Mid-term economic program to focus on growth
Posted by meb at September 17th, 2009
Ali Babacan, the Turkish Economy minister, announced Turkey’s much-anticipated medium-term economic plan yesterday which experts had been speculating would be focused on putting budget balances back on track between 2010 and 2012.
Although some feared that the plan might be unrealistic in its expectations, the consensus amongst pundits that Today’s Zaman spoke with was that the program is quite realistic in its outlook but has fuelled suspicions that the government may be planning to implement reforms without the input of an International Monetary Fund (IMF) stand-by agreement.
Commentators say that they find the creation of a “fiscal rule”, the legal framework of which will be announced early next year, to acheive long-term fiscal sustainability to be the most positive of the statements.
According to statements made by Babacan yesterday, the government foresees growth to contract by 6 percent by the year’s end — significantly higher than the 3.6 percent contraction envisaged earlier — before experiencing a modest rebound to 3.5 percent in 2010, 4 percent in 2011 and 5 percent in 2012.
The government also forecast a TL 62.8 billion budget deficit this year gradually falling to TL 50 billion in 2010, 45.1 billion in 2011 and finally, 39.1 billion in 2012. Primarily, balances were estimated at being -2.1 percent of GDP in 2009, and -0.3 percent in 2010 before barely climbing into positive territory in 2011 at 0.4 percent and 1 percent in 2012.
Babacan also said that unemployment was expected to recover modestly; however, it remains well above the 10.8 percent levels enjoyed before the crisis broke. He said unemployment was forecast to ring in at 14.6 percent in 2010, close to this year’s expectation of 14.8 percent, with the current account deficit set widen gradually from $11 billion to $18 billion.
The government also expects the disinflation process to continue, with the annual rate of Consumer Price Index (CPI) inflation forecast at 5.9 percent for 2009 and 5.3 percent in 2010 — 6.5 percent lower than the government’s previous target. Fiscal balances were also predicted to improve slowly over the three-year period, with the budget deficit declining from 6.6 percent of gross domestic product (GDP) in 2009 to 4.9 percent in 2010, and the public primary deficit to slip from 2.1 percent to 0.3 percent.
The main priority on reforms appears to be directed at public investments, the restructuring of agricultural subsidies, the implementation of a global budget for health expenditures and the extension of flexible employment conditions.
“The absence of any ambitious targets or projections for critical macro balances, primarily on the growth and fiscal sides, reveals a credible and sensible program, provided it is decisively implemented by the government,” Banu Kivci Tokali, from the Macroeconomic Research department of Finance, wrote in a statement.
“The adoption of a gradual improvement in growth and fiscal balances and the denial of any hike in corporate, income or value-added tax rates (KDV) may also be perceived as an indication that the government is inclined to conduct the program by itself [without an IMF agreement], as long as the global conditions worsen permanently.”
The consensus was shared by Eren Ocakverdi, an analyst at YapiKredi in İstanbul who told Today’s Zaman that “forecast figures regarding the 2010-2012 period [including 2009 estimations] are quite feasible and internally consistent.” This plan differs from its predecessors in many aspects and therefore it will probably gain more acceptance than previous plans ever could. The most important reform area in public administration seems to be the implementation of “fiscal rule” as of 2011.
He did not feel that the IMF would exert much influence on the markets. “The market’s main focus is the progress on a new deal with the IMF and therefore the response to the medium-term plan itself is of secondary importance for the time being. The good news is that official statements do not fully ignore the possibility of an agreement with the IMF, while officials prefer playing it cool.”
But some feared that a lack of focus on government expenditures threatened to slow the recovery. “I am disappointed,” Eylem Ünal, a strategist for private banking at HSBC in İstanbul told Today’s Zaman said describing the governments forecasted expenditures as being “not satisfactory.”
Babacan announced that the fiscal rule would be announced in the first quarter of 2010, however, it would be dependent on the budget deficit. The IMF has repeatedly said that while it certainly wants the deficit to be lowered, it also wants rules to be placed on spending. Babacan did not broach this subject in his speech. The income tax law — an important structural reform — is set to be renewed in 2010. Because of no targets in terms of expenditures, some analysts felt that it would prolong any negotiations over an IMF stand-by agreement. “Without targeting the expenditures,” Ünal said, “it reduces the likelihood [of an agreement].”
Ünal worried that the upcoming general elections expected in 2011 would place further strains on the public spending and feared that government inclinations to spend could reduce the foreign investment inflows. “If you place rules on the budget deficit but fail to explain forecasts about expenditures, then the inflows will be low compared to other emerging economies.”
Economists were disappointed, expecting that the plan would be geared to cutting government spending and also unwinding this year’s fiscal stimulus. Market analysts and most economists are also likely to be going over the plan for signs that the government may be signing an agreement with the IMF. Economists and analysts have been especially troubled in recent months by the government’s tripling of the year-end budget deficit in the first eight months of the year.
“Under realistic targets and projections, the initial market impact appears to be positive as the announcement of the program will fill the earlier significant gap in the government’s strategy over medium-term economic policies,” Tokali said. “Nonetheless, without backing from the Fund, confidence in the program would only be sustained in the medium term if the government fulfilled the necessary policies to attain the program targets and projections.
It appears that the news had little effect on markets. Ünal attributed this to the general risk aversion in the global economy and said that it had little to do with Turkey. “Investors are looking at the global environment, not Turkey” in support that the Turkish market would be little affected in the near term. He said US consumer prices data would likely boost shares further, as would information on retail sales. The expected announcement tomorrow by the Central Bank that rates would be cut by another 50 basis points, further bolstered the markets.
At the time Today’s Zaman went to press, the İstanbul Stock Exchange’s (İMKB) key index was trading up at 0.34 percent at 46,773.33 after closing the morning session up 1.53 percent.
source: Today’s Zaman
Related posts: