“We would rather have a looser monetary policy, while maintaining fiscal discipline,” Simsek, the former Merrill Lynch & Co. economist who joined Prime Minister Recep Tayyip Erdogan’s government in 2007, said in an interview in his Ankara office. “We want to keep Turkey’s public sector debt-to-GDP ratio on a downward trend and we want to keep budget deficit-to- GDP on a downward trend. That’s a commitment that we made and are delivering on.”
The policy outlined by Simsek, 44, has helped Turkey lower its debt burden as developed economies took on fresh borrowing in the past three years to recapitalise banks and pull economies out of recession. Central bank Governor Erdem Basci, who has warned further rate reductions may be needed, says prudent budgets are key to Turkey’s appeal to investors.
Simsek says Turkey’s budget posted the biggest surplus in 40 years in the first half of the year. Tax revenue grew as gross domestic product expanded 11 percent in the first quarter from a year earlier, the fastest pace among the Group of 20 major economies. Slowing growth in the second half is likely to require some extra spending, Simsek said.
“We are likely to provide additional funding for infrastructure investment, but still stay well within our fiscal framework,” Simsek said. “We are not projecting a surplus for this year, there will be a deficit, but it is likely to be smaller than what we had originally projected.”
Simsek grew up the youngest of nine children in Batman, in the southeast. He won a scholarship to study finance at Exeter University in the U.K., and worked for UBS AG before joining Merrill in 2000.
The government plans for a budget deficit this year of 33.5 billion liras ($19 billion), or about 2.8 percent of GDP, down from 4 percent in 2010. Debt will fall to 40.6 percent of GDP at the end of this year from 42.3 percent in 2010, according to the plan, which is based on a forecast of 4.5 percent growth, a very “conservative” prediction, Simsek said.
Basci said on Aug. 8 that maintaining fiscal discipline helps distinguish Turkey’s $740 billion economy in a world where budget deficits have widened.
That’s going to be difficult, because “fiscal policy always looks great at the end of booms,” said Michael Shaoul, chairman of Marketfield Asset Management.
Surprise Rate Cut
“The government is going to find that tax receipts can vary in both directions, while the expenditure side doesn’t,” Shaoul, who manages the $725 million Marketfield Fund, said in a telephone interview. The Turkish fiscal position “is going to deteriorate markedly.”
The central bank unexpectedly cut the benchmark one-week repo lending rate by half a percentage point to a record low of 5.75 percent on Aug. 4. The bank said the move was designed “to reduce the risk of a domestic recession” caused by sovereign debt problems in Europe, Turkey’s biggest export market.
The lira has fallen about 13 percent against the dollar this year, the most among emerging markets tracked by Bloomberg. Europe’s debt crisis helped drive the benchmark ISE National 100 index (XU100) of shares almost 17 percent lower this month. Turkiye Garanti Bankasi AS (GARAN), in which Spain’s Banco Bilbao Vizcaya Argentaria SA owns a 24.9 percent stake, has fallen 19 percent this month even after the lender’s second-quarter profit beat estimates.
The government is making a “fundamental shift” in policy in a bid to narrow the current-account deficit, in part by reducing the dependence on imported raw materials, encouraging the production of more value-added goods, and investing in research and education, Simsek said. The gap widened to $72.5 billion in the 12 months through June, or about 10 percent of economic output, according to figures announced yesterday.
The gap will improve rapidly in the second half of the year, Basci said yesterday, forecasting a total deficit of about $27 billion in the six months to December, partly a result of a weaker lira and slowing economic activity.
Moody’s Investors Service rates Turkish credit Ba2, the risk assessor’s second-highest non-investment grade. Standard & Poor’s rates the country an equivalent BB.
“As of today we don’t see the need for stimulus, only the need for continued investments in Turkey’s long-term future,” said Simsek, a Kurd who was chosen as a lawmaker from Batman in June 12 elections. “What we want to do is provide support for sectors that have a large trade gap.”
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