The central government budget produced a TRY 1.5bn deficit and a TRY 3.5bn primary surplus in February. We calculate that with these figures, the 12-month rolling primary deficit to GDP ratio deteriorated slightly to 1.5% from January's 1.65%. However, the budget deficit to GDP ratio improved to 1.6% from January's 1.7% thanks to the steep y/y decline in interest payments. These were in line with our expectations and the performance remains better than the government's year- end targets (2.2% budget deficit, 1.2% primary surplus).

Although revenues posted a strong 18% y/y increase to TRY 32.5bn in February spurred by the 21% increase in the tax revenues, this failed to meet the rapid widening in primary expenditures, which posted an unusually high 34% y/y jump to TRY 33.9bn.

_This extraordinarily rapid widening in primary expenditures stemmed mainly from: 1) social security premium payments, 2) agricultural support transfers and 3) real estate capital and construction expenditures. Note that agricultural support payments typically correspond to different months each year and may often become a source of volatility. We would not expect the other two to produce a significantly similar deterioration throughout the year, but especially real estate and capital expenditures may continue to remain relatively elevated.

_On the revenue side, the increase in the VAT (21% y/y) and the special consumption tax (25%) affirmed domestic demand's relatively healthier state. Last but not the least, while one-offs like agricultural transfers boosted expenditures, there was no big ticket one-off revenue items in February.

_Nevertheless, the bulky TRY 4.2bn in privatization revenues accrued to the January budget still managed to keep the y-t-d primary surplus performance better than as of end-2012, as the 12-month rolling primary surplus to GDP ratio at 1.5% as of February is still better than December's 1.4% and the budget deficit at 1.6% as of February is also better than December's 2%.

_As for the foreign trade implication, the VAT on imports sky rocketed by 53% y/y in February. However, this probably includes lump-sum payments of the previous liabilities and hence is not a true representative of the import strength in February. However, even after correcting for the noise, we estimate that imports may widen to around USD 20.5bn vs. USD 17.8bn in February 2012, spurred also by around USD 1.0bn in gold imports. All in all, the trade deficit may potentially widen by around USD 2.2bn in February as the first remarkable proof of the cessation of the rebalancing in the economy.

Source: bne