The medium-term programme, which is expected to be unveiled in conjunction with the 2012 draft budget by October 17 the latest -- the latter as per a constitutional requirement -- is keenly anticipated by market players. Key aspects of the programme that are eagerly awaited are the macro framework to be presented for the 2012-2014 period and measures to be adopted to prompt structural improvements in the C/A deficit, as well as budget targets that will help us gauge the role accorded to public savings in this process. Issuing this report ahead of these crucial disclosures, we aim to provide investors with an insight into where Turkey stands from a fiscal balances perspective and -- making use of the IMF’s recently issued ”Fiscal Monitor” study -- make an assessment of the status quo with a global perspective. This way, once budget targets for the coming years are announced, we aim to be ready to figure out what they represent from a fiscal stance standpoint.
Global perspective: Turkey compares favourably with global peers in terms of key budget performance indicators; yet... Starting our analysis with the global comparison, we infer from last week’s IMF data, disregarding minor differences in definition, that Turkey ranks highly favourably on the basis of the 2011 values of the “general government balance (% of GDP)” and the “general government primary balance (% of GDP)”. While the respective values for Turkey are -0.9% and 1.8%, the global averages are -5.0% and -3.0%, and the comparison does not change when conducted on the basis of developed or emerging countries. Nor does Turkey’s comparative ranking change when the budget is adjusted for cyclical effects. With respective values of -2.1% and 0.6%, Turkey still stands well above comparable global averages of -4.1% and -2.2%.
...actual budget balances need to be cyclically adjusted... It is worth underlining that actual budget balances are imperfect indicators for assessing public finances and fiscal policies, since they are influenced by a number of factors that are both transitory and beyond the direct control of fiscal authorities. Predominant among those are the fluctuations in economic activity. The indicators of cyclically-adjusted budget balances seek to correct the fiscal outcomes for the effects of cyclical variations. In other words, they aim to determine what the budget balance would have been if the economy were on its “normal” growth path; i.e. characterised by roughly constant increases in output over the medium-term.
The IMF method... A number of different methods could be used for this adjustment process, out of which we have opted for the IMF method cited in Regional Economic Outlook 2006, for the sake of simplicity and convenience.
With this analysis, we aim to discern the nature of the fiscal stance (pro- or counter-cyclical) pursued in recent years and whether a fiscal impulse has been utilised. To this end, we have implemented the IMF’s methodology for fiscal impulse calculations, developed by Abrego and Clements. According to this methodology, fiscal impulse is the change in fiscal stance between two consecutive years, which in turn is calculated as the difference between the actual and cyclically neutral fiscal balance. Implementation of an expansionary (contractionary) fiscal policy in times of economic contraction (expansion) points to the presence of a counter-cyclical fiscal policy. On the contrary, implementation of a contractionary (expansionary) fiscal policy in times of economic contraction (expansion) indicates that the fiscal policy is pro-cyclical. The details of the methodology are presented below (Annex)
Our assumptions... Before proceeding to the findings of our study, we find it worthwhile to lay out a few key aspects of our assumptions. Similar to the IMF’s methodological approach, we assumed Turkey’s potential growth rate as its average growth rate for the past 20 years; i.e. 4%. Moreover, as the base year for our calculations, we opted for the year 2007, which preceded the inception of the effects of the global crisis, and we assumed that in that year there was no output gap; i.e. nominal GDP was equal to potential GDP.
While computing the “primary balance to GDP” ratios on an annual basis using current GDP data and budget primary balance realisations, we also aimed to calculate the cyclically-adjusted “primary balance to GDP” ratios, employing the potential GDP level. As with the IMF method, to compute cyclically-adjusted revenues, we multiplied the base year “revenues/GDP” ratio with the actual GDP level of each year, and to estimate cyclically-adjusted primary expenditures, we multiplied the base year expenditures/GDP ratio with the potential GDP level of each year. Hence, the difference between cyclically-adjusted revenues and primary expenditures provides the “cyclically-adjusted primary balance to GDP”, and the difference between the latter and the “actual primary balance to GDP” reflects the fiscal stance of a given year. A positive difference would indicate an expansionary fiscal policy. The difference in “fiscal stance” in between two consecutive years would tell us whether and to what extent “fiscal impulse” was applied.
Our findings... As is evident from the table below, while the fiscal stance is found neutral in 2008, the 1.7% value computed for 2009, when fiscal measures were adopted to assuage the effects of the global crisis, unsurprisingly points to an expansionary fiscal policy for the year. The 1.9% value computed for 2010, on the other hand, indicates that although the effects of the crisis have dissipated, fiscal policy still remains expansionary and that despite growth having reached 9%, “fiscal impulse” has been used, albeit to a limited degree. However, in a year whereby the C/A deficit to GDP ratio deteriorated markedly, at least a “neutral” fiscal stance would have been a more appropriate choice, in our view.
