August 11, 2010 / 9:40 AM / 9 years ago

UPDATE 1-Turkish fiscal rule reform delay raises concerns -S&P

* Delay shows pressure to loosen fiscal stance in 2011

* Concern over commitment to contra-cyclical fiscal policy

* Rising c/a deficit increases reliance on external funding

* S&P rates Turkey tow notches below investment grade

By Alexandra Hudson

ISTANBUL, Aug 11 (Reuters) - Standard and Poor’s ratings expressed concern on Wednesday over a delay in implementing Turkey’s “fiscal rule” reform, saying it implies pressure to spend in 2011 and pointing to rising external imbalances and a loose fiscal stance.

Turkish Industry Minister Nihat Ergun said the government would not implement “fiscal rule” reform in 2011, and next year’s budget would not be based on the reform, state Anatolian news agency reported earlier, hitting Turkish markets [ID:nLDE67A0AJ].

The reform, which aims to enforce cuts in public debt and the budget deficit, was eagerly anticipated by investors as an anchor to Turkish budgetary discipline, particularly after Ankara decided not to renew a stand-by loan agreement with the IMF early this year.

Investors had voiced concerns that the government could launch a spending spree in 2011, an election year, to help it win a third term. “To the extent that the delay in the implementation of the Fiscal Rule implies pressure to loosen the fiscal stance in 2011 in particular, then it does raise concerns about the government’s commitment to operating a more contra-cyclical fiscal policy,” Frank Gill, Director of European Sovereign Ratings at S&P told Reuters in emailed comments.

Robust domestic demand growth in Turkey this year had widened the current account deficit, increasing dependency on external funding, Gill added, which could lead to a far more volatile growth path and interfere with fiscal policy.

“The point is that there is a connection between Turkey’s rising external imbalances and the loose fiscal stance. And that is a concern.”

S&P rates Turkish sovereign debt two notches below investment grade. Investors had hoped that fiscal rule reform and the discipline it would instil would help Turkey finally achieve an investment grade, seen as long overdue in the market. Central bank data on Wednesday showed Turkey’s current account deficit widened 51.5 percent year-on-year to $3.337 billion in June, and it ballooned in the first half of 2010.

“Fiscal Rules are frequently not respected throughout the entirety of economic and political cycles, so I wouldn’t get too hung up on the Fiscal Rule itself, except that its delay may signify greater reluctance by authorities to reign in government consumption,” Gill added. (Reporting by Alexandra Hudson; editing by Patrick Graham)

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