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Brazil’s credit rating increased; Turkey’s outlook turned to positive
Ramadan holiday must not make us ignore recent positive developments. It seems that things are beginning to get back on tract in the world; does not it? First of all, Medium Term Program (MTP) was announced. Keen efforts of Ali Babacan, State Minister for Economy, have delivered the initial results; denial period in public finance ended. Denial period also seemed to have ended with Pre-accession Economic Program (PEP), but in the same period detailed changes were introduced in both the government and bureaucracy and economy became to be of secondary importance. With the MTP, however, the denial-oriented approach to fiscal condition was replaced with acceptance and thus the disaster in public finance became visible to all of us. In fact, it is a good thing that the fiscal outlook put forth in previous TEPAV reports and the fiscal outlook put forth in the reports of the public sector became attuned.
Second development was that, with the end of denial period rating agencies as Moody's and Standard & Poor's turned outlook of Turkey's economy to positive (from stable to positive and from negative to stable, respectively) though they did not increase the rating. But this positive revision was not implemented only for Turkey. Moody's upgraded Brazil's rating to investment grade. So, leftist Lula handled things better than rightist Erdoğan once again. First message for direct investments for the coming period was heard from Brazil. So, what about Turkey? What happened? Did Turkey's economy become to perform good so that the outlook was upgraded to positive? What does upgrade of Turkey's economic outlook to positive by S&P and Moody's mean? Is it good news?
Upgrade of Turkey's outlook to positive is certainly better than the previous outlook. However, there is a question that must always be kept in mind: For whom this is good; for whom this is bad? Because, the dual structure of Turkey's economy becomes more visible day by day. This was not the case in the past; but it is so now. What goes around seems to prove more favorable for some than others. What is good for banks and foreign creditors of Turkey with the announcement of MTP is not necessarily good for the country as a whole. What is good for banks and foreign creditors of Turkey is not necessarily good for workers, artisans and entrepreneurs in Turkey. This dual outlook of Turkey which builds up day by day is not a good sign. Let us put forth some findings in this context:
First, Turkey was faced with a public finance disaster for a certain period. Uncontrolled rise in budget expenditures coupled with the recession created by the 2008 crisis increased 2009 budget deficit from 10 to 60 billion TL. In the meanwhile, we wasted our resources in unnecessary areas and skipped the measures to invigorate domestic demand in the midst of the recession. We forget about the bonus checks and kept the credit guarantee mechanism wait a long time. And we came to these days and implemented a series of measures with the medium term program (MTP) so that the public finance disaster does not lead to a new risk of the unsustainability of public debt stock. With this step, we have put forth that we are aware of the problem that might possibly happen in the public debt stock. We have emphasized that we are well aware of the damage the banking sector can otherwise encounter. This is exactly what S&P and Moody's refer with "positive change in the outlook". There actually is a positive change in the outlook. We must give the devil its due. This is the first point.
And the second point is: The state of the real sector and the rise in unemployment in Turkey is not a problem for S&P and Moody's for now. In this context, for instance the composition of public expenditures for the coming period or the steps Turkey will take to invigorate economic growth are not covered in this analysis. Or, to put it differently: This is exactly why Turkey's rating remains the same and the outlook turns to positive while the rating of Brazil, which successfully uses public expenditures as a tool to reinvigorate the economy, turns toward investment grade. Turkey needs to implement measures that will rapidly change the dual structure of the economy. Yesterday, we told the real sector "you wait for us to overcome the damage in the banking sector; then things will get back on track". But today, there is nothing to tell the real sector. Turkey has to maintain public expenditures in order to support growth. But it is proven by experience that not all expenditure items produce equally positive results. Turkey has been transferring funds to the wrong channels for the last year. Structure of the public expenditures must be change for the sustainability of expenditures in the period ahead. Problem of the quality of fiscal adjustment is once again a point of issue.
Third point is: The fiscal rule to be introduced must contain not only the size of debt stock and public expenditures but also the composition of expenditures. Fiscal rule must inform about the quality of fiscal adjustment. Then, the dual structure will be eliminated. The measures do not only protect some certain sectors. Only then S&P and Moody's treat Turkey as they treat Brazil and it can be possible to give hope to all sectors of the society.
There exists remedy; but the case is this: Lula's performance is incomparably better. Lula has once more beaten Erdoğan.
Submitted to your information
This commentary was published in Referans daily on 24.09.2009