UPDATE 3-Turkish spending plans not an "election budget" -finmin

Fri Oct 11, 2013 10:16am EDT

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By Orhan Coskun

ANKARA, Oct 11 (Reuters) - Turkey's Finance Minister said he would not use the runup to 2014 elections to follow past governments in courting popularity through heavy spending, presenting a budget that prods the deficit higher but keeps it under 2 percent of national output.

Next year's local elections, including a vote in Istanbul, mark the first test of Prime Minister Tayyip Erdogan's rule since anti-government protests and riots in June. Some experts fear a burst of public spending that could fuel inflation and put more pressure on an already huge current account shortfall.

Turkey's public debt remains one of the lowest among its peers as a percentage of GDP but its balance of payments problems prompted the International Monetary Fund last week to call for it to tighten monetary and fiscal policy.

"We have not drafted an election budget for next year, just as we didn't in the past. We are not seeking an election economy," Mehmet Simsek told a news conference.

"For the first time you will see that we are strongly controlling current expenditures and even reducing them in real terms. This is a strong message," he said, adding the aim was to increase Turkey's resilience to external risks.

Erdogan was first elected in 2002, becoming head of a single-party government after decades of fractious coalitions. Heavy and conspicuous spending in the runup to elections, on for example roads and other infrastructure projects, was a common phenomenon in the 1990s.

Turkey also faces a presidential election next year and parliamentary polls in 2015.

Detailing the spending plans, Simsek said the budget deficit would stand at around 19.4 billion lira ($9.6 billion), or 1.2 percent of GDP, by the end of this year, well below a previous forecast of 2.2 percent.

Turkey has benefited from higher-than-expected privatisation receipts, particularly from the sale of electricity distribution networks, and other one-off revenues this year. The deficit is expected to widen in 2014, but Simsek said it would still come in at 1.9 percent of output.

In its medium-term programme announced this week, the government forecast the deficit would widen to 33.2 billion lira next year before narrowing again to 29.5 billion in 2015 and 23 billion in 2016.

"Overall markets will find the discipline of the government budget favourable and its stance towards the mid-term plan credible after these statements, as long as they are implemented," said Erkan Dernek, market strategist at Odeabank.

The budget balance, which fluctuates heavily month to month, showed a deficit of 4.7 billion lira in September, giving a deficit for the first nine months of 4.5 billion and a primary surplus, which excludes interest payments, of 39.3 billion.

Simsek said those figures showed the budget performance so far this year had been better than anticipated.

VULNERABLE

Erdogan's government has overseen some of Europe's fastest growth and a near tripling of Turks' nominal wealth over his past decade in power, a record he is keen to maintain as the country goes to the polls.

But his determination to keep growth high comes as Turkey, whose explosive consumption-led expansion has left it with major structural imbalances, is particularly vulnerable.

A gaping current account deficit, mostly driven by huge energy imports, has made Turkey one of the countries most exposed to a shift in global capital likely once the U.S. central bank starts to reduce its bond purchases.

Relatively weak foreign direct investment compared to emerging market peers leaves it reliant on volatile portfolio flows and short-term debt to finance a current account gap that exceeds 7 percent of GDP.

The government this week cut its economic growth forecasts for this year and next, lopping one percentage point off the 2014 figure to 4.0 percent after a revised 3.6 percent estimate for 2013.

Simsek told Reuters in an interview last month that growth was still too consumption-led but noted that structural changes would take time.

The current account deficit narrowed to $1.995 billion in August, below the $2.1 billion forecast in a Reuters poll but still significantly higher than the previous year, according to central bank data released on Friday.

"The current account deficit is showing scant evidence of narrowing, remaining enlarged and still a key Achilles' heel for the Turkish economy," Timothy Ash, head of emerging markets research at Standard Bank, said in a note to clients.

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