The IMF just published its Article IV Consultation Preliminary Conclusions. Here are some highlights:
The Fund notes the unbalanced nature of growth I mentioned in the last post. It also ties some of the increase in import demand to higher inflation, which has decreased Turkey’s competitiveness (another point often made by yours truly).
The IMF says that the Central Bank’s policy measures did not get immediate support from other agencies. For example, BRSA enacted its measures quite late.
Turkey’s largest challenge is a gradual adjustment to a sustainable and balanced growth path, i.e. without a crash landing…
Interestingly, the Fund has revised its Turkey forecasts again. Here is my friend Ozlem Derici from Erste Securities reporting on the “first” revision.
IMF, in its newly released September WEO report, revised its growth estimates for Turkey according to which GDP growth for this year was revised down to 6.6% from its previous estimate of 8.7% and 2012 growth estimate was revised down to 2.2% from 2.5%. Current account deficit expectation was 10.5% in its latest report and this was slightly revised down to 10.3%. 2012 current account deficit estimates came down to 7.4% in 2012 from 9.8%. IMF was widely critized for the inconsistency between its growth and current account deficit estimates 2012 and according to the report, it seems that the estimates are revised on the basis of a more negatively affected Turkish economy from the global crisis.
But now the Fund now expects 7.5 percent growth this year. Next year’s growth as well as the current account deficit forecasts are roughly the same. Personally, I would not make too much of this discrepancy: The Turkey desk was actually in Turkey when the surprisingly high 2Q growth came out, so they probably just revised their forecasts based on those latest numbers.
Anyway, the most interesting parts of the report are the policy recommendations, and it is a tough wake-up call for the government, who is still in “all is well, send the doctor away” mode. Here are the highlights:
Fiscal policy needs to be tighter, in a structural sense, i.e. excluding transient revenues such as tax amnesties and the like:) This would not only support monetary policy, but also bring inflation and interest rates comparable to emerging market peers. As a level, the Fund recommends the structural primary surplus last seen around 2007- for some reason, I found this “last seen” remark very funny.
“Monetary policy should restore its focus on price stability within a transparent and consistent operating framework.” This means the following: 1. Your monetary policies are after conflicting goals; quit them and focus on price stability instead. 2. Don’t confuse markets with the conflicting goals and plethora of policies and tools. 3. Don’t mess with currency markets, and they will mess with you big time. 4. Stop losing reserves.
The Fund’s solution is an increase in the policy rate when if the inflation target is missed and risk appetite does not return. Along with the tighter structural fiscal stance, it would then be possible to lower the inflation band and lower the huge inflation band.
While the Fund finds the banking sector healthy and well-capitalized, it is worried about short-term external financing, which could be a problem if this liquidity dries up (in the current mess Europe is in, that is not really an outlier scenario at all). While the BRSA already has measures in place to discourage duration gaps/maturity mismatches, the Fund recommends minimum liquidity requirements at the three-month horizon as well as in general more stringent regulatory oversight.
On the structural reform agenda, the Fund mentions the usual suspects: Making labor markets more flexible, reducing informality, improving the business climate, increasing educational attainment (and make education fit employers’ needs- something which your friendly neighborhood economist studied 5 years ago with a World Bank project) and decreasing Turkey’s dependency on energy imports…
As a Turkish saying goes, I would rather be under a truck than under such words:). But to tell you the truth, these are not surprising at all. Many sane Turkey economists have argued that you should not mess with currency markets, that fiscal policy needs to be tighter and that monetary policy is trying to encompass conflicting goals. In that sense, I did not find anything radical in the report. I am just surprised the Fund is so clear and to-the-point on these issues…