When Turkey’s prime minister starts suggesting the government should issue war bonds, and citizens pay $100 a head or donate a slice of personal wealth to pay off the national debt, there is bound to be a suspicion or two about the state of public finances. But when these proposals come after a recent failure to secure major loans from the US, while an IMF review has been going on for months without result and a major war has broken out next-door, anxiety ratchets up another notch. However, despite all these worrying signs, Turkey continues to return some remarkably healthy looking vital statistics.
March 31st saw the release of some figures on GDP growth in 2002, with the State Statistics Institute (DIE) showing the economy had expanded 7.8% over the year. This growth rate had also accelerated during the 12 months, reaching 11.5% in the final quarter. Industrial growth in 2002 was 9.4%, while trade grew by 10.7%. By these figures, without taking into account Purchasing Power Parity, per capita income for 2002 was $2,584.
The trade figure was then filled out the following day by a statement from the Turkish Exporters’ Assembly (TIM), which took things forward into the first quarter of 2003. Over the three months, the TIM said exports had grown by 33.9% to a total value of $10.2bn.
Not a bad achievement in either respect. GDP growth in particular came after a 9.4% contraction in 2001. However, most market movers were far more concerned over the week with the percentage of that GDP the country now owes in domestic and foreign debt. This stood at around 85% at the end of 2002.
With the failure of the government to secure parliamentary backing for a resolution allowing the deployment of US troops prior to an invasion of Iraq - and the subsequent loss of a US aid package estimated at around $25-30bn - interest rates had risen dramatically, causing further problems for debt repayments.
During March, benchmark bond yields rose from 50-55% at the outset of the month to 65-70% by the end.
As a result, market concerns deepened over whether Turkey would be able to roll over its debts or would instead default. This concern was exacerbated further by the continued inability of talks between the government and the IMF on a 4th review of the economic programme to reach any conclusion. A final, $1.5bn tranche of IMF credit is awaiting the outcome of these discussions, which had been suspended before last November’s general election, then restarted this year.
Yet some market analysts found these debt repayment fears unfounded. A report from Garanti Securities issued April 1st declared that “Market concerns about the debt sustainability [are] exaggerated.”
The report argued that the structure of Turkey’s debts means that the exchange rate is far more important than the bond rate, and f/x has been relatively stable recently.
“Nearly 60% of Turkey’s public debt is linked to the exchange rate,” the report pointed out. “Of the remainder, only 15% is fixed rate government bonds.”
However, a prolonged period of high bond yields might hit market confidence, causing a rush to Turkey’s traditional safe bet - foreign currency. Confidence is also closely linked to the progress of the war in Iraq.
“If the war continues more than a few months,” an analyst with Ak Securities told OBG, “then we could see serious problems with debt.”
Also affecting the military and market situation would be any intervention by the Turkish army into Northern Iraq, a possibility that had seemed strong at the end of March, but which appeared to have eased by April, with US Secretary of State Colin Powell visiting Ankara April 2nd to restore tattered US-Turkish relations. Market analysts are pretty much unanimous in seeing any Turkish intervention there as potentially disastrous for the economy.
Also on the cards from the US is a much smaller package of aid - initially described as a $1bn grant in President Bush’s new war budget, then put forward as a sum that could be used to leverage up to $8.5bn in loans. By April 3rd though, the exact details of the package were still unclear, though its very existence had served to boost market confidence end of March, halting an upward surge in bond rates.
Yet longer term, many expect the government to still hit a shortfall in financing, even with the US aid. The Garanti report suggested this might be as much as $4bn. It seems the government is aware of this, and thus the remarkable series of policy proposals put forward by Prime Minister Recip Tayyip Erdogan at the end of March.
These included a proposal for every citizen to donate $100 to a special debt payment fund, another idea for 20% of everyone’s income to be donated, and a third for the creation of a three-year maturity war bond.
While most market analysts do not see the first two as being particularly effective, the last suggestion may have more hope. Certainly, the government will need to raise further revenue to meet any shortfall, so a long-term bond may well be an answer.
In the short term though, roll over is less likely to be a problem, with April 9th, when the next big repayment comes up, generally seen as manageable. Tackling the debt issue will likely remain a top priority for a long while to come though, with a pressing need for the government to implement policies that go beyond appeals to the citizenry’s good will.
