Transcript of a Conference Call on the Completion of the Seventh and Final Review of Turkey's Stand-By Arrangement
May 9, 2008With Lorenzo Giorgianni, Division Chief in the IMF's European Department and Mission Chief for Turkey
Friday, May 9, 2008
MS. GAVIRIA: Hello, everyone. Welcome to this conference call on the Seventh and final Review of Turkey's Stand-By Arrangement with the IMF. I'm Angela Gaviria, with the External Relations Department. With me is Lorenzo Giorgianni, the IMF's Mission Chief for Turkey. He will make some brief remarks and then he will be happy to answer your questions.
MR. GIORGIANNI: Thank you very much. Today the IMF's Executive Board approved the Seventh and final Review under Turkey's three-year Stand-by Arrangement with the IMF. This arrangement expires tomorrow, May 10. Looking back, there is no doubt that Turkey is in a stronger position than when it entered it. Disciplined fiscal policy combined with structural reforms and, until recently, favorable external conditions have enabled Turkey to sharply reduce interest rates, halve its public debt as a share of GDP, cut inflation from 70 percent to single digits, and promote record levels of foreign direct investment. As a result, we have witnessed over the last seven years the most rapid period of economic growth in the recent history of the Republic. The IMF is pleased to have supported these policies with consecutive stand-by arrangements.
Turning to the current conjuncture, the Turkish economy is running against strong headwinds from rising commodity prices, tightening global credit conditions, and domestic political uncertainties. There is no surprise therefore that Turkey is experiencing slower growth--we project growth at 4 percent this year, higher inflation, which will remain barely in the single digits, and a widening current account deficit on the back of a bloating energy bill. The government's reforms and strengthened economic institutions place Turkey in a good position to weather this storm.
But what are the priorities looking forward? The near-term priority is to support market confidence and contain inflationary pressures by combining an early monetary policy tightening with strict observance of the revised primary surplus target of at least 3½ percent of GDP.
Looking beyond the current cycle, Turkey's medium-term challenge is to combine continued macroeconomic policy discipline with the right set of microeconomic reforms that increase further the economy's resilience to shocks while boosting potential growth.
On the macroeconomic policy front, it will be crucial to adhere to the announced medium-term fiscal path and gear monetary policy to reducing inflation down to the 4 percent target over time.
Let me emphasize what we believe are the virtues of fiscal restraint. Fiscal restraint bolsters national savings and therefore reduces the economy's reliance on volatile external financing. It helps reduce inflation, which is still high by international standards and has been rising recently. It helps also in reducing public indebtedness, which improves the sovereign credit rating and reduces the country's borrowing costs. And it also shores up market sentiment. Because of the centrality of fiscal discipline to Turkey's recent economic successes, we think it will be important to institutionalize the medium-term fiscal policy framework recently announced by the government by adopting an explicit fiscal rule.
On the microeconomic reform front action is needed in three main areas: Making labor markets more flexible, addressing bottlenecks in electricity supply, and deepening financial intermediation. Together these reform steps would help generate fiscal space to lower high marginal tax rates; create jobs, reduce informality; and raise productivity, therefore affording higher living standards on a sustained basis.
Thank you very much. I'd be happy to take questions from you now.
QUESTIONER: What will happen once the present stand-by arrangement ends? What will you be doing with the Turkish government for the next format of relationships between the IMF and Turkey?
MR. GIORGIANNI: Let me first say that the government has not yet communicated to us its decision on their preference for the future course of Turkey/IMF relations. I'm sure the government is considering their options carefully, and these options are basically two. One would be to have a successor arrangement, which most likely will be a non-disbursing arrangement, that is, a precautionary stand-by. The other option would be to enter into a period of enhanced surveillance under what we call post-program monitoring, which basically involves twice a year assessments of Turkey's economic prospects and policies. If I could draw a parallel to make a distinction between the role of the Fund in these two types of modalities of our involvement, I would draw a parallel with filmmaking. The program relationship could be likened to the role for the Fund being a film producer, and the surveillance relationship could be likened to the role of being a film critic. With the government being both director and script writer: under a program relationship, the Fund would be sort of a sponsor, like the producer of a movie, and in a surveillance relationship, the Fund would be more like a film critic that observes the script from outside. Of course, both producers and critics take satisfaction from a good movie, but the way they go about improving the script is somewhat different.
But moving away from this analogy, what I would like to say is that the Fund wants to continue remaining engaged and assist the government in its reform efforts within the format that the government wants to pursue. And, at the end of the day, what is important is that macroeconomic policy discipline is preserved and that structural reforms are advanced. And if this is done, with or without the IMF, Turkey will continue to enjoy economic success in the period ahead.
QUESTIONER: Lorenzo, we haven't seen any word from Turkey, any signals on how they're going to proceed, and yet the investors don't seem to be worried about this too much. Or that's my perception. You might have another one and, please, I'd like to hear about it. The other one is, do you think Turkey could continue without an IMF program under circumstances of heightened global market turmoil and with big pressures coming from energy and commodity prices?
