Turkey’s budget posted a deficit of 16.8 billion liras ($3.1 billion) in February, widening more than eight-fold from the same month a year earlier.
The deficit jumped from 1.9 billion liras in February 2018 as spending surged, according to data published by the Treasury and Finance Ministry on Friday. Analysts opine that New Economy Program targets are almost impossible to meet under the collapse in tax revenue, and the ongoing recession. While President Erdogan heralded a rebound in the second half of 2019, S&P, which forecasts recession in 2019, and most supra-national agencies like IMF and OECD remain skeptical. Central Bank’s March survey of CEOs and economists reveal 2019 GDP growth forecast of a very meagre 1.2%.
Turkey has pledged to curb expenditure as part of measures to rescue the country from a currency crisis that peaked last August, which helped provoke an economic recession. But the ruling Justice and Development Party (AKP) is spending more ahead of local elections on March 31, as poll data indicates its alliance with nationalist MHP had not yet secured victories in big cities like Istanbul and Ankara. In fact, in Ankara CHP candidate Mr. Mansur Yavas is ahead in 9 out of 11 polls.
Budget details: Bad from top to bottom
Budget deficit for February increased to TRY16.8bn, a TRY15.0bn increase over the same period last year, wrote Yatirim Finansman Securities research team. This has brought 12-m cumulative budget deficit to TRY84.2bn (2.3% of GDP) from TRY69.2bn in January (1.9% of GDP).
The deterioration in the underlying fiscal deficit has been intensifying since December. As one-off revenues dissipates in 2019, the recent jump in expenditures could easily lead budget deficit to rise towards 3.0% of GDP and above.
Along domestic demand, tax revenues collapse
As expected, tax revenues has been in a soft patch and would continue to do so, given how pro-cyclically tied tax revenues and level of consumption in Turkey. On top of that, government’s efforts to compensate for the loss of growth momentum in the economy have begun to push expenditures even higher.
Although risk of fiscal slippage is now, risks are increasing by each budget report. In a couple of months Turkey’s 2019 budget deficit and borrowing forecast might go up sharply.
3-m average of tax revenues decelerated to a growth rate of 5.0% YoY from average 7.5% in Dec’18 and Jan’19. This amounts to a whopping 15-20% contraction in tax revenues in inflation-adjusted terms, notes Yatirim Finansman.
In contrast, non-interest expenditure continued to expand at a rate of roughly 30% YoY as in Jan’19.
One-offs saved 2018, slumped in 2019
One-off non-tax revenues, which to large extent prevented a large deterioration in headline fiscal balances in 2018, have finally disappeared to in Feb’19, rising only 12% YoY following more than 5-fold increase in Jan’19 (thanks to advance cash payment of dividends from CBRT). Figure clearly suggest further deterioration in fiscal deficits, going forward, to levels unseen since 2009.
The return of interest expenses
Taking a look at YTD figures, the items that drove expenditures higher were the usual suspects; current transfers, which increased by 43% YoY, reaching TRY66.5bn, due to transfers the Social Security & Health System (TRY31.0bn) and transfer to agricultural sector (TRY6.6bn).
Another item that pushed budget deficit was the interest expenses, which rose TRY22.0bn in YTD basis vs. TRY12.7bn last year.
Budget deficit as percent of GDP is set to increase steadily through 2019, as spending increases due to inflation, interest expenses and elevated level of current transfers. In addition, revenue growth is set to remain tepid due to weak domestic demand. Consequently, market’s attention could gradually shift to fiscal policy risks from balance of payments. In our view, it is likely that fiscal deficits would continue to rise.
What lies ahead?
Yatirim Finansman argues that post-election policy choices will be critical to avoid calamity:
Best policy response, we believe would be a more transparent budgetary outlook & guidance from the Government with respect to path of rising deficits and subsequent measures to keep it under control in a reasonable timeframe. It is becoming increasingly clear that a budget deficit target of 2.0% for 2019 is not realistic.
On top all, we have been observing government’s inclination to lower domestic debt roll-overs, but increase FX borrowing at a controlled pace. These conditions may have to revert back, potentially pushing Treasury bond rates higher.