October fiscal figures: No surprise Erdogan talks about the “need of a bitter pill”

President’s talk of “bitter bill” needs for the Turkish economy is no surprise having one look at Turkey’s deteriorated fiscal performance.

Make no mistake though. Of course the COVID-19 related sharp 3Q20 contraction (-9.9% GDP) and the government’s efforts to recover from it have added to the worst fiscal performance of the past decades.  Yet, the pandemic related spending only fueled what was already worsening over the course of the past few years.

Skimming through the October figures only, the expenditures up by 21.6% yoy in contrast to the 41.9% jump on the revenue side are promising.   What’s striking and was well anticipated was the 72.3% spike in Turkey’s interest bill which reflects the continuous rise in the risk premium of the country.

The only noticeable slowdown on the expenditures’ side was the good and services procurement which was down by 4.3%, yoy.  Personnel spending (+11.8%, yoyo) and social security expenditures (+9.2%, yoy) were slowed down compared to past months’ respective growths.  Nonetheless, the AKP government, then led by President’s son-in-law Albayrak- did not refrain from spending on current transfers (+25.4%, yoy), capital expenditures (+20.4%, yoy) and capital transfers (+29.2%, yoy).

The revenue side is strengthened by the end of tax deferrals and the fast recovery in 3Q20 as evident from the 40.4% yoy hike in tax income.  As a result, the October budget deficit is down to TL 4.9 bn compared to October 2019 level of TL 14.9 bn (+67.2%, yoy).

The October performance however was not enough to counter the 2020’s overall dismal numbers. That is, Turkey’s Jan-Oct 20 deficit at TL 145.5 bn compared with TL100.7bn last year has widened by 67.2% in a year’s time.  Even the not very credible New Economic Program estimated end of year fiscal deficit at 6% of GDP this year; which looks realistic and hideous.  

The key question now is how to reverse the rapid worsening under the management of the new Treasury and Finance Minister Elvan who just recently replaced Albayrak.

2021 will be a year where growth is to stall along with rising interest rates that were necessary to cap the extreme TL weakness. The government’s biggest dilemma is to find a tradeoff.  Between the need to keep the spending as the COVID-19 related slowdown is not yet over and revenue growth will soon turn sour; while starting to shrink the fiscal deficit.

The way to go passes through better targeted spending based on a credible game plan- which was not the case this year as the government spent precariously; ie. for the housing sector mostly that did not help with Turkey’s much to bigger economic problems such as the high unemployment, high inflation.  It will take several years, perhaps “bitter pill” measures to curb spending and of course a dedicated economy management to reverse the trend in Turkey’s fiscal balances.