Turkey and the IMF
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Transcript of a Conference Call on Turkey with Michael Deppler|
Director, European I Department
International Monetary Fund
August 1, 2003
MS. STANKOVA: Good afternoon, everyone. I am Olga Stankova with the External Relations Department at the IMF, and this is a briefing to review the Board decision on Turkey.
The briefing will be conducted by European I Department Director, Mr. Michael Deppler. The briefing is on the record. The briefing is embargoed until about 15 minutes after conclusion, and we will set the precise time at that point.
Mr. Deppler will be speaking for about 5 minutes, after which we will open the floor to questions.
Mr. Deppler, please.
MR. DEPPLER: Thank you.
The Board completed its fifth review for Turkey today. It was a good Board meeting, and the Directors had positive response to the actions that the authorities have taken over the past few weeks.
They see the program as being back on track. They particularly welcomed the measures on the fiscal side, about three-quarters of a percent of GNP, which ensures achievement of the 6.5 percent primary surplus by the end of the year. And the legislation to strengthen the administration's Social Security fund, together with the associated commitment not to have amnesties, these were viewed as actions which both strengthened the near term and the longer term prospects for the fiscal accounts.
Another dimension, of course, was the economic conditions facing Turkey. These are clearly improved. The growth seems reasonably sure to be around 5 percent. Inflation is coming down. We expect to achieve or come very close to achieving the 20 percent inflation target, and market conditions also have improved quite markedly over the past few months. The benchmark bond rates are down, the exchange rate is significantly strengthened from where it was, all of which points to sort of solid market confidence.
That said, Directors also recognized that real interest rates were high, and there was still some underlying fragility needed to be addressed. It was in this context that they emphasized the need for the authorities to demonstrate full program ownership and steadfast program implementation. Needless to say in this context, they again reiterated the importance of achieving a 6.5 percent primary surplus, both this year and also next year as well.
Another strand in the discussion was that the Directors viewed quite positively the policies and actions of both the Central Bank, the CBT and of the supervisory agency, the BRSA. In those instances, Directors saw clear improvements in credibility and competence, and particularly in the case of banks in the oversight of the banking system.
Another aspect of the decision was the Board's decision, in line with some policy, to support moving part of Turkey's repayments from 2004-2005 to 2005-2006. This is very subjective, but a main one is to try to strengthen debt management on the part of the Treasury, and through those means, contribute to the success of the program.
Directors viewed the program as having been put back on track by these actions, and they came to the conclusion that Turkey's efforts deserved continued support of the international community, and they voted accordingly.
I think I will leave it at that for the time being and be glad to respond to any questions you might have.
QUESTION: When the Fund plans to complete the next review for Turkey and what Turkey must do to wrap that one up.
MR. DEPPLER: The Letter of Intent for this program has just been issued by the authorities, and therefore all of the details and the understandings are publicly available.
The one aspect of that is an agreed rephasing of the program, at least in the near term. As you know, there's been a delay in completing this review. So trying to put things back on a sort of solid footing in terms of process going forward, it's been agreed to sort of rephase the timing of the reviews coming up, with the next one I believe not to be completed before mid-October, especially on the budget.
And there is some rephasing also for a few of the later reviews; the program with the timing going back to the old track by mid-year and with the program ending, again, as it was before, by the end of 2004.
So the point is there's a good two-and-a-half months before the next review, and it's supposed to focus primarily on the budget, but there are other structural issues as well.
QUESTION: Mr. Deppler, in your opening remarks, you talked about the underlying fragilities. Could you address those in detail.
MR. DEPPLER: The real interest rates in Turkey remain fairly high. Now, the real interest rate on Turkey's lira government debt is still I would say somewhere in the 20s. I'm not quite sure where the exact figure is right now, but something of that order, and that is quite high for a country with as many debts as Turkey. And clearly there's a need to bring, to restore enough confidence by markets and by the Turkish people to bring these interest rates down to more reasonable levels, more sustainable levels. And that is the core of the issue facing Turkey going forward.
Of course, there is much that remains to be done. One of the encouraging aspects of the situation is, whereas, the debt ratio in Turkey a couple of years ago was around the mid-90s, certainly in the 90s, our present estimates, this is falling around 70 by the end of this year.
