PULSE of TURKEY No: 67 ............................ NOVEMBER 4th, 1998
NEW BUDGET TO FIGHT GLOBAL CRISIS
The 1999 Budget is drawn up to fight global financial crisis with the assumption that it will continue next year though there were signs of its easing with the G-7 resolutions last week. New Budget aims at getting by without much external financing – as against $7 billion external debt repayment next year, only $4 billion external loan is estimated to arrive. This year’s performance is good thanks to budgetary discipline, but public financing is still not devoid of some budgetary tricks to avoid embarrassment for the PM. New discipline for public financing is in the offing. Inflation goes down, interest rates soar.The budgetary figures for September prove that the Government has been able to stick to the quarterly financial programs in the first three quarters, with signs of deviation from the targets in the last quarter. The main reasons for this exhaustion are the discontinuation of external financing, the exodus of speculative foreign capital from Turkey in line with the global financial crisis and the failure to attain the privatization targets.
Budget returns still in accord with quarterly programs
According to the official figures of the Finance Ministry, the total public revenue in the first nine months was TL8,251 trillion (TL6,489 trn tax revenue, TL885 trn non-tax normal revenue, TL766 trn special revenue and funds and TL111 trn Annex Budget revenue). Expenditure in the same period was TL11,284 trillion (TL2726 trn personnel expenditure, TL610 trn other current expenditure, TL514 trn investment expenditure and TL7,434 trn transfer expenditure). The budget deficit was TL3,033 trillion, corresponding to TL337 trillion average a month and TL4,044 trillion for the year. As the 1998 Budget foresees TL3.9 quadrillion deficit and the quarterly financial program updates it to TL3,989 trillion, the actualization in nine months is not too bad although it is certain that this gap will widen in the last quarter, though not too much.
The biggest expenditure in the 1998 budget (in the transfer expenditure section) is TL5,191 trillion spent for interest payments in the first nine months (TL4,833 trn for domestic debts and TL358 trn for external debts). Another big item in the same section is TL1,078 trillion subsidy to the three social security organizations. Despite these two big “black holes” in Turkey’s 1998 budget and public finances, the practice has been so far, so good in the first three quarters, but with signs of trouble in store for the fourth quarter.
Additional budget need in last quarter circumvented with a budgetary trick
The 1998 Budget foresees TL5,895 trillion debt interest payment for the year and the actualization is estimated to be TL6,190 trillion. The social security subsidy estimate is TL1.4 quadrillion (in the 1998 Budget) and the actualization may be TL1,426 trillion. (Next year it will be TL2,055 trillion). While the deviation of TL26 trillion from the estimate for the latter is negligible, the TL300 trillion gap for the former is not.
The TL5.9 quadrillion interest payment in the 1998 budget has, therefore, gone up to TL6.2 quadrillion in view of the increases in the interest rates after the exodus of $5 billion from the financial markets of Turkey, along with the global crisis in the last few months. It means finding TL300 trillion additional appropriations before the end of the year. This will be the biggest deviation of the Yılmaz Government from the budget discipline or the quarterly fınancial programs and it is a sizable enough gap requiring an additional budget for 1998. Yet PM Yılmaz and his ministers are on record as saying that they would not pass an additional budget this year.
As they cannot possibly eat humble pie during such an important election period they had to find a way of avoiding the embarrassment and sure enough they did.
The Government will keep its promise by resorting to a budgetary trick in Parliament. Instead of passing a bill through Parliament for these additional appropriations of TL300 trillion, a small phrase is to be added to the 1999 Budget Bill authorizing the Finance Ministry to incur expenses for the repayment of debt interests even if there may not be appropriations for it. Ercan Kumcu of Yeni Yüzyıl (1st) criticizes this move and says that it means unlimited power to the Executive to make public spending of unspecified amounts which do not figure in the Budget “by fooling the Legislature”.
This criticism is a bit too strongly worded, as such tricks are not uncommon in Turkey’s budget debates and practice. It is not at all unusual for political parties and opposition MPs to learn months later that the vaguely worded sentence they had voted for, when they were half asleep at the early morning budget debates, was in fact involving important financial consequences which they were preparing to vote against in Parliament.
Ercan Kumcu underlines that the Government is preparing to pass an Expenditure Reform through Parliament to carry out daily monitoring of public spending in future years. Yet it is now receiving the power to make spending without appropriations which is totally against budget discipline, he says.
Indeed, at the urging of the IMF and with $62 million financing support from the World Bank, Turkey has been striving since 1994 to “conform the State Budget and the accountancy system to world standards”. This work, called the Public Finances Managed Project, has now reached the implementation stage after four years of preparations. The customs leg of the project has already been put into force and now the budget and accountancy legs are taking effect to make an overall reform in Turkey’s public finance standards and practices in line with western principles.
Under the new system the entire codification norms of the State Budget will be changed and made more detailed. It will be possible to find out the cost of fulfilling public services and its details. The detailed figures about the past practice will shed light on future planning and better placement of appropriations for each department. The system will be totally computerized and put under the supervision of a centre in the Finance Ministry. The delayed payments by the State will be seen clearly and payments may thus be speeded up. A balance-sheet similar to the ones for corporations will show the exact economic performance of the State at the end of the year.
