International rating agency Fitch said its outlook on Turkey's international credit rating of 'B' remained stable following the general election on Sunday. However, it warns that the next government of Turkey inherits a challenging economic and political agenda and has very little room for maneuver if it is to steer the country into safe financial waters.
With an absolute majority in parliament, a government led by the Justice and Development party, or AKP, will potentially have a strong base from which to take the tough decisions necessary to restore confidence in the solvency of the public sector, sustain economic recovery and effectively manage the political challenges of discussions over the future of Cyprus and accession to the European Union (EU).
In that respect, AKP leader Recep Tayyip Erdogan's commitment to accelerate Turkey's efforts to join the EU is welcome. Nonetheless, Fitch believes that Turkey's political and economic prospects remain challenging.
Fitch will be looking for the new administration to demonstrate its commitment to the present IMF program by taking the measures necessary to complete the fourth review and unlock a further $1.6 billion of financial assistance. This will require the new government to press ahead with reductions in public sector employment, adopt a plan for the privatization of the the state-owned tobacco monopoly, TEKEL, tax reform and, most importantly, maintain fiscal austerity with a credible budget for 2003.
The latter is crucial if the government is to secure some $70 billion of financing next year, of which more than $50 billion is to come from the market at sustainable interest rates. Managing Director of Sovereign Ratings at Fitch, David Riley said "Fiscal austerity will have to be maintained if the government is to retain essential financial support from the IMF and encourage investors to meet the government's substantial refinancing needs."
While the new government will seek to shape the 2003 budget to reflect its political and social priorities, the target for the primary surplus must remain in excess of six percent of gross domestic product (GDP) and must not be materially weakened.
In the event of a US-led military campaign against Iraq, the political and economic management skills of an AKP-led government will be tested to the full given widespread concern within Turkey regarding military action against Iraq as well as the adverse economic effects of likely higher oil prices, reduced foreign exchange receipts from tourism and heightened investor risk aversion.
Securing a commitment of a starting date for negotiations on accession to the EU would provide Turkey with a valuable anchor in such an uncertain and potentially volatile international environment.
The election of a new government is a necessary but insufficient condition to bring economic and political stability to Turkey. Fitch believes that Turkey's political and economic prospects remain finely balanced and presently support a stable outlook for its international credit ratings. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
