WASHINGTON Turkey remains vulnerable to a sudden slowdown or halt in capital inflows, and failure to address its imbalances could lead to "systemic distress," slowing the country's economic growth, IMF staff warned in a report.
The International Monetary Fund has long called for Turkey to tighten its monetary policy to address a large current account deficit and "excessive" credit growth, and it repeated its warnings in a detailed staff report that was prepared in November and released on Friday.
"Given the size of Turkey's current account deficit, a sudden stop in inflows (one sharper and more sustained than the one seen in recent months) would require a large compression in absorption to close the external deficit, leading to negative GDP growth," IMF staff said.
Provided conditions do not get worse, the IMF has estimated Turkish economic growth of 3.8 percent this year and 3.5 percent next year, while the current account deficit is projected to narrow to 7.2 percent of GDP next year from 7.4 percent expected this year.
Turkey's economy has been hurt this year by expectations that the U.S. Federal Reserve would begin to stem a flood of U.S. dollars that has boosted global emerging markets. Turkey's central bank has sold dollars regularly to prop up its lira currency and keep a curb on domestic inflation.
The lira fell to record lows on Friday, rattled by domestic political tensions and the Fed's decision to start trimming its monetary stimulus program, prompting the Turkish central bank to threaten more market action.
According to data from November, IMF staff said Turkey's current account deficit is about 1.5 to 3 percent higher than it should be based on economic fundamentals, and Turkey's exchange rate was misaligned by 10 to 20 percent.
"These trends are not sustainable, and Turkey could sooner or later suffer a sharp adjustment if they are not redressed," the IMF said.
Turkish authorities agreed with the Fund's economic projections for this year and next, but disagreed about forecasts after that, IMF staff said in a summary of their views.
Turkish officials believed much of the current account deficit was due to slow growth in Europe, Turkey's main trading partner, and the deficit would narrow as Europe comes out of its recession.
But the Fund disagreed, asserting that Turkey must boost its savings rate and improve competitiveness in order to keep growing as quickly as it has.
(Reporting by Anna Yukhananov; Editing by Ken Wills)