Now, part of this is due to the strength of the TL, so we shouldn't put too much weight on the improvement, but the basic tendency from debt ratios in the 90s to debt ratios in the lower 70s is clearly there, so one also needs to focus on the progress that has been made. The government, which really has become much more focused on its economic policies over the past few months, is beginning to see the results of that in terms of market sentiment.
QUESTION: If I may ask another question, Mr. Deppler, could you also elaborate on the movement of the repayments.
MR. DEPPLER: Yes, this is a fairly complicated in-house technical issue, and I don't want to go into that. My understanding is the authorities are going to address this issue fully tomorrow, and there will be I think a complete explanation then.
But, essentially, Fund programs are financed on the basis of a certain schedule for countries that are able to repay faster than that particular schedule; that is the program does even better than originally anticipated, then there is a provision for paying early.
What has been agreed in the case of Turkey is that, while the program is doing well and some of the payments are going to proceed early, some of the payments also are going to be rephased to be in line with what was in the program, and this is what this decision is about.
The main advantage for Turkey from this is basically a smoother repayment schedule to the Fund than would have been the case otherwise. From the market point of view, this should clearly be something that is viewed quite positively, and the Board supported this decision entirely at the Board meeting today.
QUESTION: Mr. Deppler, Turkish lira, appreciated in real terms for the last couple of months, and it has been helpful in reducing the inflation, but led to higher account deficit, and the government revised the figures. Can you elaborate on that.
MR. DEPPLER: Yes. I agree with you that the strength of the TL has surprised us, frankly, and this is something we are watching fairly carefully, but in terms of competitiveness, this has not, from our point of view, become a particular source of concern. Bear in mind that the appreciation vis-a-vis the euro is not nearly as marked as it is vis-a-vis the dollar, which is what most people focus on. It's less vis-a-vis the euro. And the EU, of course, is the main trading partner.
Now, partly as a result of this, but also because wages in Turkey are still quite well behaved, the competitiveness, as measured by unit labor costs, remain, in our view, within reasonable ranges. And it's not only because wages have been reasonable, but also because productivity has been very strong.
And if you look at what's been happening to exports, Turkey continues to gain market shares. While you are right, the current account has weakened, we view this as a reflection of the strength of domestic demand, rather than a loss of competitiveness. So far, we would say things look reasonably good.
QUESTION: I wanted to go back to the rescheduling of the extension on the obligation date. You said that this would be viewed as a good thing. I just wanted to clarify you said that in some cases countries pay ahead of schedule, and this is not the case this time, so you're going to what was established as the original obligation date for the payment?
MR. DEPPLER: Yes, that's basically correct. There are several things. Turkey has been paying part of the repayment on the so-called expectations basis which says that the program is doing better than anticipated, and there is scope to repay the Fund earlier.
The so-called obligations basis, which is the traditional and until recently was always the baseline within which these things were done, and in fact it is the baseline within which financing dimensions of the program remain put together. Those are for sort of the more traditional expectations about what a country's repayment capacity is.
Now, in the case of Turkey, what has been decided, this was a request of the authorities, which the staff supported and the Board had supported. It was essentially to keep some of the payments on an expectations basis, move some of the payments onto an obligations basis, and the result of doing that is a smoothing of Turkey's repayment schedule to the Fund. Some of the market participants have been raising questions about how Turkey is going to be able to repay the large sums coming due next year and beyond. And this is an answer to that particular issue.
QUESTION: But this is also the majority of the outstanding money, as well. It's $11 million out of about $15 million that's going to be repaid at the obligation date?
MR. DEPPLER: In terms of the implications for 2004, on an expectations basis, they were supposed to repay $9.7 billion. That number becomes $5.25 billion. And then in 2005, they were expected to pay $10 billion, this has been reduced to less than $7.8 billion in 2005.
QUESTION: Thank you.
QUESTION: The U.S. administration was awaiting conclusion of the IMF talks in regard to this grant, $1 billion grant, which could turn into $8.5 billion. So does this have any effect on this rescheduling debts?
MR. DEPPLER: No, not really. In terms of the financing of the program, the financing from the U.S. is not in any formal sense taken into the baseline view of the program. Basically, this is financing which would be additional to what's been foreseen in the program.
