Turkey rejects future IMF loans

Ankara will no longer borrow money from the International Monetary Fund (IMF), according to Turkish President Recep Tayyip Erdogan.

Background

The value of Turkey's currency had nosedived since January and it has lost more than 40 per cent of its value against the dollar. It hit a record low of reaching 6.30 to the dollar, although it has since recovered slightly. Investors are worried that Turkish companies that borrowed heavily to profit from a construction boom may struggle to repay loans in Dollars and Euros, as the weakened lira means there is now more to pay back.

The country’s $900 billion economy is teetering on the edge of a full-blown financial crisis. Recently, the Central Bank of Turkey increased its benchmark interest rate to 24 per cent, a hike of 625 basis points from the previous rate of 17.75 per cent. The Turkish lira jumped more than 2 per cent on the news, firming to around 6.1 against the dollar.

Relations between the US and Turkey have certainly not been at its best in recent months, primarily due to disagreements on Syria. The latest dispute was over the decision by a Turkish court to extend the detention of Andrew Brunson, an American pastor accused of espionage for Kurdish militants and the Gülen movement, a group accused of masterminding the 2016 coup. Turkey had also pledged to buy the S-400 missile defence system from Russia, a step that strained its ties with the broader NATO alliance. When Donald Trump announced economic sanctions against Iran last week, Erdoğan pointedly refused to take part.

Analysis

Ankara will no longer borrow money from the International Monetary Fund (IMF), said Turkish President Recep Tayyip Erdogan. “Turkey’s economic indicators are at a very good level compared to other countries,” Erdogan told his AK Party on Sunday, adding that the IMF chapter in the country has been closed for good.

Last week, Erdogan’s government was criticized by opposition party CHP for the hiring services of international consultancy firm McKinsey to estimate the Turkish economy every three quarters. The opposition says it shows a lack of confidence in the country’s economy.

“We undertook a debt of $23.5 billion when we took office. We paid off the debt in 2013. Aren’t we the ones who saved this country from the IMF yoke?” Erdogan said on Sunday, referring to the criticism.

Turkey’s lira has lost around 40% of its value this year, while inflation is above the central bank’s rate of 24%.

“Inflation was really a disappointment on all fronts. Real rates are now slightly negative, so the massive September rate hike has been completely offset,” Guillaume Tresca, senior emerging-market strategist at Credit Agricole said.

However, Turkey remains a country with low debt levels. Turkey’s 28% public debt and 16% household debt-to-GDP ratios are both roughly half the developing country average, Treasury and Finance Minister Berat Albayrak said on Sunday.

Counterpoint

Despite the sustained defiance, President Erdogan has a relatively fragile Turkish economy to restructure and will require significant external support to achieve it. Turkey may be refusing the IMF’s help in favour of receiving assistance from the Beijing-backed New Development Bank.

Turkey has recently been critical of the Washington Consensus organisations (World Bank and IMF). Ankara’s denial of potential IMF assistance in the future could signal a larger shift toward easier Chinese money and an overall re-alignment towards the Moscow-Beijing axis. Turkey’s defiance of the US and the international organisations it supports could re-balance West-Asia’s politics.

Assessment

Our assessment is that Turkey is trying to reduce its dependence on US-backed institutions and financial assistance. Ankara has been pursuing a largely independent foreign policy for the past few months, which has been evident in its interventions in the Syrian Civil War. We believe that by refusing IMF assistance, Turkey is signalling that it is open to support from other financial institutions, particularly those backed by China or Russia. We also feel that this may be one of the first steps that Turkey will take to distance itself from the US’s foreign policy.