Turkish Government Aims to Spend Its Way Out of Growth Slowdown

EghtesadOnline: Turkey’s government is seeking to overcome an economic downturn fanned by terrorism attacks and a failed military takeover by investing more and expanding budget deficits.

News ID: ۷۳۷۳۴۳

04 October 2016

According to Bloomberg, Prime Minister Binali Yildirim lowered his growth forecast for this year and next, saying the economy won’t revert to its longstanding target of 5 percent expansion until 2018. Gross domestic product is seen growing 3.2 percent for 2016 and 4.4 percent for 2017, down from earlier forecasts of 4.5 percent and 5 percent.

Citing the impact from a chaotic year, Yildirim announced targets for the new three-year economic program that were less ambitious than last year’s. The revisions mark the first time the government quantified the economic impact of July’s botched putsch by a faction within the Turkish military as signs of slowing domestic demand and industrial production emerge. The overall message from Yildirim’s press conference in Ankara was one of a cautious rise in spending that will widen the government’s budget gaps but not necessarily to dangerous levels, Halk Yatirim economist Banu Kivci Tokali said in e-mailed comments.

“The new program’s priority is growth,” Tokali said. At the same time, “we see a commitment not to forgo policies of fiscal discipline and disinflation,” Tokali added.

The central government’s budget gap will likely reach 1.6 percent of GDP this year and 1.9 percent in 2017, up from the previous forecasts of 1.3 percent and 1 percent, respectively. The jump in next year’s gap is largely due to government investments equal to 2.8 percent of output, up from a previous forecast of 2.3 percent, Development Minister Lutfi Elvan said at the press conference. New investments will focus on underdeveloped areas in Turkey’s east and southeastern provinces, Finance Minister Naci Agbal said.

Rising government spending won’t damage Turkey’s “fiscal discipline,” Yildirim said.

As public budget deficits widen, so will Turkey’s current-account deficit, the broadest measure of trade in goods and services. The ratio of the shortfall to GDP is seen at 4.3 percent in 2016 and 4.2 percent next year, compared with previous forecasts of 3.9 percent and 3.7 percent. Inflation is expected to be 7.5 percent at the end of the year, unchanged from the central bank’s forecast in July. The government projected end-2017 inflation at 6.5 percent, above the central bank’s most recent 6 percent forecast.

The slowdown in growth comes amid a falloff in private consumption, which makes up about two-thirds of the economy and has been the main driver of GDP growth in recent years. New public outlays will go a long way to offset the impact of the failed coup on the economy, Yildirim said.

“Growth between 3 percent to 4 percent is never something we see as a target,” he said.

The lira was trading 0.5 percent lower at 3.0335 per dollar at 12:41 p.m. in Istanbul.