Standard & Poor's Ratings Services said today that its ratings on the Republic of Turkey (B-/Stable/C) remain predicated on the government's success in implementing its International Monetary Fund (IMF)-supported program and maintaining domestic political stability.
"The stable outlook on the ratings adequately reflects the current mix of risks and opportunities in both the political and economic spheres," said Ala'a Al-Yousuf, Standard & Poor's credit analyst and director of sovereign ratings for the Middle East and Africa.
Political volatility remains significant, as events of the past month have demonstrated. As expected, Recep Tayyip Erdogan has become prime minister, thereby regularizing his constitutional role in the political system and strengthening the credibility of the government led by his Justice and Development Party (AKP), which won the November 2002 general election with a landslide majority.
Nevertheless, while the government's unexpected failure to resubmit a parliamentary motion to allow the deployment of US ground forces into northern Iraq—in return for a financial aid package of up to $24 billion—has spared it a domestic political crisis, this has been at the expense of straining Turkey's strategic relationship with the US.
At the same time, Turkey's chances of being invited to start accession talks with the European Union (EU) appear to have been set back by the failure of UN-sponsored negotiations to agree on a plan to reunite Cyprus by the end of February.
This event revealed divisions between the AKP government and Turkey's nationalist establishment. Nevertheless, the government has vowed to step up its efforts to find a solution to the Cyprus issue, while the EU has offered to double its pre-accession aid program to Turkey.
Today's visit to Turkey by US Secretary of State Colin Powell aims to heal the strategic relationship between the two countries, and should prevent a possible political crisis over Turkey's military involvement in northern Iraq.
It should also increase the likelihood that Congress will approve the US administration's request for financial assistance to Turkey of about one billion dollars in grants, which could be used to guarantee loans of up to eight billion dollars at lower interest rates—although the disbursement of these grants, even if approved, is unlikely any time soon.
"Going forward, the significant political challenges faced by the new government are mitigated by the fact that it has a large parliamentary majority and huge popular support," said Al-Yousuf. On the economic front, the government has belatedly secured parliamentary approval for its 2003 budget, which is in line with its IMF-supported program.
In addition, it is making progress on finalizing its letter of intent, with the aim of submitting it to the IMF in the coming few days. In turn, this should pave the way for the completion of the country's long-delayed fourth review under the program, and the release of about $1.6 billion in IMF credit, probably in the third week of April.
Meanwhile, the government is also making progress in its discussions with the World Bank on the release of tranches from existing loans and the design of a new three-year Country Assistance Strategy.
Nevertheless, the banking system remains fragile, and the risk of a resumption of political interference in the running of the large state banks increased with the recent change in their joint board of directors. Moreover, there are concerns that the government might undermine the operational independence of the banking regulator, which would slow down the process of liquidating failed banks and seizing weak ones.
Turkey's economy will also remain highly vulnerable to external current account shocks, such as oil price spikes, falls in tourism receipts, drops in merchandise exports to the EU, and, particularly, interest rate shocks that could put its huge debt burden on a spiraling path. If real interest rates do not in the near future embark on a steep downward trend that is sustained through to the expiry of the IMF-supported program at year-end 2004, then another financial crisis, possibly leading to a sovereign default, will be likely.
Reflecting on the prospects for Turkey going forward, Al-Yousuf concluded: "The expected resumption of the IMF-supported program should further strengthen market confidence and government finances. However, only strict adherence to the program, combined with maintained political stability, will result in a durable reduction in real interest rates and the debt burden, and in sustainable high economic growth. Moreover, the path of real interest rates will depend in part on external developments beyond the government's control." — (menareport.com)
© 2003 Mena Report (www.menareport.com)
