Fiscal Consolidation On Hold As Growth Slows
BMI View: Although we remain broadly constructive towards Turkey's fiscal trajectory, we expect budget deficit consolidation to take a breather in 2014 and 2015 as revenue growth weakens and government expenditures prop up slowing economic growth. After falling to 1.9% of GDP in 2013, we forecast the budget deficit to reach 2.4% and 2.8% in 2014 and 2015 respectively.
On the back of a strong fiscal performance in H113, we maintain our forecast for the general government budget deficit in Turkey to narrow from 2.1% of GDP in 2012 to 1.9% in 2013. However, given the fiscal breathing room at its disposal, we do not expect the government to pursue further consolidation beyond 2013. We forecast the budget deficit to widen to 2.4% and 2.8% in 2014 and 2015 respectively, as revenue growth slows while the current pace of expenditure growth is maintained in order to prop up stagnating economic activity. However, debt and deficit levels remain well below regional averages, providing the leeway to pursue counter-cyclical policy while maintaining a sustainable fiscal trajectory.
Despite the ruling Justice and Development Party's (AKP) track record of fiscal restraint and relatively modest spending in previous quarters, the percentage point contribution of government expenditures to headline GDP has grown steadily ( see chart), which will make it difficult to continue scaling back spending at the potential expense of economic growth and public support. The AKP has outlined ambitious growth targets and is facing the prospect of slowing economic activity just as its need for political capital reaches a peak. The Gezi Park protests and regional instability have increased both domestic and foreign opposition to the AKP on the eve of local and presidential elections in 2014, and general elections in 2015. We forecast expenditure growth of 12% in 2013, and have revised up our 2014 and 2015 forecasts to 11.5% and 11.0%, from 11.0% and 8.5% previously.
|Public Debt & Budget Deficit, % of GDP|