Credit outlook shiny, IMF prospects uncertain

The medium-term economic program announced Sept. 16 by the government was welcomed by two credit-rating agencies, as Standard & Poor’s and Moody’s Investors Service both raised Turkey’s debt-rating outlook.

However, top government officials continued to offer conflicting messages on a possible deal with the International Monetary Fund, or IMF.

Speaking to a group of journalists at an iftar, or fast-breaking, dinner Thursday evening, Prime Minister Recep Tayyip Erdoğan said Turkey no longer needs the “walking stick” of IMF loans and cannot accept IMF demands on taxes and spending.

Speaking at a conference in London on Friday, Economy Minister Ali Babacan said IMF financing would “help strengthen investor confidence.”

The government would “prefer” to agree to a standby accord with the fund, Babacan said. An agreement would be good, he said, as it would help the economy grow faster. “If we don’t agree, it’s not the end of the world.”

Meanwhile, speaking in Ankara, State Minister Cevdet Yılmaz said after the announcement of the medium-term program, “There is not much left to talk about with the IMF.”

“This is the first time I have witnessed the political authority to work this hard on a program,” he told economic journalists on Friday, according to the Anatolia news agency. “This program reflects a strong political will and its likelihood of implementation is very high.”

Cheap financing:

Turkey disagrees with IMF proposals to make tax administration more independent and reduce payments to municipalities, Erdoğan said. Turkey would still consider IMF loans as a cheap form of financing, provided the fund agrees to the government’s conditions, he said, according to Bloomberg.

“The medium-term program was prepared based on our own resources, not IMF support,” Erdoğan said, according to his adviser. “We’re trying to stand on our own two feet; we don’t want a walking stick any more.”

The economic contraction has cut tax revenue and forced the government to borrow more to fund a budget deficit forecast at 63 billion Turkish Liras ($43 billion) this year, six times the original target drawn up before the crisis struck.

The government expects tax income of 193 billion liras in 2010, according to details of the three-year plan. That’s an 18 percent increase over forecasted tax revenue of 164 billion liras this year.

Under the plan, Turkey won’t post a budget surplus, excluding interest payments, until 2011, when the ratio of public debt to gross domestic product will start to decline.

The fiscal plan doesn’t foresee any changes to tax rates, Babacan said on Sept. 16. The government will instead seek to widen the tax base and improve collection, he said. It will also cap the money that ministries can request next year, and make patients carry more of the costs of health care.

The government will also deduct at least 40 percent of monthly transfers to local municipalities, to reclaim money they owe the Treasury, daily Zaman reported on Friday.

Outlook upgrades

After the announcement of the program, Standard & Poor's and Moody’s have upgraded their outlook on Turkey.

Standard & Poor's said Thursday it upgraded Turkey's rating outlook to “stable,” from “negative.” The upgrade came as a response to decreasing uncertainty about the country's fiscal direction as the government has pledged to rein in the budget gap and Turkey’s financial markets improved, reported Anatolia, citing S&P.

S&P credit analyst Farouk Soussa said the upgrade reflected the medium-term challenges the government was facing, “which are balanced by a track record of prudent management and a demonstrated increased resilience to economic shocks."

The revision of the outlook “reflects the easing in external-financing risks and the publication of the government’s medium-term fiscal plan, which we believe reduces uncertainty regarding the fiscal trajectory in Turkey,” reported Bloomberg, citing the S&P statement.

Moody's Investors Service also upgraded the outlook on Turkey’s Ba3 bond rating to “positive” from “stable.” The move reflects the economy's improved resilience in the face of struggle, as illustrated by its unassisted performance during the global financial crisis, it said.

“The positive outlook acknowledges that the Turkish economy was better prepared to face the credit crunch and the resulting global recession than would have seemed possible given its dependence on external capital," said Kristin Lindow, the regional credit officer for Europe and Africa at Moody's Sovereign Risk Group. "Moreover, the government did not have to rely on external support from the IMF or other official sources as it had needed in past crises."

"Given the depth of the recession and expectations of slower growth in a less benign global economy in coming years, the restoration of favorable debt dynamics will depend on maintaining lower interest rates and a gradual tightening of the structural fiscal stance," Lindow said.

Moody's also changed the outlook on Turkey's B1 foreign currency bank deposit ceiling to “positive” from “stable.” The outlook on the Ba1 foreign currency debt ceiling remains stable, as do the outlooks on the local currency country ceilings.