Careful readers might recall that I warned here about the probable poor performance of the central government budget in December. As a matter of fact, in December alone, there was a gigantic 16.1 billion-Turkish Lira deficit mainly due to high capital spending. However, despite this outlier, the central government budget produced a 39.6 billion-lira deficit in 2010 (3.6 percent of gross domestic product), pointing to a better performance than the revised official estimate of 44.2 billion liras (4 percent of GDP) deficit. It can also be seen as a relative success in today’s world full of debt and budget problems.
On the other hand, economy officials have long said they would allocate the strong revenue performance especially to investment expenditures rather than saving it. Therefore, the deterioration in the budget was well-telegraphed and came even later than envisaged. In my opinion, it is related to the aim of the full utilization of 2010 appropriations. In other words, the steep advance in expenditures is a result of a year-end factor and does not imply a permanent acceleration. However, for many analysts this was an excuse for changing the rate cut call by citing the Central Bank’s possible caution after these results. Although I give more weight to the “on hold” decision, I do not see any impact from that factor on the Central Bank verdict, as the Central Bank probably has the knowledge of this spending increase beforehand.
For the outlook of fiscal discipline going forward, I still think the strong economic activity should keep supporting the revenues side of the budget. The official target for the 2011 year-end budget deficit of 2.8 percent implies some narrowing in the budget deficit, which is currently at 3.6 percent. However, this improvement is planned to be backed by higher privatization revenues and lower interest payments. This means neither tightening nor loosening in the fiscal discipline in 2011 compared to 2010.
When doves cry
By the time I wrote today’s article, the markets were anxiously waiting for the Central Bank decision. The Central Bank had cut rates by 50 basis points at last month's meeting and many analysts had been pricing in a further cut initially. However, those expectations have waned over the last weeks as the lira has weakened and a majority of analysts think rates will remain on hold. While expectations of no change in the policy rate have been the main theme lately, a contradicting decision is not totally ruled out. Whatever the decision, the Central Bank should make sure that it will not be perceived as “dovish” this time. Gov. Durmuş Yılmaz also acknowledged this by saying: "I don't want to leave this impression that the Central Bank is aiming at a monetary policy of easing. That is not the case. The target that the bank wants to reach is a tighter monetary policy," during a Euromoney conference in Vienna on Tuesday. Yılmaz also said the Central Bank cut interest rates last month to curb the inflow of hot money into the economy and added that its policies were aimed at reducing domestic demand.
Mind the unemployment gap
As a lagging indicator of economic recovery, the unemployment rate continued to come down to levels not seen since October 2008. According to the latest data available, the unemployment rate declined to 11.2 percent, and in the non-farm sectors to 14.1 percent, from 13 percent and 16.4 percent a year ago. While this sharp decline is related to a crisis-hit base term, seasonally adjusted figures also show that the labor market conditions recovered from their weak performance in the previous months. The leading indicators, like consumer and real sector confidence and industrial production, suggest that the economic activity is to strengthen in the fourth quarter of 2010. Thus the labor market conditions will likely improve going forward. However, this would not be strong enough to cause any wage pressure, bearing in mind the still-high unemployment rate and population growth rate of 1.1 percent. Before the global crisis, the long-term unemployment rate average was around 10 percent. That is to say, there is still room for improvement before the full closure of the unemployment gap.
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