Can Turkey survive without an IMFcrutch?

By Lesley Wroughton - Analysis

WASHINGTON (Reuters) - The muted response by investors on Monday to the expiration of Turkey's $10 billion agreement with the International Monetary Fund may be just the reaction the Turkish government needed to show it can live without the IMF.

After an economic crisis in 2001, Turkey set out to break from a history of high inflation and low economic growth, as it set its sights on EU membership.

But the restoration of its fortunes may have been helped as much by five years of global economic growth, as by improved macro-economic strategy.

As the IMF's three-year program wrapped up on Saturday, weakening economic growth in developed countries, and rising world fuel and food prices, threaten to dampen demand for Turkish products abroad and push inflation higher again.

Tighter global credit conditions are also problematic for Turkey which relies heavily on external financing to fund its investment and growth.

Debt markets on Monday were unfazed by the end of the IMF program, with Turkey's five-year credit default swap (CDS) spreads, a measure of investor sentiment, unchanged at 250 basis points. CDS provide investors insurance against credit defaults or restructurings and wider spreads indicate increased concern about a country's ability to pay its debts.

Turkey's credit spreads have widened in the last 10 days, rising from 231 basis points, however they are well below the March 30 two and a half year high of 297 basis points.

OVER-PERFORMANCE ENDING?

The Turkish IMF program was a success if judged according to economic objectives set out at the start of the program, according to IMF mission chief to Turkey, Lorenzo Giorgianni.

"In terms of the macro-economic targets, the program has been a success," Giorgianni said.

He said growth rates averaged between 6.0 to 7.0 percent while reserves are now almost twice the size envisaged.

"If you look at macroeconomic indicators, there is certainly significant overperformance," he said.

"Of course, if you look at where we stand now, the economy is coming off a good run and there are signs of fatigue."

"All this is because Turkey has run into strong head-winds from global tightening of credit conditions, increasing food and energy prices, and also has been affected by domestic political events," he added.

The IMF estimates that for every 1.0 percent decline in economic growth in industrial nations as a group, cumulative growth over a one-two year period declines by about 0.8 percent in Turkey.