Turkey Hooked on Stimulus as Budget Deficits Seen Stuck Over 3%
(Bloomberg) -- The spending spigot Turkey has kept open during the election season will push the budget deficit to double the official target this year as the economy sputters, according to analysts surveyed by Bloomberg.
With the central bank on hold since last September, authorities have instead relied on fiscal stimulus to ride out Turkey’s first recession in a decade. The spending spree will result in a wider budget deficit than previously forecast, pushing this year’s shortfall to 3.6% of gross domestic product and keeping it at more than 3% in 2020-2021, the poll showed.
Goldman Sachs Group Inc., which predicts the central government budget deficit at 4.2% of GDP in 2019, said the expansion in fiscal expenditure explains much of Turkey’s economic recovery in the first quarter. As a result, it estimates the total financing required this year will rise to 295 billion liras ($52 billion), about 95 billion liras more than assumed in the official program.
“This constitutes a sharp break from past episodes where monetary or credit policy was generally used to support the recovery and fiscal policy was more passive,” Goldman Sachs economists Murat Unur and Clemens Grafe said in a June report. “We think this change in the authorities’ reaction function has been partially driven by necessity, because monetary policy is more constrained than it has been in the past.”
The prospects for the economy remain dim. It’s now forecast to shrink this quarter and next, resulting in a deeper contraction in 2019 and a slightly shallower rebound in 2020-2021, according to the survey conducted June 21-26.
Although earlier in the year Treasury and Finance Minister Berat Albayrak reiterated his pledge to keep a lid on public spending to help curb inflation, the outlook suggests a continued need for stimulus. Even as Turkey moves past the elections, the government is planning to use central bank cash to help finance its widening budget deficit, just weeks after policy makers refrained from proposing a similar measure.
“The government seems to be in no rush to withdraw pre-election stimulus,” said Jason Tuvey, senior emerging markets economist at Capital Economics in London. “This is a pattern we’ve seen before and, while there is a case for stimulus to support the struggling economy, it will raise further concerns over fiscal credibility.”
The central bank may not stay on the sidelines for much longer. With inflation headed lower after decelerating for two months, monetary easing may begin already this quarter, bringing the key interest rate down by 400 basis points lower by the end of the first quarter next year, according to the median forecasts compiled by Bloomberg.
“In Turkey, we believe that the authorities may try to provide support through both fiscal and monetary policy, with the room for maneuver relatively bigger on the fiscal policy front given that public debt/GDP slightly above 30% is well below the EM average,” Morgan Stanley economists including Ercan Erguzel said in a report.
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