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Turkey Beating Budget Goal, May Have Spending Room, Simsek Says

Turkey’s government may have room to accelerate spending in the run-up to next year’s elections without breaching the target for the budget deficit, Finance Minister Mehmet Simsek said.

The country’s economic rebound has outpaced government projections, Simsek said in an interview in Istanbul on Sept. 17. That may allow Turkey to invest more in developing its infrastructure even as it reduces debt as a proportion of output faster than planned, he said.

“The targets are within reach, so we’ll deliver on that,” Simsek said. “But if we have some extra room, and if there are some reasonable demands that would ultimately help boost productive capacity, then probably they will be accommodated.”

Turkey’s economy grew at an annual rate of more than 10 percent in the first two quarters, outpacing all other members of the Group of 20 major economies bar China. The government, which had based its budget on 3.5 percent growth, has been urged by the International Monetary Fund and the Organization for Economic Cooperation and Development to save any extra revenue instead of spending it.

The budget deficit in the first eight months of the year was 14.4 billion liras ($9.7 billion), compared with a full-year target of 50.2 billion liras. The eight-month primary surplus, excluding interest payments, was 20.9 billion liras, more than triple the target of 6.6 billion liras for the whole year.

With elections due by July, some investors have expressed concern that Prime Minister Recep Tayyip Erdogan will loosen the purse strings to help win re-election for a third term. The 2011 budget must be submitted to parliament by Oct. 17.

Fiscal ‘Stretch’

Erdogan’s government “will stretch the fiscal opportunities to the extent that it can in 2011,” Guldem Atabay, chief economist at Ekspres Invest in Istanbul, said in a Sept. 13 report.

Erdogan this month dropped plans to legislate a so-called fiscal rule, backed by the IMF, which would require governments to target a budget deficit of 1 percent of gross domestic product. In May, he broke off talks on a new accord with the IMF, which has overseen the country’s public finances for most of the past two decades as a condition for loans.

Simsek said he understood investor concerns, and pointed to Erdogan’s track record of reducing budget deficits, and the benefits Turkey has reaped from it.

“We’ve had four elections in the past eight years and on average we’ve done reasonably well in terms of maintaining fiscal discipline,” he said. “They should look at our track record. Even without an IMF program, without an explicit fiscal rule, they will notice that we’ve done a good job.”

Deficits Narrow

Turkey’s budget deficit averaged 1.3 percent of GDP in the four years from 2005, before widening to 5.5 percent last year after the global crisis curbed exports and foreign investment. In the decade through 2003, the average deficit was 9.6 percent, according to Finance Ministry data.

The country’s debt, which was more than 70 percent of GDP in 2002, may drop to the “low 40s” this year, beating the government target of 49 percent, Simsek said.

The improvement in Turkey’s public finances under Erdogan, who came to power in 2003, sparked a boom in foreign investment. The arrival of companies such as Citigroup Inc., which bought a 20 percent stake in Turkish lender Akbank TAS in 2006, and Vodafone Group Plc helped the economy grow at an annual pace averaging about 5 percent a year.

The benchmark ISE-100 stock index has surged almost sixfold since the end of 2002, and has added 22 percent so far this year, four times the gain on the MSCI Emerging Markets Index. Yields on benchmark two-year lira bonds have dropped to about 8 percent, from almost 25 percent in 2004.

‘Not an Island’

Asked whether those market gains will continue, Simsek, a London-based economist at Merrill Lynch & Co. before he joined Erdogan’s government in 2007, said he’s “left that hat in London.” He said, though, that Turkish assets will perform better than those of other emerging-market economies because of the country’s fundamental strengths, including “long-term demographics and productivity patterns.”

“We’re not an island,” he said. “If the rest of the world is going to struggle then clearly that would impact us, but the chances are we are going to outperform.”

Simsek rejected calls from Turkey’s exporters for active management of the exchange rate to weaken the lira, which has gained almost 10 percent against the euro this year, and make the country’s goods more competitive. Turkey has a customs agreement with the European Union, which it’s in talks to join, and sends the biggest share of its exports there.

“We can’t cure Turkey’s structural problems purely by focusing on the exchange rate,” Simsek said. “We need to make the Turkish economy more competitive and more productive. That is the core solution. It’s a tough one, but there are no quick fixes.”

To contact the reporters on this story: Mark Bentley in Istanbul at mbentley3@bloomberg.net; Steve Bryant in Ankara at sbryant5@bloomberg.net.

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net.

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