Turkey set to overshoot budget targets as elections approach

Reuters News
Posted: Jul 22, 2013 12:42 PM
Turkey set to overshoot budget targets as elections approach

By Asli Kandemir

ISTANBUL (Reuters) - Turkey is likely to overshoot its budget deficit targets this year as the government spends in the run-up to elections to help keep the economy growing, economists said on Monday.

Prime Minister Tayyip Erdogan's government, which has built its reputation on Turkey's economic transformation over the past decade, is keen to maintain that record as it faces three elections in the next two years.

Growth this year is widely expected to fall short of a 4 percent government target with domestic demand remaining weak after falling sharply last year, private sector investment declining and the global environment offering little support.

The budget deficit-to-GDP ratio is expected to overshoot the government's 2.2 percent target as weaker growth reduces tax revenues and budget spending increases before the polls.

Weeks of anti-government protests coupled with concern about how much longer the U.S. Federal Reserve will pump out cheap money have prompted investors to pull billions of dollars out of Turkish capital markets since early May, leaving the country's gaping current account deficit exposed.

"Growth in the first quarter came almost totally from the public sector," said Elif Gulay Girgin, chief economist at Istanbul-based brokerage Ata Invest.

"It is estimated that in the second quarter, although there is as yet insufficient data, foreign markets and domestic developments had a slightly negative impact on the pick-up in private sector investments," she said.

In the first quarter gross domestic product (GDP) grew 3 percent, 2.9 percent of which was due to public spending. Private sector investment has failed to make a positive contribution to overall growth for the past four quarters.

"This trend will become more evident in the final quarter due to seasonal factors and the impact on public spending of the approaching elections," Girgin said, revising her growth forecast to 3.3 percent from 4 percent and her budget deficit-to-GDP forecast up to 2.6 percent from 2.4 percent.


Deputy Prime Minister Ali Babacan said last week that it should be "no surprise" if the government revises down its growth expectations for this year, but it needed more data from the second quarter and had no immediate plans to do so.

A Reuters poll of 25 economists last week, taken largely before the central bank indicated it could raise interest rates to prop up a weakening lira, showed median forecasts of growth picking up to just 3.7 percent this year.

After the economy grew 8.8 percent in 2011, the fastest in Europe, growth slowed sharply to 2.2 percent last year.

"At a time when youth unemployment is high, when there are serious downward risks to growth and there is a heavy election calendar, there are various risks on the budget front," Is Investment chief economist Burcu Unuvar said in a research note.

Unuvar said Is Investment had revised its 2013 growth forecast to 3.3 percent from 4 percent and expected a budget deficit-to-GDP ratio of 2.7 percent.

According to the latest finance ministry data, the budget showed a deficit of 1.2 billion lira ($615 million) in June, while the surplus in the first half amounted to 3.1 billion lira.

Budget expenditure rose 11.2 percent year-on-year to 187.9 billion lira in the first six months of the year, while revenues climbed 17.7 percent to 190.9 billion lira.

Turkey's budget expenditure generally increases sharply in the latter part of the year. The deficit last December was larger than for the rest of 2012 as a whole.

"It would not be surprising if the government resorts to expenditure-boosting policies before the long election period and this exerts pressure on fiscal balances," said Professor Umit Ozlale from Ozyegin University.

Last year, the government targeted a budget deficit of 1.5 percent but it ended the year at 2.3 percent due to increased expenditure, lower than expected privatization revenues and problems in the cash flow of state energy companies.

($1 = 1.9181 Turkish liras)

(Writing by Daren Butler; Editing by Nick Tattersall/Ruth Pitchford)