Moody’s says Turkey needs to secure IMF funds by autumn at latest

Negotiations between Turkey and the IMF have so far failed to produce a loan accord, expected to reach $45 billion, due to differences over public sector spending and fiscal reforms. Â

 

A $10 billion IMF stand-by agreement expired in May 2008 and the current talks are aimed at a new three-year stand-by deal, but the government is increasingly reluctant to agree to demands from the fund for spending cuts.

 

"Our balance of payments analysis suggests that the government has room to do without an IMF financing program for a limited time, i.e. during the summer months," Moody's senior vice president Kristin Lindow said in a statement sent to Reuters.

 

Turkey's current account deficit, a main weak spot of the economy when it posted growth rates averaging 7 percent, has nearly vanished in 2009 due to weak demand.

 

The deficit is traditionally lower in the summer thanks to large tourism revenues. But later in the year the deficit could come under pressure again as those revenues fade.

 

The current account deficit was $41.7 billion last year, and the government predicts only $11 billion deficit this year.

 

Lindow reiterated her comments published earlier this week in the Turkish media that the country's Ba3 credit rating probably will not change whether or not the IMF and Turkey agree on a loan accord.

 

"Whether or not the IMF and the Turkish authorities agree on a new program, the Moody's rating is probably going to be unaffected," Lindow said.

 

The inference from some comments in the Turkish media that she was recommending a program or suggesting a credit rating upgrade if a program is agreed is not accurate, she said.

 

Moody's said in a statement in April that Turkey's rating could be upgraded should the government demonstrate stronger capacity to generate revenues and manage its debts and introduce new labor market and public sector reforms.

 

Some economists have said the country's credit rating was too low compared to peers and does not reflect strengths of its $750 billion economy.

 

Moody's said in December that Turkey would retain its Ba3 rating although the momentum was for the rating to move up in the longer term.

 

QUICK DEAL

Turkey and the IMF can quickly reach a deal if serious market pressures emerge due to uncertainty about the macro framework, such as higher interest rates demanded in domestic debt auctions or lira weakness, Lindow said.

 

"Because so much negotiating has already taken place, we would assume that it could happen rather quickly if needed to calm nervous markets," Lindow said.

 

Absence of IMF funds would hurt Turkey's economic prospects this year. Moody's forecasts that the economy will shrink 4.0 percent, while the IMF sees a 5.1 percent contraction.

 

"The relative lack of external financing available to Turkey -- in the absence of an IMF program with associated funding from other multilateral and bilateral sources -- is likely to constrain the growth rate of the economy due to the country's large investment needs and relatively low savings," she said.

 

Lindow called on the Turkish government to device its own comprehensive medium-term strategy as it seeks to join the European Union.

 

The rating agency said Turkey's rating could come under downward pressure should either economic or political disarray "meaningfully and durably worsen the government's debt metrics."

 

Despite fiscal discipline that has contributed to steeply falling debt ratios, Turkey's debt affordability remains low relative to its peers, the agency has said.