Turkey: External Imbalances Amplify the Crisis, Domestic Strengths Limit the Damage
Crowding out poses a potential risk to the recovery. Given global financial conditions, Turkey’s access to foreign borrowing is likely to remain lower than before the crisis over the medium term. Although growth in 2010 is expected to exceed 5 percent, as private consumption and investment demand rebounds, heavy government financing needs could crowd out private borrowers from domestic credit markets and undermine the recovery. The risk of crowding out underlines the importance of fiscal consolidation. Any further increases in public sector deficits would also put pressure on the sustainability of public debt over the medium term and, thus, on the overall credibility of economic policy.7 The government’s Medium-Term Program for 2010–12 uses realistic macroeconomic assumptions based on a gradual recovery. The program is aimed at reducing public sector deficits, adopting a fiscal rule to enhance the institutional base of fiscal sustainability, promoting private sector activity, and attaining sustainable growth. Despite forecasts of over 5 percent by market participants, the Medium-Term Program uses a growth assumption of just 3.5 percent in 2010, climbing to 4.0 percent in 2011 and to 5.0 percent in 2012.8 Growth is expected to be led by the private sector, with an expected rise (over 8 percent) in private gross fixed capital formation. Although Turkey’s pace of recovery is expected to be shaped mainly by global conditions—specifically external demand, financing opportunities, and foreign confidence in the Turkish economy—private consumption may continue to lead the recovery in GDP growth, once domestic banks ease credit conditions and the government’s adjustment program reduces the need for banking resources. The Medium-Term Program assumes only a gradual improvement in public sector balances. It projects a shift from a 2.1 percent primary deficit in 2009 (the realization likely having been better than this) to a 1.0 percent surplus in 2012. Half of the adjustment is expected to occur in 2010, with the deficit reduced to 0.3 percent of GDP. More ambitious fiscal adjustment may not be possible given the role of automatic stabilizers and fiscal pressure from social security and health expenditures. Improvement in the primary balance in 2010 is the result of higher revenue; expenditure measures account for nearly all the planned adjustment in 2011–12. General government revenues should rise by 1.8 percent of GDP in 2010, and spending should remain roughly constant as a share of GDP. The government attributes about 0.8 percentage
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