Turkey

The seasonally adjusted (SA) unemployment rate, following the sharp downtrend from its peak in April 2009 of 14.8% to a single-digit 9.9% in March 2011, showed a slight increase to 10.0% in April 2011. Despite the continuing increase in the SA labour force participation rate (49.9% in April), the SA employment rate (44.9%) maintained its improvement, implying that job creation in the Turkish economy is still strong, and the improvement in the unemployment rate will continue in coming months. In fact, the job opportunities index, derived from the consumer confidence index, reached its highest level since March 2006, confirming our view that the unemployment rate should maintain its downtrend. The non-farm unemployment rate, on the other hand, fell to its lowest level in the last 2 years at 12.5%, once again indicative of a recovery in labour market conditions to pre-crisis levels.

It should be noted that the uptrend in labour force participation still limits the decline in employment rates and helps alleviate labour cost pressures, supporting the CBT’s view that “…real unit labour costs are falling due to strong productivity gains and flat real wages…”.

By June, year-end targets for the primary surplus and budget balance were already met by a significant margin. But there is room for the government to improve sentiment on Turkey’s widening C/A deficit via more fiscal tightening. In Jan-Jun 2011, the central administration budget balance realised a TRY2.9bn surplus v the TRY15.4bn deficit in the same period of the previous year, with the support of hefty revenue growth and a decline in interest expenditure, while the primary balance reached TRY25.3bn with a 109% y/y growth. After a surge of 20% y/y in May, mainly due to election spending (with the doubling of agricultural support and a jump in transfers to provincial administrations), non-interest expenditures realised a more modest growth of 7.2% as a result of a ‘remarkable’ 29.% y/y decline in transfers to the social security system in June.

Robust revenue growth of 20.8% is another contributor to the strong budget performance. Tax revenues, up by 24.4%, are being driven by mostly cyclical factors, indicating solid economic activity in 2011 so far. Meanwhile, VAT on imports, maintaining its steep uptrend, shows no significant slowdown in imports in June. TRY8.0bn of an expected TRY13.5bn in extra revenues from tax restructuring for 2011 was realized at the end of June. Minister of Finance Mehmet Simşek reiterated that these revenues would not be used to finance current expenditures.

Simşek also added that the ratio of public debt stock to GDP is expected to fall below 40% this year, implying one-off revenues might be utilised to reduce debt. Details will be evident in the next Medium Term Programme and during 2012 budget preparations in the Sep-Oct period.