Turk public finances strained by stimulus ahead of local elections

The government cut some tax rates this week for three months to entice frugal consumers to spend more as the jobless rate hit an all time high, upping pressure on the government ahead of March 29 municipal elections. The polls are seen as a referendum on Prime Minister Tayyip Erdogan's ruling AKP.

Economists said the boost in government spending may result in a deterioration in debt stock/GDP ratios for the coming years and also undermine the benefit of steps to ease monetary policy by raising market interest rates.

The benchmark bond yield traded above 14 percent in the secondary market on Wednesday, above the central bank's borrowing rate at a record low of 11.50 percent.

The government has said it had already spent 22 billion lira ($12.88 billion) since the crisis began, and it said it would spend a minimum 5.5 billion lira in addition, cutting tax rates to bolster car and home sales ahead of March 29 elections.

The state employment agency Is-Kur data showed that the number of people hired in the public sector soared 110 percent year-on-year in January.Â

"We entered the crisis with fiscal policy already seriously loosened...A budget deficit between 35 and 40 billion lira may emerge without the International Monetary Fund saving measures," said Yatirim Finansman economist Levent Durusoy.

Compared to many other countries announcing stimulus packages, Turkey has a debt stock structure dominated by short-term debt and it pays much higher yields.

"A sudden rise in the government borrowing requirement and rising debt roll-over ratios may result in a deterioration in the debt stock's dynamics...but what is important is that this does not become permanent," Durusoy said.

The central bank warned earlier this month that a rise in the government borrowing may trim the fall in the market interest rates -- by making investors more concerned about the debt outlook -- and curb the benefits of the monetary easing.

The government defended fiscal expansion steps.

"Turkey has not piled up debt but lowered debt in the last four-five years...We have loosened (government spending) but we are doing this for the right things," Economy Minister Mehmet Simsek was quoted as saying by the state Anatolian news agency on Wednesday.

The financial markets have so far largely shrugged off the increase in the government spending and welcomed stimulus steps as a way of backing the ailing companies during a sharp economic slowdown, but this may not last forever.

"Under normal conditions rising Treasury borrowing requirement should put upward pressure on the interest rates but this is not happening because of large central bank interest rate cuts," HSBC strategist Fatih Keresteci.

"These problems will start to be taken seriously when slight recovery signals start to come," Keresteci said.