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Turkey’s Politics May Encourage Looser Fiscal Stand, Lubin Says

Turkey’s government may loosen fiscal policy to help counter rising support for its main challenger, swelling an already-expanding current account deficit, said David Lubin, Citigroup Inc.’s chief emerging markets economist.

With the opposition “revitalized by a change in leadership, and where opinion polls suggest that the AKP’s popularity has been waning a little bit, it’s possible to imagine that there might be incentives for a fiscal stimulus,” Lubin said in an interview in London yesterday. With record-low interest rates, that could lead to “much worse trends in the current account deficit” in the second half of this year.

Prime Minister Recep Tayyip Erdogan’s government has pledged to rein in a budget deficit that widened to 5.5 percent of economic output last year. Erdogan’s government said in March that it no longer needs International Monetary Fund assistance to manage its public finances, and parliament is debating legislation to impose a cap on the deficit.

Erdogan’s Justice and Development Party or AKP, which must call elections within a year, was backed by 39 percent of voters according to a May poll by research company Genar, down from the 47 percent in 2007 elections. The main opposition Republican People’s Party, which elected Kemal Kilicdaroglu as its new leader in May, was on 26 percent.

Turkey’s budget surplus before interest payments in the first five months of 2010 was more than double the target for the whole year, leaving the government room to relax fiscal policy without jeopardizing budget goals.

Lubin said he expects Turkey’s economy to expand more than 6 percent this year, “which is a really impressive rate.” He said measures to strengthen Turkish banks, taken after a series of collapses a decade ago, helped the country rebound from the global crisis of the past two years.

‘Strong Balance Sheets’

“Turkish banks went into the crisis with strong balance sheets, and this gave the Turkish central bank a lot of flexibility to support the economy by cutting interest rates,” he said.

Turkey’s gross domestic product grew an annual 11.7 percent in the first quarter, recouping most of the output lost in last year’s slump. The country’s current account deficit has been widening since November, and the April shortfall of $4.4 billion was the largest for almost two years, as the recovery spurred demand for imported goods among consumers and companies.

Lubin said Turkey’s real interest rates are “very low by historical standards,” meaning that “investors are not being hugely compensated for the risk.”

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