It seems somewhat premature to make an assessment of the year 2011 from a fiscal stance standpoint. This is because the current performance is ahead of the fundamental aggregates such as growth and inflation foreseen in the macro framework of the medium-term programme for the year 2011. Moreover, the budgetary effects of the restructuring of public receivables are perceived to have become sizable. According to our estimations, based on a growth forecast of around 6%, the neutral primary balance to GDP level for the year 2011 would be 3.1%. We should note that each 0.5bp growth overshoot would prompt a 0.1bp upward shift in this balance level. While the 12-month primary surplus/GDP ratio as of August stands at 1.8%, the 2011 primary surplus target of 1.1% appears bound to be revised upwards. Hence, while a level below 3.1% for the actual primary balance to GDP ratio by the year-end would imply the usage of an expansionary fiscal policy in the year 2011, a difference of at most 1.9% between the neutral primary balance to GDP ratio and the actual primary balance to GDP ratio would make us conclude that at least no “fiscal impulse” has been applied.
Undoubtedly, how the TRL13.5bn revenues projected for the current year from the public receivables restructuring plan (1% of the GDP) or the improvement in primary expenditures (whose magnitude we are unable to precisely estimate at this point) via a reduction in budgetary transfers through social security institution (SGK) premium collections are included in the analysis are also crucial. (The plan in question envisages additional revenue collections of TRL10.3bn (2012); TRL8.6bn (2013); TRL3.1bn (2014); and TRL1.0bn (2015)). While such revenues, given their one-off nature, might be excluded from the scope of the analysis to reveal the actual performance, conversely they might be maintained on the premise that they amount to the depletion of an accumulated receivable inventory. For example, in the programme defined data issued for the budget, the Treasury Undersecretariat makes adjustments for one-off items such as privatisations and public banks’ profit transfers, while making no adjustments for related collections. Moreover, the delivery of tax and premium payments to the Finance Ministry and the SGK initially has a contractionary effect on household disposable income and hence in this way amounts to a contractionary fiscal policy. Eventually, this effect is neutralised based on the extent to which these additional revenues are transformed into expenditures.
Conclusion: Cyclical variations paramount for a realistic assessment of fiscal framework... Turkey is one of the few countries to have implemented exit strategies from expansionary fiscal policies in the aftermath of the global crisis. This has helped Turkey rank favourably on a global scale in terms of fiscal balances and indebtedness indicators. However, adjusting for the cyclical variations induced by high growth, the resulting picture indicates that in fact expansionary fiscal policies have not been completely discontinued, and that fiscal impulse remained in use in 2010, albeit to a minor degree. While this stance observed in the past two years has failed to stem the deterioration in the C/A deficit, it has also narrowed the manoeuvring space for counter-cyclical fiscal policies. Hence, we believe it would be appropriate to evaluate the fiscal framework to be laid out in the medium-term programme not solely on the basis of budget targets, but with an approach that takes cyclical variations into consideration, and hope our study would help investors to this end.
Annex: Methodology for Fiscal Impulse Calculations The fiscal impulse is calculated as the change in the fiscal stance between two consecutive years, which in turn is calculated as the difference between the actual and a cyclically neutral fiscal balance. The first step in the process is to estimate the fiscal stance:
FS = (T – G) – (T* – G*) (1)
where T and G refer to actual revenues and expenditures in the current year, and T* and G* to cyclically neutral revenues and expenditures (all as a share of GDP). T* and G* are from a base year when actual output was at its potential, with two additional assumptions: (i) T* remains constant and (ii) G* remains constant only as long as actual growth equals potential growth. In the case that actual growth is greater than (less than) potential growth, G* falls (rises). For the present exercise, potential GDP growth was assumed to be the average annual growth rate over the past 20 years.
The fiscal impulse is the change in the fiscal stance in (1), multiplied by negative one (to indicate that a weakening of the fiscal stance imparts a positive fiscal impulse):
FI = (ΔG – ΔG*) – (ΔT– ΔT*) (2)
The first term in the fiscal impulse captures an increase in the spending to GDP ratio above what would occur if spending rose at the rate of potential output. The second term is equivalent to the change in the revenue to GDP ratio, since by assumption T* is held constant. Thus, the fiscal impulse, on the revenue side, simply reflects changes in actual ratio of revenue to GDP.
Source: IMF, Regional Economic Outlook: Western Hemisphere, November 2006
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