Turkey Underwhelms With New Spending Cuts to Curb Inflation

Beril Akman and Tugce Ozsoy
·3 min read
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(Bloomberg) -- Turkey’s move to cut public spending in a bid to curb rampant inflation was largely shrugged off by investors, with questions raised over how much would actually be saved.

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Treasury and Finance Minister Mehmet Simsek and Vice President Cevdet Yilmaz on Monday announced a series of measures to lower state expenditure for the next three years. Reported by Bloomberg on Friday, they include cuts to public-sector hiring and a slowing of investment in major infrastructure projects.

Read More: Erdogan’s Public Spending Craze to Pause Over Inflation Fight

Simsek didn’t say how much the plan would save, though reports in Turkish media have estimated the amount at about 100 billion liras ($3.1 billion).

“Even if the numbers floated in Turkish media turn out to be correct, it will likely be split across multiple years,” said Erik Meyersson, chief emerging-markets strategist at SEB AB. “With coming years’ expected budget deficits in the trillions of liras, it’s hard to see this making a real dent in aggregate statistics.”

Evren Kirikoglu, the founder of Istanbul-based market strategy consultancy firm Orca Macro, said any savings under 500 billion liras would “fail to make an impact.”

Turkey’s efforts to cut public spending are aimed at trying to rein in stubbornly high inflation, which central bank officials expect to end the year at 38%, revised up last week from 36%. Simsek has helped oversee a pivot to more conventional economics since President Recep Tayyip Erdogan was reelected just over a year ago, with interest rates jacked up to 50% from 8.5% last June.

Turkey sees the budget deficit at 6.4% of GDP this year, or about 2.7 trillion liras ($84 billion).

Read More: Turkey Hones Rates Message for New Policy Era Riddled With Angst

Meyersson said one of the purposes of the spending cuts could be to reduce outlay on “practices that could be seen as excessive or even corrupt, such as the use of luxury vehicles by government officials, current expenditures, and board salaries.”

That could have the dual effect of helping to repair the image of Erdogan’s ruling AK Party, which suffered unprecedented defeats in local elections at the end of March.

What Bloomberg Economics Says...

“Turkey posted a lower-than-expected deficit in 2023 - a surprise given the earthquake in February and the parliamentary and presidential elections in May. The smaller-than- expected shortfall in 2023 suggests post-quake rebuilding costs will spill into the coming years, suggesting a delay in the budget balance reverting back to pre-pandemic levels. We see the fiscal deficit improving beyond the trough it reached in 2023 as austerity measures take hold.”

— Selva Bahar Baziki, economist. Click here to read more.

For Maya Senussi of Oxford Economics, the announcement likely represents “the first step toward rationalization” in public finances. “Markets will look for more meaningful savings in 2025 and beyond to complement monetary tightening,” she said.

Both Simsek and the central bank have highlighted the challenge of resilient domestic demand, fueled by a sharp increase in the minimum-wage and stocking up on purchases by consumers before prices rise even higher. Inflation accelerated to almost 70% in April, a sixth increase in as many months.

“The package is underwhelming in terms of its ambition and many measures will be hard to implement,” said Wolfango Piccoli, co-president of consulting firm Teneo.“It won’t make any difference in terms of fighting inflation and certainly it does not make a meaningful contribution to repair damage done over the past few years,” he said.

(Updates with chart, economist comment.)

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