Turkish budget and debt indicators

The direction of causality between debt and deficit usually runs from budget deficit to external debt, but I would like to analyse the debt indicators first.

There are both positive and negative aspects of Turkish debt indicators according to the figures the administration published. I would like to start with the good news.

The government debt-to-GDP ratio at 28.5 percent is well below the Maastricht standard of 60 percent; that is both significant and satisfactory.

The net public debt stock is around 272 billion lira, a relatively small figure, but there has been a steady increase of 161 billion lira since 2015, which is worrisome.

According to the government's New Economic Programme, the budget deficit/GDP ratio is a little bit below 2 percent this year, which possibly is the saving grace of Turkish economy right now.

Parallel to the decline in the budget deficit, the ratio of central government interest expenditures to tax revenues declined from the incredibly high figure of 86 percent early in the last decade to 11 percent and to some extent stabilised at this level. But it is somewhat difficult to predict how the recent hike in interest rates will affect this ratio in the future. Most likely this indicator will start rising, but it is quite hard to predict by how much.

Similarly, the share of central government interest expenditure to GDP fell to 2 percent from 15 percent in the first years of the millennium. But the recent interest hikes also created an uncertainty in the medium-term for this indicator. Even though the possibility of going back to 15 percent looks slim, it is not entirely impossible.

Now the bad news.

The gross debt stock of the central government shows a steady increase in its foreign exchange liabilities, which considering the recent devaluation of the lira could increase pressure on the budget.

The numbers show that the portion of gross debt stock issued in foreign currencies shot up to 44 percent from 28 percent in 2012. Similarly, the government's lira debts are down to 56 percent in the gross debt stock from 72.  

Turkey's gross external debt, including private sector debt, stands at $468 billion in 2018; the private sector debt stands at $326 billion, and about $100 billion of this debt matures in the short-term.

The private sector's external debt in 2010 stood at $191 billion, of which $71 billion was short-term. This rise in private sector foreign debt from $191 billion to $326 billion in the last eight years without much change in Turkey's production or productivity is perhaps one of the main reasons for the recent economic downturn.

Turkey's net external debt to GDP has increased to 35 percent from 21 percent in 2012, this upsurge appears to be critical because Turkey failed to increase productivity or create sectors that trade globally.

The average maturity of domestic cash borrowings has shortened to 69 months from 72 months in 2012, a sign that private and legal persons are favouring shorter-term loans, albeit at low levels; another worrisome indicator.

The average maturity of U.S. dollar-denominated international bonds is down to 10 years from its 18-year average in 2017, which is another sign that global markets are worried about issuing long-term debt to Turkey.

The share of non-residents in domestic debt stock decreased to 15 percent in 2018 from 23 percent in 2012. This development confirms that soon Turkey will have to self-finance its own debts, or the interest rates will continue to increase.

The Turkish public sector since 2015 has not been able to sustain a primary surplus; producing and maintaining a primary surplus has been a significant factor in overcoming the 2001 financial crisis.

The main problem with having a primary deficit right now, albeit small, is increasing risk factors in the future. Will the politicians accept returning to posting primary surpluses in exchange for growth as they did in 2005? That is the real problem.

Why is there the likelihood of facing significant debt stock increases for Turkey? 

Turkish banks and a significant number of Turkish firms are suffering substantial losses because of the currency or current account deficit crisis that Turkey is facing. If the Turkish government chooses to take on these debts to save these banks and companies, and transfer all the toxic loans a public bank, the budget deficit and increasing debt stocks will quickly start ballooning.

Perhaps the creation of a wealth fund is an early warning indicator of their intention to take over the toxic debts.

Is the budget deficit of around billion lira in August 2018 a sign of things to come?

Why did markets did not react to the announcement of the New Economic Programme?

Turkish President Recep Tayyip Erdoğan will visit Germany this week, and the press reported a German citizen was released from detention as a sign of goodwill before the trip. That undermines Turkish government assertions that the judiciary is independent. Hence the Turkish economy mimics its judiciary.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.