By Ibon Villelabeitia
ANKARA, Dec 3 (Reuters) - Turkey must swiftly agree an International Monetary Fund deal and apply an aggressive stimulus package to avoid its economy tipping it into recession.
A slump in Turkey's economic growth and rising risk aversion by foreign investors have battered the lira and stocks.
But Prime Minister Tayyip Erdogan's government has resisted joining other emerging markets in seeking IMF help to protect the $700 billion economy from the global financial crisis.
With Turkey facing local elections in March, analysts say the government appears reluctant to extend an IMF deal that expired in May for fear of having to make painful spending cuts.
Further dithering over an IMF agreement and what critics say is a government denial of the severity of the crisis given domestic politics risks undermining economic stability.
"It is essential the government signs an IMF deal and it should be done as soon as possible," said Ali Ihsan Gelberi, an analyst at Istanbul-based Garanti Bank.
"If not it risks seeing more capital flight, the lira will keep losing value against the dollar, access to external financing will be very difficult and growth will be affected. Without the IMF agreement Turkey will not be able to put the economy in order," Gelberi said.
Buttressed by successful IMF deals, the ruling AK Party has overseen strong economic growth after the 2001 financial collapse: foreign investment flowed, inflation was tamed and the banking sector rallied.
VULNERABLE ECONOMY
But as the global crisis hammers emerging markets, Turkey's economy appears vulnerable -- GDP growth is seen at the low end of 2-4 percent in 2008, exports have slumped, inflation has crept back into double digits and unemployment is now almost 10 percent.
Turkey's current account deficit -- the country's long economic Achilles' heel -- is seen rising to $50.4 billion in 2009 and the funding need of the private sector is estimated at around $90 billion.
Analysts, including Moody's, the leading sovereign analyst for Turkey, have begun sounding alarm bells, saying Turkey could enter a recession in 2009 unless it agrees an IMF programme.
"There is a very serious risk of negative growth in 2009. The government must move on," said Ahmet Akarli, a London-based analyst for Goldman Sachs. "The IMF deal should have been signed months ago. It is already too late.
But Industry Minister Zafer Caglayan said on Wednesday Turkey did not face the prospect of a recession in 2009, adding that 4 percent growth target was still valid.
The Organisation for Economic Cooperation and Development predicts 1.6 growth in Turkey in 2009.
The abrupt end of Turkey's bonanza of nearly 7 percent annual growth in the last five years has coincided with what critics say is a slowing of the government's reform agenda.
The AK Party won reformist credentials after 2002 for achieving macroeconomic stability after years of mismanagement and opening accession negotiations with the European Union.
But EU reforms have slowed and critics say the AK's pro-business credentials appear increasingly adrift.
TUSIAD, the leading forum for Turkish business, has criticised Erdogan for saying the worst of the crisis is over, and urged the government to push ahead with a stimulus package to jumpstart growth.
"The prime minister and his economic tsars are of course very busy with crisis denial," Yusuf Kanli, a frequent critic of the government, wrote in an opinion piece in the Turkish Daily News on Wednesday.
"They should spare some time and watch TV bulletin demonstrations of workers...sacked from work across the country," Kanli wrote.
Much is at stake. Turkey, a NATO member, is of huge strategic importance for the West. It has a long history of volatile economics and politics.
Yarkin Cebeci, an analyst from JP Morgan, believes the government will eventually sign a regular stand-by agreement for $20 billion to shore up investor and consumer confidence, but that it was still buying some time.
"The government is not feeling the urgency. It feels it has the time and the power to negotiate the terms of the IMF deal," Cebeci said.
Ivalo Vesselinov, an analyst at Dresdner Kleinwort Investment Bank, said the government was aware of the risks of not signing an IMF agreement soon but that domestic factors and local elections were playing a hand.
"The government might be miscalculating how quickly risks can unfold. It is a dangerous assumption to assume the worst case scenario will not happen," he said. (For a factbox on the IMF deal click on [ID:nLK305756])