We presume that that possibility has made market conditions a bit better than they would have been otherwise. So, in that sense, that financing is playing a role in how we assess the program. But in terms of formal financing, it's not in there.
The point I would emphasize about U.S. financing is that the authorities have committed to using this to strengthen the composition of that debt, rather than to increase their debt. Basically, the idea would be to substitute short-term domestic debt for long-term U.S. Government debt. And this results in a strengthening of the debt position of Turkey, and it would be quite compatible with strengthening the program.
QUESTION: I'm just going to try to make sure that I understand exactly what you mean by this extension on the payments. It sounds like you're saying that you have extended payments from the expectations basis to the obligations basis.
Now, was the original obligations basis, which I always think of as the absolute you have to pay it by that point, it can't be this extended, were the obligations basis was that also extended or was that left alone?
MR. DEPPLER: No, no. There's nothing unusual about this transaction. It's straight Fund policy. The wrinkle is something that's rather new because it's the result of decisions that applied to new lending by the Fund beginning in early 2002. It's starting to affect programs, not only Turkey's, but all programs in the Fund right about now.
Now, the programs are constructed on the assumption that repayments are going to be on an obligations basis. But when the purchases are made initially, the understanding is, in the first instance, the authorities should attempt to meet and repay on the so-called expectations basis. Basically, the idea is, if a country is doing exceptionally well, instead of holding onto Fund money, they should repay on an early basis.
But since we don't expect countries on average to do exceptionally well, it's pretty routine to move to an obligations basis.
QUESTION: It's pretty clear to me that you're saying that the old expectations basis schedule was extended from 2004 to 2005 and 2006, but...
MR. DEPPLER: No, no. Well, it was extended, you're right, because we are moving from one schedule to another.
QUESTION: Right. But was the obligations basis, the old obligations basis schedule, was that also I guess automatically extended by extending the expectations basis?
MR. DEPPLER: You are shifting from a repayment schedule, which I think is 2.5 years to 3.5 years.
QUESTION: So I'm accurate in saying, in my story, that you're giving them an extra year to make some of the payments.
MR. DEPPLER: But bear in mind that this we're only covering part of that. It's only part of the obligations which are being shifted.
QUESTION: Right. You're saying in your press release it's $11 billion coming to you during 2004 and 2005 has been shifted.
MR. DEPPLER: Well, the figures I gave you were $9.7 in 2004 becoming $5.2, and in 2005, it's $10.1 becoming $7.8, in dollars. There's an assumption on the dollar ACR rate here, but it will be set aside.
But there are two points to bear in mind. First, that this is sort of standard Fund policy, and it's an issue that arises routinely these days. Secondly, in the case of Turkey it has the effect because they are paying some of the obligations on an expectations basis, and only moving some to an obligations basis. The effect is a smoothing out of the repayment schedule of Turkey vis-a-vis the Fund.
QUESTION: Okay. I think I understand now.
QUESTION: Yes. I'm sorry, Mr. Deppler, I missed the very beginning. So how do you define the performance—better than expected or is it under your expectations?
MR. DEPPLER: Better than expected.
QUESTION: Thank you.
MR. DEPPLER: This review is a fairly tough review for this government. There was some fiscal deficit gap which in May had been assessed at less than half a percent of GNP, and it ended up being three-quarters of a percent of GNP. And the authorities have filled that gap, and there were difficult issues on amnesties that needed to be faced, and those have been faced and resolved.
I think the authorities are doing well in terms of coming back up to speed on the program.
QUESTION: I do have a technical question at this point. I have not received one myself, so I was wondering if there would be a written press statement from the Board.
MR. DEPPLER: Yes, there will be. You should be getting it within an hour or so I think. Basically, what I said at the beginning was a sort of a freewheeling version of that should be out in about an hour.
QUESTION: It's a very minor question. I was just wondering if you were speaking to us from Washington or someplace else.
MR. DEPPLER: Washington.
QUESTION: Thank you.
MS. STANKOVA: I would like to conclude this press briefing and remind everybody that the briefing is embargoed until 4:45 Washington time. And thank you for being with us today.
[Whereupon, the press briefing was concluded.]
IMF EXTERNAL RELATIONS DEPARTMENT