International rating agency Fitch Ratings has issued a comment outlining its views on the Republic of Turkey following the November elections and in light of the significant challenges that are facing the incoming administration.
A wealth of positive expectations has been generated in the wake of the strong electoral victory of the moderate Islamic-oriented Justice and Development Party (AKP). However, the incoming government faces a spectrum of challenges, both internally and on the foreign front and needs to 'outperform' in the months ahead in order to justify the expectations of the market.
In fact, further positive developments are probably needed given that real interest rates are still slightly above where they were six to eight months ago, asserts a newly released report by Fitch analysts, 'Turkey - After the Elections'.
The European Union (EU) and Cyprus represent significant short-term political challenges. It is hard at this stage to see the EU totally shutting the door on Turkey. However, failure to secure any commitment from the EU would mean that one of the main strategies of the incoming administration produces no meaningful results, damaging its credibility at this early stage. This might remove some of the motivation for further economic and socio-political reform.
The fiscal challenge is significant. The government will need to achieve a primary surplus of 5.5 percent of Gross National Product (GNP) or more in 2003 and to sustain this for some time. Concerns over unsustainable debt dynamics have fallen, but confidence is fragile, and even a small rise in interest rates could reignite these worries. In other areas, the government will need to complete banking system reform and implement further structural changes to the economy.
Meeting the large fiscal and external financing needs through 2003 will be challenging but will be manageable if confidence is sustained. The composition of the domestic debt stock means that adverse swings in market yields, exchange rates and/or a shortening of maturities feeds through very quickly into additional debt servicing costs.
The government still has some room for maneuver in the event of shocks and could push through a higher rollover rate on debt held by public institutions. However, the scope for additional debt swaps and a voluntary lengthening of maturities would be very limited during a crisis, and is further complicated by large maturity mismatches within much of the banking system.
Gross IFI financing will compress by nearly 70 percent in 2003, but Turkey will still face an external financing need of roughly $21 billion. Additional market borrowing and stronger reserves at end-2002 suggest that, in the absence of serious shocks, sufficient external financing should be raised in 2003. However, in 2004 the financing need rises to nearly $25 billion, accentuated by repayments to the International Monetary Fund (IMF) of some $8.7 billion. Turkey may, therefore, have to negotiate a further program in 2004. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