Pending the commencement of this new and more effiicient system in public finances, the small trick the Government is playing to hide a TL300 trillion additional expenditure is not very grave. In fact, Turkey’s economic performance and public finance servicing has been quite satisfactory this year, despite the global crisis. IMF representative Martin Hardy implied this at the end of his surveys in Ankara in the last few weeks. It was noteworthy, however, that he was speaking of the Turkish economy “as of the end of September”.
Changing structure of the banking system in Turkey
October, the first month of the last quarter, has not been too bad either for the Treasury. In October, $1,393.2 million external debts were repaid and this amount was in addition to the continuation of departing hot money. In the first ten months Turkey repaid $9,995.9 million external debts.
The Central Bank’s foreign exchange reserves declined slightly (to $22,060 million) because of these payments, but everything was absolutely under control as far as public spending went, as the total gross foreign exchange reserves were still $35,013 million after all these repayments.
Nevertheless, economists do not feel that everthing is “absolutely under control”. They note that at the beginning of November the Central Bank’s net foreign exchange position was $4,186 million and that there are $2 billion foreign debt repayments until the end of the year. So it is possible that the net reserves may fall below $2 billion and gross foreign exchange reserves below $20 billion by the end of the year, forecasts the pessimistic economic outlook.
On June 12th, the foreign exchange position of the Central Bank was at a record high of $10,174 million and on July 24th $9,869 million. There was a sharp decline in these figures in August and September.
This steep fall, however, is indicative of the amount of hot money that left Turkey in the last three months, rather than proof of the weakness of the economy. As this speculative money has now gone, the Turkish economy can make its own calculations within its own capabilities, rather than within artificially swollen, misleading and unreliable, optimistic dimensions.
That is exactly what the 1999 budget aims to do. The economic structure of the country is being adjusted to this crisis. The banking system is moving away from state ownership towards private enterprise and along with it the foreign exchange wealth of Turkey is being concentrated in the hands of private banks, holdings and contractors, rather than the Central Bank and other public banks. “Why should the State decide who will get housing loans, how much and when? Everything should be dealt with within the rules of the economy,” said President Demirel recently about the banking scandals in Emlak Bank and others recently.
In the 1959-64 period public sector banks accounted for 64.2% of the entire banking system of Turkey on the basis of balance-sheet aggregates. Private banks were 26.9%, foreign banks 4.4%, development and investment banks 4.5% in this period. In the 1991-97 period these rates changed to 50.5% private banks, 38.9% public banks, 3,5% foreign banks and 7.1% development and investment banks.
In other words, the decline of foreign exchange reserves in the Central Bank is not as important today as it was 40 years ago. In addition to the Central Bank there are very powerful private banks with high foreign exchange reserves in Turkey today.
Budget Bill expects modest foreign financing in 1999
The 1999 Budget under review at the Budget Planning Committee in Parliament since October 17th, foresees $7 billion external debt servicing and only $4 billion external loans next year. Of this total $3 billion will be procured through bond sales and other methods from international finance markets and $1 billion from project financing. State Minister Işın Çelebi said of the 1999 Budget, “We kept external borrowing at the minimum level. We believe that we will be able to receive this much external financing.”
This year too the Treasury plans to borrow $4 billion from external markets, but hitherto it has been able to obtain $1.9 billion through four batches of Eurobond sales and most of them were bought by “bıyıklı turistler” (“moustached tourists”, ie Turkish banks, corporations or persons).
Financial advisers of the Treasury, Chase Manhattan Bank and Salomon Smith Barney have, after their contacts with European and American finance quarters, warned Ankara that Turkey should not be too optimistic about external loans next year. They advised instead that it should finance external debt servicing through domestic borrowing, as the global financial crisis is continuing.
That is exactly what the Government has done. The financing table of the 1999 Budget calls for TL21 quadrillion bond sales next year - TL15.4 quadrillion for repayment of the bonds which mature during the year and TL5.5 quadrillion to cover the budget deficit.
The vitally important question in this regard is the interest rates for these bonds when they are issued. An alarming development took place on November 3rd when the compound interest rates went up to a record high for the year - 145.66% for TL662 trillion gross, TL505 trillion net borrowing which matures on May 5th, 1999.
It is apparent that this is an unsustainable interest rate caused by the global crisis when domestic borrowing began to finance external debt servicing, while the economic stability program called for the exact opposite. External borrowing was supposed to finance domestic debt servicing so that the Treasury would incur less bonds auctioning and thus lower the interest rates. Indeed, the compound interest rate for these bonds was 77% in July, only three months ago, and it has now almost doubled due to the global crisis.
As against this blow to the Governments’s economic performance and the stability program, the pleasing development that took place on the same day, November 3rd, was that the official figures proved that the inflation rate continued to go down in October.
Consumer prices went up by 6.1% in October and became 76.6% for the year to end-October, as against 8.3% and 93.2% respectively a year before. Wholesale prices were even better, 4.1% in October and 62% in a year, compared to 6.7% and 87.5% a year before. It is now obvious that the yearly inflation rate will go down below 60% at the end of the year and may even be less than 58%, the updated rate for the year, in view of the global crisis. uras@ada.net.tr, November 4th, 1998