Şimşek: Turkey can forego IMF loans

The International Monetary Fund's $10 billion loan agreement with Turkey, which expires in May, has been an anchor for Turkey's economy, helping it rebound strongly from a financial crisis in 2001.

Investors, wary of Turkey's reliance on external financing, have been clamoring for information on what direction Turkey will take with the IMF when the current program expires given the near seizing up of the global credit markets. "I feel comfortable the public sector can carry on without additional funding from the fund. So a stand-by arrangement is unlikely," Şimşek said in a late interview with Reuters on Monday.

Şimşek was in the United States for speaking engagements and meetings with investors. He will hold talks with IMF Managing Director Dominique Strauss-Kahn in Washington on Thursday. "I do not believe that Turkey needs a stand-by agreement," he said. Instead it is considering either post-program monitoring or the use of a precautionary stand-by agreement. "No decision has been made. That decision will be made by May," he said, noting that due to parliamentary delays there is now a need to merge all outstanding reviews and try to complete them before the IMF program expires. A key IMF concern has been the Turkey's failure to pass a long-delayed reform of its social security system. Business groups have criticized the government for slow progress on measures to stimulate a slowing economy and pushing reforms such as social security, which is now sitting in parliament for a vote. Parliamentary approval of the reform, which will raise retirement ages in Turkey, is a pre-condition for the IMF to release a $1.3 billion loan tranche to Ankara.

Şimşek reiterated he thought the reforms would be passed in the next two weeks. "I am optimistic, I am hopeful, that it will clear the parliament over the next week or two," he said. "I would give it an 80 percent chance (of passage)."

Investors are also concerned by attempts to create extra-budgetary funding for infrastructure and education projects, something Şimşek categorically denies is on his agenda, saying he blocked parliamentary attempts to push such funding through. "We will not have extra-budgetary funds. If we need additional funding to finance human capital or infrastructure investments, we will do it in a transparent way that will be through budgetary procedures," he said.

Borrowing and growth

Turkey has borrowed $2 billion out of an expected $5.5 billion from international capital markets this year so far. Şimşek said the country could, if need be, go without external financing for two years if market conditions did not improve. "If lets say the markets remain closed, right now obviously not only for us but for everybody, we can live. We can essentially survive not coming to the market for two years very comfortably," he said. "Why? It won't be a pleasant experience but we have a pipeline of privatization receipts, most of which are hard currency, over $5 billion. These are for this year," he said, adding more privatizations are to come.

But Turkey is vulnerable to the vagaries of the global financial system due to its large current account deficit. It grew to roughly $38 billion, or 5.6 percent of GDP, last year. Inflation risks from high food and energy prices and a drop off in the growth rate, which averaged 7.4 percent over the past four years, are raising questions.

Şimşek countered that with the strength of the banking sector, citing return on equity in 2007 of 24.9 percent; a capital adequacy ratio of 18.8 percent; and a non-performing loan ratio of 3.5 percent, of which 90 percent is fully provisioned. Şimşek, noting the troubles in the global economy and the fire sale of No. 5 US brokerage Bear Stearns after it faced what amounted to a run on a bank, plus a serious legal challenge to his AK Party at home, said the economy faced sub-trend economic growth.

"Yes, we will be affected to the extent of credit availability and pricing of credit for the Turkish corporate sector changes. That may mean sub-trend growth, he said. "We think trend growth in Turkey, meaning potential growth, very comfortably you could talk about 6 percent. So sub-trend growth, you could say 4 or 5 (percent). Is it the end of the world? No. Not a big deal."