IMF hails tighter fiscal policy stance proposed in 2013 budget in Turkey

WASHINGTON

On November 26, 2012, the IMF Executive Board concluded the Article IV consultation with Turkey. IMF says after growing well above trend in 2010 and 2011, the Turkish economy has slowed to a more sustainable 3 percent growth rate this year.

Growth has also become more balanced, as domestic demand and imports decelerated on the back of tighter monetary and macro-prudential policies implemented in 2011, while exports continue to perform well thanks to successful diversification towards new markets. In November, Turkey was upgraded to investment grade by one credit rating agency.

Slower and more balanced growth is helping to unwind imbalances. The current account deficit has shrunk significantly, by 33 percent year- on-year in the year to August. Inflation, both headline and core, is also coming down from its peak in early 2012, though recent increases in indirect taxes and administered prices have boosted it temporarily and could further undermine competitiveness.

The primary budget surplus so far in 2012 has fallen significantly relative to the same period last year. The budget target for the year is expected to be missed, notably because of spending overruns in the areas of personnel, health, and capital spending. The banking system remains well capitalized, with capital ratios at more than 16 percent and well above regulatory minima, and not materially impacted by the introduction of Basel II and II. 5. Profitability is strong, and Non-Performing Loans (NPLs) remain near historic lows despite a minor uptick in recent months. Executive Directors commended the Turkish authorities for setting the stage for more sustainable and balanced growth in 2012, accompanied by declines in the current account deficit and inflation.

Directors noted that the outlook is clouded by external uncertainties, and that Turkey remains vulnerable to shifts in market sentiment, given the country's still large external financing needs. Policy priorities thus need to remain geared toward a continued unwinding of imbalances.

Raising domestic savings and enhancing the economy's potential are important objectives over the medium term. IMF Directors welcomed the tighter fiscal policy stance proposed in the 2013 budget, turning around the pro-cyclical stance of this year and contributing to a more balanced policy mix.