MR. GIORGIANNI: As I said, at the end of the day, credibility is earned by hard work and good policies, and if those are in place, Turkey certainly is well positioned to do well even without a formal program with the IMF. So what is key, and that's I think what investors are looking for in the future, is to see what the government's attitude with regard to policy is. If they continue with good policies, I think investors will reward the country handsomely by continuing to pour in money and invest in the future prospects of the economy. So the key really is the quality of policies, and provided that is there, investors at the end of the day would continue to reward Turkey.
QUESTIONER: Is it quite natural that a country that has had such a large program with the Fund doesn't say anything before the program expires? Can you think of another country?
MR. GIORGIANNI: I think all countries behave differently when it comes to these sort of issues and that there is not one size that fits all, so to speak. So what's happening is quite natural. This program was designed originally to be an exit, a graduation so to speak, from Fund involvement. I think what the country is facing now is a situation where although it has done a lot to become more resilient and to lay the foundations for higher and less volatile growth, it's facing very difficult and unusual circumstances and clearly Turkey has significant dependence on external inflows. Therefore, in the current environment where global credit markets are tightening, global growth is coming down, and supply shocks are seen from elevated food and energy prices, and also given domestic political difficulties, I think it's right that the government is weighing all the options it has to buy insurance and to anchor its policies and whether they will do so in the context of a Fund program or in the context of other more homegrown frameworks, I think it will be fine provided that of course good policies, as I said, are implemented and the reform plans that are announced are complied with.
QUESTIONER: If you might, would you encourage the government to quickly lay out its plan to encourage the market or show the market what it's up to basically?
MR. GIORGIANNI: I think if I look at the public statements of government officials, they have been quite candid about where they are at each point in time. I don't think there is an issue of a lack of communication. The issue is one of taking a hard look and seeing what's best for the country, and that might take a little bit of time. Of course, it would be ideal to remove uncertainty sooner rather than later because investors typically like a predictability. But we do have predictable policies in place right now--it's not that without an IMF program policies cannot go on in the way in which they've been announced. I would flag here to the detailed fiscal plan that the government has just recently announced: that is a sign to me, and also you will see in the letter of intent that will be released this afternoon, that the government has laid out a host of other policy intentions regarding the future, and these policies will be done either with or without a new program. You will see that there are a number of future commitments that the government has entered into for the good of the country and the main issue is that these policy commitments are implemented in the future. We have confidence that this will happen.
QUESTIONER: I was wondering that we haven't heard what the Fund is saying about the cut in the primary surplus targets. We know that Turkey's pressures are about spending currently and if that means that there's no discipline, or do you think that the primary surplus target is adequate and appropriate?
MR. GIORGIANNI: As you know, the government has recently announced revised fiscal plans for this year, and also announced a comprehensive medium-term fiscal framework for the next five years. Under these plans, the primary surplus target for 2008 has been reduced from just over 4 percent of GDP to 3 1/2 percent. With the fiscal space that is generated by this reduction in the primary surplus, the government intends to fund initiatives that are aimed to support growth and increase employment, such as additional infrastructure spending, especially in the impoverished Southeastern region, and a cut in labor taxes that should shore up employment generation and reduce informality. The idea behind this move is basically the need to attend to two competing objectives: growth and disinflation. The original budget of just over 4 percent of GDP had embedded a significant tightening of fiscal policy in the order of .7 percent of GDP or so. By undoing that, the government is basically preserving the same level of the primary surplus as last year and, because growth is coming down, this technically implies a slight tightening of the stance of fiscal policy. To put it differently, the fiscal stance is not changing much compared to last year despite the reduction in the primary surplus, which will be used for growth-inducing initiatives.
Of course, and maybe here I'm anticipating your next question, this puts additional burden on monetary policy in stemming inflationary pressures, and the Central Bank has already announced that to avoid a broadening of pressures from the supply shocks from elevated food and energy prices, it has embraced a tightening bias, and in fact, its inflation forecasts for the next three years embed a tightening of interest rates that is measured and gradual in the next few months, so they're already signaling a tightening of monetary policy. So the combination of an unchanged primary surplus with a tighter monetary policy should be able to strike a good balance between these two competing objectives of supporting growth while at the same time restarting the disinflation process.
QUESTIONER: The Managing Director spoke about tightening monetary policy. How much tighter do you think?
MR. GIORGIANNI: That's a question that the Central Bank will need to come to grips with in the coming period. It is difficult to say with precision. If I look at recent, I think today or yesterday's, release of analysts' expectations data on inflation going forward, on interest rates going forward, those data point to an expectation by analysts of a 50 basis point increase in interest rates at the next meeting, which I think is on May 15, of the Monetary Policy Committee, and an additional 40- to 50-basis point increase through September of this year. So that's what markets are pricing in at this stage and I think the Central Bank is going to have to take a look at these data and also developments in inflation and then take action based on that.
QUESTIONER: Are you worried about the court case against the governing party? And what will be the effects of this on the Turkish economy?
MR. GIORGIANNI: We do not comment on political developments or speculate about judicial processes. What I could say is that the political uncertainty generated by the recent events puts a premium on disciplined policies and continued reforms to secure the confidence of the investors going forward.
Thank you all for participating in this conference call and I'm looking forward to future opportunities to chat with you.
MS. GAVIRIA: Thank you, Lorenzo. We conclude here this conference call. Thank you.
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