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REFILE-ANALYSIS-Guessing game heats up over Turkey-IMF deal

Published 01/07/2010, 11:39 AM
Updated 01/07/2010, 11:42 AM

* IMF accord could boost Turkish shares, currency

* Analysts remain sceptical Turkey will sign

* Rising inflation seen pushing bond yields up

(Adds background in ninth paragraph)

By Simon Cameron-Moore

ISTANBUL, Jan 7 (Reuters) - A guessing game, fuelled by a thinly-sourced newspaper report and ministers' comments, has heated up in recent days over how close Turkey is to agreeing a stand-by loan arrangement with the International Monetary Fund.

If Turkey does sign, something many analysts doubt, Turkish stocks, having hit two-year highs this week, could get some extra bounce.

A lira currency that firmed as much as 3 percent against the dollar since the IMF speculation reignited on New Year's Eve, was also seen gaining further.

While inflationary pressures could dictate rising bond yields, access to IMF cash would be a moderating influence.

But, it is not as if Turkey needs the money desperately.

A heavily oversubscribed $2.0 billion 30-year Eurobond issue on Tuesday reminded everyone what they already knew; Turkey has little problem raising funds overseas and interest rates are low enough both at home and abroad.

"They seem reasonably well-placed to fund themselves, unless there's some out-of-the-box event," said Timothy Ash, Royal Bank of Scotland economist. "And at 6.85 for external funds and 9-10 percent for domestic it's not a problem."

Investors, however, see an IMF arrangement locking the government into fiscal discipline, easing the external financing gap and allowing Turkey to fund public debt without issuing too many government bonds.

The recent flurry of speculation began when Milliyet newspaper reported on Dec. 31 that Prime Minister Tayyip Erdogan had told his party's leadership that the IMF had accepted Turkey's terms. However, the deputy chairman of the AK Party later told Reuters that Erdogan had simply said talks were continuing "in a positive direction".

Ever since the last $10 billion IMF accord expired in 2008, the investment community has urged Erdogan to sign a new deal with the Fund, but foot-dragging led to perceptions that Turkey wanted to go it alone.

"It's not about the financing that comes with the deal -- it's more about the policy anchor that an IMF agreement provides," said Justin Patrie, head of emerging Europe analysis at Business Monitor International in London.

POLITICAL REASONS

The fiscal deficit is seen as the biggest risk factor for the Turkish economy.

After years of strong growth, Turkey slipped into a deep recession in 2009 and as the government spent to turn the wheels of the economy, the budget deficit surged 446 percent to 46.356 billion lira in the January-November period.

The recovery has begun, credit conditions are easy, the banking sector is sound and the lira is stable, all factors encouraging confidence in Turkey to do without the IMF.

Recognising Turkey's economic management, ratings agency Fitch raised Turkey's issuer default rating two notches to just below investment grade in December.

Submitting to IMF conditions the year before a general election could cost votes. Opinion polls have shown support for Erdogan's AK Party sagging, raising doubts whether it can win a clear majority in a vote due by mid-2011.

In the past, disagreements over issues such as the country's tax administration and payments to municipalities have been among issues dividing Turkish and IMF negotiators.

Christian Keller, economist with Barclays Capital, wrote in a note this week that despite signs that Economy Minister Ali Babacan was trying to secure a 2-year stand-by loan of $20-30 billion, he still had doubts over what would compel Erdogan to sign at this time.

"Why now?" several analysts echoed. After all, they argued, should Turkey's needs become urgent there is little doubt the IMF would be there fast.

INFLATION CONCERN

Latest data showing inflation accelerating faster than expected, together with the dovish rhetoric of the central bank and a negative real policy rate, posed "a significant rise in risk premia," Keller said.

"Disappointment on the IMF front would add to this," wrote Keller, a former IMF official.

Further delays in the negotiations, or a possible announcement to switch into "post-programme monitoring" rather than a stand-by deal, combined with rising inflation, could lead to a rise in bond and cross-currency swap yields, Keller said.

The lira could weaken too, though not significantly, he told Reuters.

Conversely, if the government confounds sceptics and signs a deal, the lira could strengthen to test 1.45 versus the dollar and possibly break through to 1.40, according to analysts.

But ultimately, they said, Turkey's performance won't rest on whether it signs up to another IMF programme. The bigger factor remains how fast the global appetite for risk recovers from the ravages of the financial crisis. (Editing by Stephen Nisbet)

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