Fatih Özatay, PhD - [Archive]

USA-Turkey: Medium term budget 04/02/2010 - Viewed 1347 times

On Monday, US budget for 2010 fiscal year was declared. According to this, the budget which recorded a deficit of 10% of the GDP in 2009 will have a higher deficit in 2010 (10.6 %) whereas the budget deficit is targeted to be reduced as of 2011. Experts on the US economy are in a fierce discussion on the budget, which I will refer to in my commentaries time to time. Today, I specifically want to touch upon something which came to my mind as soon as I saw the public debt and interest payment estimates in the budget. And that 'something' would be comparing the figures for the US and for Turkey. Let us proceed with Table 1 and 2 without wasting time.

Table 1: Public debt and interest payments (ratio to the GDP, %)

Table 2: Turkey (ratio to GNP, %)

Table 1 shows central government debt and interest payments for 2009-2012 period for Turkey and 2009-2015 period for the US as the ratio to the GDP. Figures for Turkey are retrieved from Medium Term Program introduced in September and those for the US are from the 2011 budget announced on Monday. Turkey's debt stock is EU defined debt stock, which is slightly different than the US's definition. Table 2 presents the debt and interest payments for Turkey in the period where debts of Turkey tended to elevate. The debt stock represented in this table is not EU defined; it is the debt stock of the central government as there were no EU defined debt stock figures for those years - at least I could not access any. Nonetheless, this difference is not significant for what I will discuss.

First, let us compare the state for the USA as reflected in Table 1 with that for Turkey in Table 2. Over the 1996-2001 period where Turkey's debt elevated gradually, ratio of interest payments to the GDP increased extensively when compared to the USA even though the planned ratio of the debt to the GDP was far below in the former than the latter except for 2001. And the debt to GDP ratio for Turkey, which peaked in 2001 is not much different than the 2013-2015 target of the USA.

The source of this large difference between the interest payments is evident. First, Turkey's financial markets are shallow, and were even shallower back in the addressed period; debt stock/GDP ratio much lower than that in developed countries imposes much lower interest payment. To put it differently, the pool feeding (lending to) the public sector is too small to do so (savings are limited and financial system is small). Thus, as the amount sought to be borrowed is considerably high in comparison with the total amount that can be lend, the interest rate goes up. Second, Turkey's economy was highly damaged back then pushing up the risk premium and thus real interest rates. Third, borrowing maturity was quite short.

Thanks to the stability program introduced in May 2001, Turkey made significant progress in building a stable economy. However, the current state of affairs is still striking when compared with the performance of the US. Record high budget deficit, and public debts that tend to rise ever-increasingly worry many economists. They question whether the public debts at substantial amounts will be paid. Despite this, it is estimated that the ratio of interest payments to the GDP will only be 2.1 percent in 2012. Turkey's targeted public debt for the same period is 68 percent of the US's; whereas interest payments will be high above.

Conclusion: First, we still have a long way to go with respect to public finance, stability, and confidence in the economy. Second, sins of the past (for instance of 1990s) as well as some similar practices of the 2007-2009 period still affect Turkey's economy negatively. Third, US administration still believes that the sins of the US cannot be punished as they foresee that the level of interest payments will be moderate. And they probably are right.

This commentary was published in Radikal daily on 04.02.2010