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there were “already signs that they might resort to financial repression in order to keep a lid on borrowing costs”, Tuvey said.
Based on IMF definitions, Turkey’s primary deficit reached 3.3% of GDP in the 12 months to April, compared with a surplus of around 0.5% of GDP in 2015. The deterioration in the budget position is partly attributable to the effects of the recession that followed the August 2018 lira crisis as tax revenues declined and welfare spending increased. The coronavirus (COVID-19) crisis will put further pressure on the public finances.
“But that is by no means the only factor—after all, the IMF estimates that Turkey’s cyclically-adjusted primary balance has deteriorated by 4.5% of GDP since 2015,” observed Tuvey, adding: “The worsening of the budget position can also be pinned on the government’s repeated attempts to satisfy President Erdogan’s demands for faster growth. “Ahead of the numerous elections and referenda in recent years, the government has (unsurprisingly) pumped stimulus into the economy in a bid to boost support among the electorate. Crucially, this stimulus has not been withdrawn once the votes have passed.”
Tax cuts, wage bill​. Erdogan gained direct control over the state budget following constitutional amendments that came into effect in 2018 making him executive president at the head of a presidential, rather than parliamentary, republic. Among items he has allowed to weigh on the fiscal balance are a range of temporary tax cuts implemented after the currency crisis that have been left in place and a steady rise in the public sector wage bill, partly reflecting wage indexation amid high inflation, as well as subsidies paid to companies for social security payments.
“Against this backdrop, the debt-to-GDP ratio has started to drift higher and we think that the effects of the current economic slump may push it up from 33% to around 40% by the end of this year,” said Tuvey. “While the debt ratio will still be relatively low, President Erdogan is unlikely to sanction the fiscal consolidation needed to stabilise the debt ratio. If anything, the budget position is likely to deteriorate further. Indeed, if the primary deficit were to widen to 5% of GDP, debt could reach 55% of GDP by 2025.”
An underappreciated risk is the build-up of contingent liabilities faced by the government​, according to the Capital Economics report. Most of the liabilities are related to the government’s use of public-private partnerships (PPP), many of which include explicit minimum revenue guarantees as well as debt guarantees issued by the Treasury or other public institutions. In addition,
42​ TURKEY Country Report​ July 2020 ​ ​www.intellinews.com