Turkey will face a balance of payments problem next year that could snuff out growth if the government does not overcome its reticence to join the queue of emerging countries seeking International Monetary Fund help.
Politicians are loath to ask for IMF help before municipal elections next year given the public backlash against the six years of fiscal austerity demanded by the IMF in return for helping Turkey through a financial and economic crisis in 2001.
However, economists say its $70 billion foreign exchange reserve is not a large enough buffer given the current account deficit is seen rising to $50.4 billion in 2009 and the funding need of the private sector is estimated at around $90 billion.
Turkey's business community has therefore been calling for an IMF loan deal to limit the fallout from a global financial crisis which has already forced Ukraine, Hungary, Iceland and Serbia to seek IMF help.
Such aid comes with strings attached and while the government is reluctant to accept big spending curbs and other painful steps that might exacerbate the economic slowdown, economists say IMF credit may be the only source of credit if Turkey finds itself in a balance of payments difficulties.
"Turkey is not an EU member with access to the European Central Bank credit lines that have been made available, nor does it have a swap line with the (United States') Fed as do a few other emerging markets now to boost dollar liquidity," Kristin Lindow, Moody's Investors lead sovereign analyst for Turkey, told Reuters.
Turkey is carrying out accession negotiations with the European Union, but is not expected to join the 27-members bloc for several years at the earliest.
FINANCING NEEDS Turkey' economy is in much better shape than it was in 2001, when it had a severe crisis and signed one of the biggest ever IMF bailouts but some economists say the Treasury may not be able to maintain its current cash holding.
Government spending is expected to pick up in coming months and appetite for Turkish bonds has faded as investors favour safe-heaven U.S. dollar assets.
Analysts say Ankara needs $15-$20 billion IMF credit to meet its short-term financing needs, even if such help is made contingent on measures such as cutting spending, raising taxes, accelerating privatisation, and increasing interest rates to correct fiscal and external imbalances and control inflation.
"For the first time in a couple of years, the balance of payment will be a binding concern for Turkey in the sense that Turkish corporates might have to cut back their borrowing from international markets," said Reinhard Cluse, economist at UBS.
It is estimated the non-bank corporate sector will roll over roughly $20 billion in debt in the coming months.
Curbs on firms' ability to borrow will dampen economic activity, which has already weakened.
The economy expanded by 1.9 percent in the second quarter, a a sharp slowdown from 6.7 percent in the first quarter, and some economists expect it will grow by only 2-3 percent next year.
Turkish banks have strong loan/deposit and capital adequacy ratios compared with their western peers and are tightly regulated, but this is not the case for manufacturing firms.
"I don't think banks will have a problem rolling over their debt. The unknown factors are more in the non-financial sectors. The non-financial sector firms borrowed $18 billion in the first eight months. This is a very high figure," said JP Morgan Chase senior economist Yarkin Cebeci said.
"An IMF deal will cut the size of the shock waves even if it can't stop the financial volatility. More importantly is that an IMF deal will comfort both the financial and non-bank corporate sectors," Cebeci added.
An IMF deal would also help shore up financial market sentiment, economists said. Global financial turmoil has hit Turkish markets in the last two months, with the lira losing one third of its value and stocks halving in value.
"An IMF deal will ensure a gradual and softer fall. If the market attempts to make a correction on their own, the fall will be sharper and faster…I mean further slowdown of growth and more lira weakening," Merrill Lynch EMEA economist Turker Hamzaoglu said.
