Crisis veteran Turkey among first to recover in 2010

By Alexandra Hudson ISTANBUL, June 17 (Reuters) – Turkey, a financial crises veteran, could be the first in emerging Europe to return to stable growth next year thanks to its robust banking system, lack of export dependency and enviable demographics. The global downturn has brought considerable pain to Turkey’s once fast-growing economy if not the high drama seen elsewhere — unemployment hit record levels, industrial production and capacity utilisation plummeted, and the lira is trading at levels last seen for a sustained period in 2003.

But as some indicators begin to post faint gains many analysts forecast Turkey, dubbed “China on the Bosphorus” by one, could see the strongest growth of the ailing Emerging Europe region in 2010, with forecasts for economic growth next year as high as 3.0 percent.

“We expect the economy to rebound faster than anyone else in emerging Europe,” said economist Manik Narain at Standard Chartered Bank, who sees 5 percent GDP decline in Turkey this year turning into growth of 1.5 percent next year.

“Turkey is much less reliant on exports than peers,” said Narain, and while Turkey does depend on foreign capital inflow — often cited as a negative — credit markets are thawing.

By contrast many banks in Eastern Europe are dependent on cash-strapped Western European parent institutions for funding, and are without the strong deposit base held by Turkish banks.

While 2010 looks brighter Turkey must first weather this year’s contraction — forecast by the government at 3.6 percent and the IMF at 5.1 percent. Markets are braced for first-quarter gross domestic product figures on June 30 showing double-digit contraction.

Such a fall would outstrip Turkey’s worst quarterly economic performance from the trough of the 2001 domestic crisis.

But lessons learned in that crisis which wiped out several banks, have left Turkey’s banks well capitalised and stable. As credit markets thaw Turkish lenders are well placed to resume borrowing and lending activities to help spur domestic demand in the country of 72 million.

“You can only grow domestically when you have the credit for it. Turkey has the combination of a banking system less damaged by the crisis and a large market,” said economist Christian Keller of Barclays Capital, who sees 2010 growth at 3 percent.

Ratings agency Fitch forecasts Turkey will grow 2.5 percent next year, the highest growth of the region after Azerbaijan and topping a projected 2 percent rise in Russia.

It ascribes this to Turkey’s relative lack of dependence on trade — the value of merchandise exports accounted for only 16 percent of Turkish GDP in 2007, compared with 78 percent for Slovakia, 27 percent for Russia and 33 percent for Poland.

Turkey also lacks the huge dependence on commodity exports of countries such as Russia.

Economist Neil Shearing of Capital Economics agrees Turkey could be among the fastest to emerge from the region, although he believes Poland could just beat Turkey as its fiscal position is stronger.

“Turkey doesn’t have any of the obvious distortions in the banking sector such as the likes of Latvia, Romania, Hungary and Ukraine have seen,” he said.

Turkey’s central bank has been able to act more aggressively in easing monetary policy and these rate cuts have been passed on more effectively than elsewhere, he said.

Interest rates have fallen by a massive 800 basis points since last November. For related story click here [ID:nLG854256]

But he cautions Turkey is heavily reliant on cyclical industries such as car manufacturing, which have been hard hit during the crisis, even though the government has just extended sales tax cuts to try and support the domestic auto industry.

SPENDTHRIFT GOVERNMENT

Optimism over Turkey’s outlook for next year is tempered by concern that Turkey is still without a new loan deal from the IMF, which could ease borrowing requirements, and fears Prime Minister Tayyip Erdogan’s big-spending government looks to have thrown fiscal caution to the wind.

Even the central bank is urging the government to take care.

In the first five months of 2009 the budget deficit surged to 20.683 billion lira from 2.060 billion a year earlier. The government has also revised its full-year budget deficit target to 48.3 billion lira from 10.4 billion lira.

“Turkey can probably get away without an IMF programme but I think it would be fairly unwise to do so. It needs to persuade the market that it is fiscally prudent and the best way to do that is to sign up with a new IMF deal and ensure fiscal retrenchment,” said Shearing.

After months of discussions and footdragging a new deal with the IMF is starting to look in doubt, particularly as talks are now mired in arguments about government spending.

“Without an IMF programme the issuance need by the government could crowd out the private sector. 2010, when things should be getting better, might be exactly the time when high amounts of bonds will crowd out the private sector and drive up rates,” said Keller.

“However, with an IMF deal we could have a surprise in growth on the upside.”

Before the crisis struck, aspiring European Union member Turkey had grown an average of 6 percent each year over the past six years, overcoming domestic political strife to lure huge amounts of foreign direct investment.

Any growth below such levels will still feel tough in a country with huge youth unemployment and a large grey economy.

“Whatever happens the recovery in Turkey will be fairly tame, even if it is the first out,” said Shearing. (Editing by Toby Chopra)