Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive.
The government disclosed the Pre-Accession Economic Program (PEP) last week, providing a much-needed update to its outdated economic projections. Economist reaction was worthy of the profession, varying between those who found the new figures very realistic to completely unrealistic. But the truth is not so black and white; like a good Spaghetti Western, there was the good, the bad and the ugly in the new numbers.
To start with the good, I am glad that despite the acronym, the government forewent pep talk on the growth side. Being one of the first to go for a significant contraction (5%) for 2009, I am pleased at the government’s admission of the inconvenient truth by projecting growth at -3.6% this year. But, contrary to conventional wisdom, which is going for negative growth next year as well, the government’s 2010 projection of 3.3% is in line with my own forecast of 2-3%.
Before being accused of unfounded optimism, I have to note that Turkey would have to significantly underperform peers if it were to shrink while the global economy recovers next year, which is more or less the consensus baseline scenario. Similarly, expecting negative growth is in sharp contrast with the prospect of a large IMF program, as much of the impact on growth would be felt next year. I have to say that I do have my doubts on some of the details of the PEP growth figures, such as a sharp rebound in private investment and a large contribution of net exports. But when the numbers add up, the government’s numbers for next year are not out of whack at all.
If the growth projections classify as good, unemployment would certainly fit into the bad category. The government’s forecast of 13.5% at year-end is not only totally fictional; it is also in sharp contrast with its own growth predictions. Last week’s employment statistics, which showed unemployment at 15.5% in the December-February period, have revealed that firms have started laying off workers with great abandon in the first two months of the year. Even under optimistic scenarios, the vast army of the unemployed, currently at 3.5 million, is on its way to surpassing the population of the capital. Even more worryingly, due to the inherent asymmetries in hiring decisions and Turkey’s own structural problems in the labor sector, the rehiring process will be painfully slow.
If the unemployment outlook is bad, the fiscal picture is downright ugly. While the projected IMF-defined primary (net of interest payments) deficit of 0.6% is more optimistic than my own projection of 1.5-2%, the real issue lies elsewhere. In fact, I would not be that worried if the government did indeed run a larger deficit this year, especially if the extra money went to good use. However, the surpluses for the next two years, 0.5% and 0.6% respectively, are not viable from a debt sustainability point of view, as rough calculations show that a surplus of 2.5% would be needed to keep debt in a sustainable path. Moreover, the supposed fiscal adjustment from this year to the next is actually a marketing gimmick; the extra tax revenues from the growth differential between the two years would be enough to ensure the difference. So, take my word for it: Those at the IMF Turkey desk were probably scratching their heads when they saw these fiscal figures, as they are definitely not Fund-stamped.
I am aware that this is rather unpleasant fiscal arithmetic, but reality does indeed bite. So, when expectations have converged on the IMF stand-by agreement as an already-in-the-bag 45 billion deal, it might be a good idea to get a rabies shot. The stand-by will no doubt be signed sooner or later, but markets will start grumbling if the agreement is still dragging along come mid-May, especially after the heavy Treasury redemptions on May 6.
The government disclosed the Pre-Accession Economic Program (PEP) last week, providing a much-needed update to its outdated economic projections. Economist reaction was worthy of the profession, varying between those who found the new figures very realistic to completely unrealistic. But the truth is not so black and white; like a good Spaghetti Western, there was the good, the bad and the ugly in the new numbers.
To start with the good, I am glad that despite the acronym, the government forewent pep talk on the growth side. Being one of the first to go for a significant contraction (5%) for 2009, I am pleased at the government’s admission of the inconvenient truth by projecting growth at -3.6% this year. But, contrary to conventional wisdom, which is going for negative growth next year as well, the government’s 2010 projection of 3.3% is in line with my own forecast of 2-3%.
Before being accused of unfounded optimism, I have to note that Turkey would have to significantly underperform peers if it were to shrink while the global economy recovers next year, which is more or less the consensus baseline scenario. Similarly, expecting negative growth is in sharp contrast with the prospect of a large IMF program, as much of the impact on growth would be felt next year. I have to say that I do have my doubts on some of the details of the PEP growth figures, such as a sharp rebound in private investment and a large contribution of net exports. But when the numbers add up, the government’s numbers for next year are not out of whack at all.
If the growth projections classify as good, unemployment would certainly fit into the bad category. The government’s forecast of 13.5% at year-end is not only totally fictional; it is also in sharp contrast with its own growth predictions. Last week’s employment statistics, which showed unemployment at 15.5% in the December-February period, have revealed that firms have started laying off workers with great abandon in the first two months of the year. Even under optimistic scenarios, the vast army of the unemployed, currently at 3.5 million, is on its way to surpassing the population of the capital. Even more worryingly, due to the inherent asymmetries in hiring decisions and Turkey’s own structural problems in the labor sector, the rehiring process will be painfully slow.
If the unemployment outlook is bad, the fiscal picture is downright ugly. While the projected IMF-defined primary (net of interest payments) deficit of 0.6% is more optimistic than my own projection of 1.5-2%, the real issue lies elsewhere. In fact, I would not be that worried if the government did indeed run a larger deficit this year, especially if the extra money went to good use. However, the surpluses for the next two years, 0.5% and 0.6% respectively, are not viable from a debt sustainability point of view, as rough calculations show that a surplus of 2.5% would be needed to keep debt in a sustainable path. Moreover, the supposed fiscal adjustment from this year to the next is actually a marketing gimmick; the extra tax revenues from the growth differential between the two years would be enough to ensure the difference. So, take my word for it: Those at the IMF Turkey desk were probably scratching their heads when they saw these fiscal figures, as they are definitely not Fund-stamped.
I am aware that this is rather unpleasant fiscal arithmetic, but reality does indeed bite. So, when expectations have converged on the IMF stand-by agreement as an already-in-the-bag 45 billion deal, it might be a good idea to get a rabies shot. The stand-by will no doubt be signed sooner or later, but markets will start grumbling if the agreement is still dragging along come mid-May, especially after the heavy Treasury redemptions on May 6.
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