By Delphine Strauss in Istanbul, FT, Published: April 14 2010
Turkey can afford to keep tax rates unchanged “for the foreseeable future” while other European governments struggle to repair the damage done by the financial crisis, Ali Babacan, economy minister, said on Wednesday.
His comments reflect Turkey’s pride in weathering last year’s turmoil without bailing out any banks or seeking help from the International Monetary Fund. In contrast with much of the European Union it aspires to join, Turkey won recent upgrades to ratings of its sovereign debt after setting medium term fiscal targets it is likely to beat in 2010.
“We see no reason to raise corporate tax for years to come. We don’t need to raise VAT . . . We don’t have the problems some countries [have] on debt and deficits,” Mr Babacan said. He was critical of the EU’s failure to enforce fiscal rules, saying rescue plans for Greece were “extinguishing the fire” and “not a strategic solution”.
Stable tax rates may not be enough to draw foreign companies to Turkey, as Mr Babacan hopes. Christian Keller, economist at Barclays Capital, said labour taxes, which foreign employers often pay more punctiliously than locals, remained high. Tim Ash, at the Royal Bank of Scotland, said Turkey needed to broaden the tax base and improve collection.
But analysts agree Turkey’s public debt, around 45 per cent of GDP at the end of 2009, compares well with that of Greece, its historical rival, and with European averages. The treasury has had little trouble rolling over debt and lengthening its maturity. “Eurozone membership doesn’t mean much any more . . . people look much more at countries’ individual fiscal strength,” Mr Keller said.
Tax revenues will receive a further boost if economic growth outstrips the official 2010 forecast of 3.5 per cent, as most expect it will. But some fear any gains will be offset by a spending spree before elections in 2011.
“We have to be more careful on the expenditure side,” Mr Babacan said, but he added the main reason Turkey had rejected IMF funding was that it wanted greater freedom to spend or save any extra revenues.
Separately, Turkey’s central bank on Wednesday sought to calm investors’ worries over rising inflationary pressures, by outlining an “exit strategy” under which it will gradually reduce its role in supporting liquidity in money markets. However, it gave no time scale for technical measures such as raising requirements for foreign exchange reserves to pre-crisis levels.
The announcement followed Tuesday’s decision to hold interest rates at a historic low, with policymakers saying they were unlikely to change “for some time”. Tevfik Aksoy, Morgan Stanley economist, said on Wednesday’s measures were a “first step” to remove excess liquidity, signal higher rates ahead and show an intention to act “as and when necessary”.
