Erdogan can’t sidestep the IMF for long

Last June Saudi Arabia, Egypt and other Arab states severed ties with Qatar. Turkey offered food and military aid. Now Qatar has returned the favour, with a pledge of $15bn in direct investment. Turkey desperately needs the help. But Qatar's lifeline, with largely unknown terms, simply isn't going to cut it. Over the next year, the country's external financing needs will approach $238bn, according to HSBC. (Last week we went into greater detail on the country's corporate debt). The lira has only barely stabilised after weakening as much as 24 per cent in a week, and foreign reserves are dwindling.

There is no way around it. Turkey will need the IMF.

In recent days, Erdogan has hinted that a distinctly non-Western list of countries including Russia and China could come to his aid. The Kremlin has new US sanctions on its mind. China's Communist Party has its own growth concerns to grapple with, and has typically favoured investing in individual infrastructure projects, not financing large-scale bailouts. So neither of these countries can be the “alternatives” that Erdogan claims to have.

And even if both could provide some relief, it's certainly no substitute for the IMF, which can inject tens of billions of dollars of funding at once, while defining and demanding structural reforms that shore up investor confidence. This has not, ahem, always worked out in the past. But it does seem to be working now for Argentina, which received a $50bn bailout in May, the Fund’s largest. “It was a game changer”, says Viktor Szabó of Aberdeen Standard Investments:

The peso still needs to adjust and inflation is still a problem, but at least you have an anchor. And the pressure is starting to ease because investors know that the money is there and that policymaking is under scrutiny.

Turkey does not yet have this backstop, nor is it likely to request it soon. First, an IMF deal demands full buy-in from the recipient country on a host of orthodox economic policies. In Turkey’s case, the minimum conditions would be higher interest rates and an independent central bank, and we all know Erdogan’s views on both by now: interest rates are evil and the central bank is under his domain. And now that he is an “all-powerful” president, says Szabó, “it just wouldn’t work for him to have to bend to an international organisation”. Secondly, Erdogan has long showed antipathy towards the IMF, and with local elections scheduled for March 2019, Metin Esendal of Renaissance Capital believes it may be too politically toxic for Erdogan to change his stance beforehand.

However, early elections are not off the table, says Mr Esendal, and we could see a step towards the IMF once they happen. A U-turn of this nature is not without precedent. Take Turkey’s relationship with Syria, or Germany. Both have changed dramatically in recent years; Turkey has soured on Syria and befriended Germany. And according to Mr Esendal, “Erdogan tends to do the right thing at the last minute, so there’s still time for a deal”.

In fact, a deal with the IMF may be Turkey's only option. While many analysts see a rate hike as a critical next move, “the fixation on interest rates”, says GAM’s Paul McNamara is “entirely overblown”. Markets instead need the Finance Minister (Erdogan’s son-in-law) to announce debt restructurings and explain how the losses will be distributed. And even then, argues McNamara, “the IMF is something Erdogan will ultimately have to capitulate on”.