Today the Turkish Economy Minister Ali Babacan presented the Turkish government’s Medium Term Economic Programme (MTEP). Our overall assessment is that the MTEP is ambitious, but also essentially realistic. Most positive is the announcement that the Turkish government will introduce a fiscal rule to secure long-term fiscal sustainability. The legal framework for the fiscal rule will be announced in Q1 10.
The Turkish government forecasts a drop in GDP of 6% this year, but forecasts GDP growth to rebound in 2010 and grow by 3.5% y/y. GDP is forecast to growth by 4% in 2011 and 5% in 2012. Overall, we believe that the GDP forecasts in the MTEP is a little too optimistic – especially the forecast growth for 2010. We forecast GDP to grow by 2.7% y/y in 2010. Similarly we believe that the Turkish government is a little too optimistic in terms the speed of decline in inflation. The Turkish government forecasts inflation to drop to 5.3% y/y in 2010 – somewhat below our forecast of 6.1% y/y. See the following table for a comparison between the Turkish government’s forecasts and our forecasts.
The outlook for the public finances also seem to be slightly too optimistic, but can hardly be described as very ambitious, as public debt is forecast to be relatively stable at about 48-49% of GDP from 2009 to 2012. Anyhow we believe that there is a risk of rising debt ratios in coming years due to the fact that we have a less optimistic forecast for growth and therefore also a more negative forecast for the public deficit.
In our view, the most positive element in the MTEP is the announcement of a new fiscal rule. The fiscal rule is “designed” to be a fixed rule for the size of the budget deficit. The fiscal rule has two elements: 1) A counter-cyclical element that allows the budget deficit to increase below trend growth in the economy; and 2) An element that will force the budget deficit to be reduced if public debt increases to a certain target level. This should ensure that public finances remain on a sustainable track. Overall we believe that this is a positive policy innovation that will commit the Turkish government to fiscal conservatism. However, it is slightly disappointing that the size of the parameters in the fiscal rule has not yet been announced. That said today Babacan stated that the legal framework for the fiscal rule would be announced in Q1 10. In net terms we can live with that and believe that the markets will be giving the Turkish government the benefit of the doubt – so we do not believe that it is a major problem that parameters in the fiscal rule have not yet been announced.
The key question concerning the MTEP is naturally how the IMF views the programme and whether it is ambitious enough in terms of fiscal tightening for the IMF to agree with the Turkish government about a new Standby agreement. Fundamentally we believe Turkey will get a deal with the IMF, but the IMF might want to see a bit more than Babacan has announced today. In that regard it should be noted that Finance Minister Semsek on Friday will announce a more detailed Medium Term fiscal Programme.
