Turkish economy minister Mehmet Simsek has insisted that his government will tightly control spending – despite plans, unveiled yesterday, to cut the primary surplus target to 3.5% of GDP and to loosen budget targets for this year.
The primary surplus target – which excludes interest payments, and is seen as a key indicator of creditworthiness – was set at 5.5% of GDP in October last year, and effectively came down to 4.2% in recent months.
“We need to continue to reduce debt levels as a percentage of GDP,” Simsek said in an interview with Emerging Markets just prior to the announcement.
“We have a very large current account deficit, and need to continue to ensure there is no further deterioration there.”
Simsek and finance minister Kemal Unakitan yesterday announced Turkey’s medium-term financial framework until 2012. A revised budget deficit forecast of 1.4% of GDP, down from 1.9%, was included.
Turkey is announcing its plans before its $10 billion International Monetary Fund loan agreement ends next week, and the budgetary easing comes as the country’s central bank prepares to reverse the last six months of interest rate cuts.
The IMF is due to meet on May 9 to approve a $3.7 billion loan payment to Turkey, the final payment under the accord, which expires on May 10.
Last month, the Central Bank revised upwards its inflation forecasts and warned of monetary tightening to come.
Rising food and fuel prices will push inflation to 9.3% in 2008, the Bank stated, but added that there was a 70% chance of inflation falling within a 4.9%-8.5% range by December 2009. Defending the Central Bank, Simsek told Emerging Markets: “I don’t think anybody had expected the supply side shocks we have seen.” Of the 9.2% inflation Turkey saw in March, about two thirds was attributable to food and energy price rises, Simsek added: “What could monetary policy have done about that? What difference could tightening or loosening monetary policy have made? Not much.”
Fiscal discipline is also an important element in controlling inflation, Simsek added. “There are limits to what monetary policy can do. We need to make sure there is no pressure from administrative spending and that is why fiscal discipline is important.”
Simsek is predicting foreign direct investment of around $16 billion in 2008, down from the $22 billion the country attracted in 2000 due to the global slowdown.
As at February, the country’s current account deficit, stood at $39 billion, of which energy imports accounted for $37 billion. The government has implemented a medium term plan consisting of energy market, labour market and social security reform as well as a programme to encourage research and development.
Simsek said Turkey is pushing ahead with its privatization programme – including the sale of Turk Telecom – despite the twin plagues of the global credit squeeze and a deteriorating political environment. “The commitment to privatization is not only about revenues,” Simsek said. “It’s about promoting competition, enhancing the investment climate and moving towards becoming a more productive, innovative society.
“We are going through an episode where global backdrop and domestic political backdrop are less supportive than they have been over the past five years. Naturally that gets reflected in our asset prices. “But we are committed to playing by the rules in the sense that prices are set by the market.”