Turkey: Central government budget hits TRY 129.6bn deficit in August

• Budget balance deteriorates y/y in August amid slowing revenues and rising spending
• Cumulative deficit reaches TRY 973.5bn in Jan-Aug, up y 153.9% y/y
• Mounting fiscal pressures highlight need for stronger fiscal discipline, in our view

The central government budget witnessed a TRY 129.6bn deficit in August, the finance ministry reported. The deficit negatively compared to the TRY 51.3bn surplus in the same month of the previous year. The deteriorating budget execution during the month was on the back of a significant slowdown in budget revenues, which rose only by 12.5% y/y driven by 6.2% y/y increase in tax revenues. Tax revenue growth was rather weaker than the average growth in the previous months of the year and it was due to substantial 87.3% y/y decrease in corporation taxes and 53.6% y/y decrease in property taxes. We note that the collection of corporate taxes was postponed from Aug 27 to Sep and therefore, it is not straightforward to evaluate the overall impact.

Budget expenditure growth increased at a substantial rate of 45.8% y/y in August, albeit slower than average so far this year. The increase mainly stemmed from a 77.7% y/y increase in the compensation of employees and a 61.5% y/y increase in current transfers. Payments for contracted personnel accounted for the increase in payroll costs, while the growth of current transfers was on the back of duty losses of public enterprises, which surged by almost 37 times in August compared to the same period in the previous year. We note these duty-loss payments are usually concentrated to the state-owned gas company BOTAS. Similarly, under the same category, Treasury aid to health, retirement and social aid expenditures increased by 41.0 y/y and was responsible for the increase in transfer expenditures. Goods and services purchases increased at a moderate level of 36.7% y/y, mainly driven by increases in the defence and security sector. Overall, Turkey is facing mounting fiscal pressures as government expenditures have significantly outpaced revenues, leading to a substantial budget deficit in August and the need to maintain fiscal discipline, in our view.

The cumulative budget deficit reached TRY 973.5?bn in Jan-Aug and expanded by 153.9% y/y. The deficit represented 36.7% of the full-year target, in our opinion still suggesting a strong likelihood of no deficit slippages this year despite the expected slowdown of the economy for the rest of the year. Expenditures increased by 84.1% y/y and revenues rose by 75.2% y/y during the period, but the higher base of expenditures resulted in a y/y widening of the deficit. Budget expenditures accounted for 56.2% of the annual plan in Jan-Aug, compared to a 62.3% execution ratio for budget revenues.