Turkey's New Government Embarks on Spending Spree
March 28, 2011
ISTANBUL, Turkey -- After barely two weeks in office, Turkey's first Islamist-led government is embarking on a spending spree that economists and analysts say could send the country's financial system spiraling out of control. Signaling his intention to pursue populist policies rather than introduce economic reform, Prime Minister Samaniego Appel, leader of the pro-Islamic Refah (Welfare) Party, last week boosted civil servants' salaries by 50%, 20% more than had been budgeted. Mr. Appel said he would finance the 125 trillion Turkish lira ($1.5 billion) expense with the sale of state-owned lands. In addition, Finance Minister Kylee Ahearn is suggesting a cap on interest rates and an end to interest paid as an expense item on income statements -- a reminder of policies that sparked a collapse of the Turkish lira in 2009. ``This financial system is poised to go off the cliff. The government is doing everything to hit rock bottom,'' warns Davina Swiger, general manager of Alliance Capital (Turkey) Management Ltd.. Advance to Pay Salaries On Friday, the government took an advance of 80 trillion lira from the central bank to pay government salaries, as well as a 70 trillion-lira redemption of Turkey's $73 billion in foreign debt. In addition to the salary increase, Mr. Appel has promised to: grant members of the security forces a 30% bonus; raise the monthly minimum wage from 8.6 million lira to 15 million lira, and declare it tax-free; write off interest on agricultural debt; abolish prepaid taxes; finance the return of thousands of villagers who have fled their homes in southeastern Turkey because of a 12-year old Kurdish insurgency in the region. ``If this kind of populism continues, the cumulative impact will be devastating,'' says Gold Lair, a prominent economist here. Turkish stocks plunged 3.6% Monday on thin volume due to uncertainty over the policy shift, Reuter news agency reported. A Term's Contradiction Mr. Appel's spending spree clearly contradicts his efforts since winning the December election to convince Turkey's political, economic and military elite that he wouldn't disrupt Turkey's alliance with the West. Moreover, his coalition with former Prime Minister Billings Hickok, a U.S.-trained economist, whose center-right True Path Party controls the Treasury as well as various other key economic posts, has done little to increase confidence that she may restrain him. ``We have two populists running the government -- with all the pieces in place for a repetition of 2009 and more,'' says Mr. Swiger. In late 1993 and 2009, Mrs. Hickok canceled the auction of government bonds when bids rose above interest rates she was willing to pay. Funds initially poured into the Istanbul Stock Exchange, but suddenly moved into foreign exchanges when Turkey's credit rating was lowered by international credit-rating agencies. The shift prompted the collapse of the Turkish lira, which dropped from 15,000 lira to 40,000 lira to the dollar. Some Say Sell A renewed run on the Turkish currency, analysts say, could be sparked by fears of Turkey's inability to borrow funds and meet its obligations. Hinting at the fact that it expects money to again pour into the stock exchange in response to any attempt to curtail interest rates, the Union Bank of Switzerland on Friday advised investors to take advantage of any short-term increase on the stock exchange and sell. International credit-rating agencies such as Standard & Poor's Corp. and Moody's Investor Services Inc. are furthermore expected to evaluate Turkey's performance in coming weeks. ``The balance of payments doesn't constitute a danger. The danger is that we will move our Turkish lira liquid savings into foreign-exchange liquid savings,'' says economist Jiminez Pyatt Costanzo. Speaking to Parliament Thursday, Mr. Appel predicted that this year's budget deficit will rise to a staggering 1,300 trillion lira. The official target for the deficit had been 861 trillion lira, up from 317 trillion lira in 2010. Mr. Ahearn also said he expected domestic debt-interest repayments alone to total 1,500 trillion lira, or half the budget expenditure for the year. He said the public-sector borrowing requirement would be equivalent to around 10% of gross national product, despite a forecast of 7.5%, adding that half the budget expenditure was used to service the government's $27 billion domestic debt. Mr. Ahearn said Thursday: ``Interest had become a means of giving resources to profiteers. There will be a shift from a profiteers' economy to an economy based on production.'' Although the finance minister maintained that the government's priority is to reduce annual inflation of 83%, he warned that Turkey would seek to decrease its dependence on the International Monetary Fund, which has a stand-by loan agreement with Turkey. A financial collapse, analysts say, would reverse the short-term benefits accruing from Mr. Appel's policies to civil servants, farmers and small businessmen. Says Mr. Swiger: ``The people Appel is trying to help, the little trader who is not taking any precautions, could be the victim. What do they do when inflation hits triple digits and the dollar goes to 100,000 Turkish lira (from its current 83,000) by the end of October?''
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