What will be the cost of governing?
On the good side, the fact that budget deficits and public indebtedness rates have been kept “relatively” low over the years seem to have provided us with a certain buffer, a fiscal space during this crisis period. As of the end of the year, the ratio of total domestic and foreign debt to national income was below 30 percent. According to the 12-month budget cash developments announced last week, we posted a deficit of TRY 70.4 billion in 2018. This corresponds to about 1.9 percent of the national income. Under the prevailing conditions, both the two rates can be considered as quite good. However, at this point, an annotation is essential: In this year’s revenues a total of over TRY 20 billion oneoff income was acquired from building registration fees and paid military services. In 2019, there will be no such additional income.
However, there is already another good income infusion of up to TRY 20 billion for 2019: the transfer of some amount of 2018 profit of the Central Bank, which is estimated to be TRY 38 billion, to the Treasury without waiting for the General Assembly in April. (Of course, this abnormal high profit by the Central Bank last year also means losses for other segments of the society). However, despite this additional income, I believe that it is very difficult to reach the 1.8 percent budget deficit estimated in the new economy program for 2019. (According to the year-end realizations of 2018, budget expenditures are expected to increase by 15 percent and revenues by 17 percent.)
I liken the current situation to the period between the years 19942000. In 1994, interest rates increased with an increase in the budget deficit, with the wacky belief of the prime minister of that time that these increases would be subdued by non-market methods. A currency crisis resulted. Some foreign banks had to writeoff debts, currency flows to Turkey stopped because rating agencies, which had just begun to evaluate Turkey, rapidly downgraded our rating below investable levels, and finally in 1999 we had to call the IMF.
Of course, there are serious differences between that period and today. First of all, figures (national product, foreign trade volume, international investment position, etc.) are much higher. The risks of the banking sector are much more under control. Even though there is an increasing bad debt problem in banks, it is not at the levels of that day. However, there are some other risks. At the time, many banks were hurt because of their open position. Although there is apparently not an open position today, there is a similar risk, albeit indirectly due to the open positions of the companies that were given credit. In addition, decreasing foreign borrowing facilities and non-performing loans have dried up fresh credit resources. Let us not forget that although the failed private banks hit the headlines during the restructuring process of the banking system in 2001, the main burden was due to the duty losses of public banks. (The cost to the state was $21.9 billion for state-owned banks and $ 17.3 billion for private banks transferred to the Saving Deposit Insurance Fund).
Today, more and more public banks and other government agencies are working in a way that will increase their duty losses. New packages, which will put more burdens on public banks, are announced every day, such as the recovery of the big football clubs and restructuring of credit card debts. It is quite difficult to know exactly what the current loss of duty created by them will be, nor is it possible to estimate the maximum amount of loss in the future.
I know I’m not able to give a concrete answer to the question I asked in the headline. However, I can say that the most important data that the markets will follow in the coming period will be the: “total cost of the crisis to the public.”