Fiscal Conservatism To Continue
BMI View: We expect Turkey ' s budget deficit to remain stable in 2013, ending the year at 2.8% of GDP from an estimated 2.9% in 2012. With a credible track record of deficit reduction and conservative fiscal policy, we believe the government will abide by moderate expenditure increases built into their medium term fiscal plan despite slower than forecast growth.
Having brought public debt from 70.0% of GDP in 2003 to an estimated 38.6% in 2012, fiscal prudence has become a hallmark of Turkish government policy in the last 10 years, and broadly speaking we expect this to continue. While we see 2013 being a year of lower than expected growth ( see our online service, March 15,'Slower Growth Here To Stay'), the government will continue to rely on monetary policy measures to achieve economic stimulus. With their sights on a second ratings upgrade in 2013, they are unlikely to deviate from this path in the short-term despite the leverage afforded to them by relatively small budget deficits and sustainable debt dynamics.
Expenditure: Model of Consistency
Turkey has shown a sustained commitment to modest levels of government spending, with general government expenditures averaging 24% of GDP since 2004. Even in 2009, when the economy contracted 4.8%, this figure only reached 27.3%. Being perceived as fiscally responsible is an important part of Turkey's strategy to boost long term growth potential by attracting private investment. Furthermore, Turkey's fiscal stability is a significant reason why a second ratings upgrade in 2013 remains a strong possibility, which would go a long way in portraying Turkey as a business friendly environment. As such, we see no reason to believe expenditure targets will be significantly exceeded in 2013.
|Fiscal Discipline: Ahead of the Pack|
|Average Annual Government Expenditure, %GDP, 2004-2011|
Turkey's positive standing among international and domestic portfolio investors has enabled it to build a favourable debt profile. Public debt is predominantly domestically owned and denominated in lira, at fixed as opposed to floating rates, while average maturities have been on the rise for several years. This makes fiscal expenditure projections fairly well shielded from short-term interest or exchange rate risks.
|Average Maturity on the Rise|
|Turkey - Average Maturity of Domestic Borrowing (Months)|
Revenue: Questions Over Privatisation
The Turkish government's 2013 budget assumes real GDP growth of 5%, compared to our forecast of 4%, and as a result revenue targets will likely be missed. However, the potential effect of this on overall budget performance is mitigated by relatively modest assumptions built into the medium term fiscal plan, which by our calculation forecasts central government real revenue growth of just under 4% in 2013. In light of this, it is unlikely that revenues will fall significantly short of expectations, as approximately 86% of government revenue comes from taxation and increasing levels of economic activity in 2013 will ensure higher receipts.
A more significant impediment to reaching revenue targets in 2013 could come from questions over the progress of privatisation projects in Turkey. Prime Minister Recep Tayyip Erdogan took a decisively interventionist stance in February by scrapping plans for a US$5.7bn privatisation after bids were perceived as being too low. This could weigh on private investment in Turkish infrastructure projects and make the realisation of privatisation revenues in 2013 lower than expected.
Risks to Outlook: Slower Growth Could Threaten Political Will
Prime Minister Erdogan has built his popular support and reputation on a decade of rapid growth. As we now expect slower growth over the next few years, the potential for the government to adopt a more expansionary fiscal policy is becoming more salient. With elections on the horizon and Erdogan seeking to garner support for his bid to change the constitution, and in our view, run for president in 2014, Turkish officials have repeatedly and openly called for the central bank to do more to spur growth. As the central bank has been in an accommodative stance since H212, they are now constrained by price and external imbalance pressures ( March 13, 'Central Bank Credibility At Risk') and are unlikely to pursue further monetary easing. Although we do not expect significant fiscal expansion, as the realities of lower growth set in the government will potentially see stronger incentives to increase spending as elections loom.