisen Centrobank of Austria, according to the FT.

“If Turkey can get through May and June then I think that some portfolio allocation could come back,” he said.

But Güyüldar said economic risks remained – inflation could jump in the autumn, which could then spark more capital outflows and further pressure on the lira, forcing the central bank to increase interest rates and put the brakes on economic growth.

Refet Gürkaynak, a professor of economics at Ankara’s Bilkent University, said Erdoğan may have to introduce new forms of capital controls should all else fail. While that may mean the president could keep the economy going without IMF money, it would hardly be a triumph, he said.

“The way I see it, we haven’t gotten through and we haven’t been muddling through,” Gürkaynak said, referring to high unemployment and low levels of investment over the past few years. “It just doesn’t look to me like anyone’s definition of good times.”