IMF’s Scorecard Says Turkey Passed Test, May Fail Its Aftermath

(Bloomberg) --

The International Monetary Fund reversed its prediction for an economic contraction in Turkey this year but called into question its efforts to rev up growth instead of taking advantage of a market lull to embark on long-overdue reforms.

Thanks to stimulus that includes expansionary fiscal policy, the IMF now expects the economy to eke out expansion of about 0.25% in 2019, a sharp change from its previous forecast of a decline of 2.5%, according to a statement concluding the fund’s annual mission to Turkey.

Even so, it warned of grimmer prospects ahead and took issue with President Recep Tayyip Erdogan’s focus on turning on the credit tap again.

“The current calm appears fragile,” the IMF said. “Actions to support credit growth should be limited.”

Hardly chastened by last year’s currency crash and a recession that followed, Erdogan is clamoring for lower interest rates to complement other efforts to saturate the economy with lending. Despite Turkey’s near-certain failure to come close to its goal of 2.3% for economic growth this year, the president this month set a target for 2020 that’s twice as ambitious.

The aim of 5% unveiled by Erdogan is comparable to the outlook in the government’s medium-term program before the Turkish currency’s meltdown upended its plans in 2018. The government is expected to present its new economic program at the end of this month or early October.

Analysts surveyed by Bloomberg predict the economy will contract 0.9% this year and grow 2.1% in 2020.

‘Remain Subdued’

“Despite the recent turnaround, without consistent implementation of a comprehensive package of reforms, medium-term growth is likely to remain subdued given balance sheet strains,” the IMF said.

In its assessment, the IMF pointed to a “remarkable adjustment” in the current account, a major vulnerability in the run-up to last year’s crisis. The fund also described the country’s public debt burden as “commendably low” and said it welcomes some of the steps taken to unwind the recent fiscal stimulus.

Turkey posted a budget surplus for a second month after running a deficit for most of this year, as the Treasury received a part of the central bank’s reserve funds in July and August.

Risks Abound

Still, “the fiscal deficit has increased and uncertainty over the possible scale of contingent liabilities and potential debt rollover pressures limit available fiscal space,” the IMF said. It also described the central bank’s easing cycle as “too aggressive.”

In the days before the fund’s report, its staff were pulled into a political spat in Turkey after what government officials described as a “secret” meeting with opposition party representatives and dissident economists on Saturday in Ankara. The Treasury and Finance Ministry called the talks “inappropriate” and said it warned the IMF to adhere to maximum transparency and not to repeat the same actions.

The IMF, which earlier didn’t reply to a request for comment, concluded its statement by thanking “the authorities and private sector counterparts for their warm hospitality and constructive discussions.”

To contact the reporter on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky, Michael Gunn

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