By Selcuk Gokoluk
ANKARA, Feb 27 (Reuters) - Turkey is not alone in wanting to spend its way out of the economic slowdown but its ambitious growth assumptions and risks posed to its currency and budget by the spending are cause for concern.
The government's budget spending for 2009 has been raised by nearly $20 billion as it works to ward off recession and curb lay-offs through lending to companies and more infrastructure spending.
"It is time to leave behind the emphasis on fiscal discipline and allow the budget deficit to rise," said one senior government source. "Some countries have allowed their budget deficit to rise by two-fold or three-fold."
Yet analysts fear the spending will have adverse effects, by driving up borrowing rates that crowd out private investment and raising investors' risk perception of Turkey.
Underpinning those concerns is the fact the government is still operating on forecasts for 4 percent economic growth and 15 percent rise in budget revenue.
"The government needs to understand that the private sector is the engine of economic growth," said Mehmet Besimoglu, chief economist at Oyak Securities.
"If the government raises spending excessively, this risks crowding out private sector investment by raising borrowing rates."
Analysts said the government should draft a new 2009 budget based on more realistic targets to ensure transparency in its spending and present a clear plan for reducing debt.
"The government should come up with a plan saying how it will reduce debt in the next five years," said Garanti Bank chief economist Pelin Yenigun Dilek.
"Otherwise, risk perception for Turkey will rise and we will pay higher real interest rates, which Turkey worked for years to lower."
Many countries, including the United States, have launched huge stimulus packages aimed at lifting their economies out of recession, but economists caution that emerging markets cannot afford such lavish spending.
They also note that risk aversion hits emerging economies before large, industrialised ones.
GROWTH SLOWING
Turkey's economic growth slowed to its lowest level in seven years in the third quarter of 2008 and unemployment jumped to its highest in five years late last year.
That has triggered government worries about social unrest and hardened its resistance the IMF demands to limit spending.
Turkey's narrow taxpayer base, a large informal economy and several past crises, partly caused by poor state finances, make creditors more nervous about fiscal expansion steps.
The country's current account deficit is almost 7 percent of GDP but is expected to fall this year on lower oil prices and plunging imports, but it will still be hard to finance it due to scarce credit and falling foreign direct investment.
Turkey faces a fall in privatisation revenues and foreign direct investment is seen falling to $10 billion at best this year from $17.71 billion last year, economists said.
It also has hefty corporate sector debt obligations, which make a loan deal with the International Monetary Fund (IMF) more necessary.
OFF TO BAD START
The country's budget made a bad start this year, soaring almost fivefold in January from the previous year.
"Bank profits are falling, corporate tax and value-added tax income are falling. Budget revenues fell sharply in January, and this can fall as much as 40 percent in the next months," said Mina Toksoz, head of country risk at Standard Bank.
The IMF expects Turkey's economy to shrink by 1.5 percent this year, which will lower tax revenues further.
Yet Turkey and the IMF remain at odds over spending with the government unwilling to agree to unpopular steps taken in the past, such as limiting public servant pay rises, before March 29 elections.
Ulrich Leuchtmann, head of FX research at Commerzbank AG, said depreciation of the Turkish lira could be one consequence.
"Twin (current account and budget) deficit plus a monetary policy clearly on a cutting cycle means (a) higher risk of a depreciation spiral for the lira currency," said he said.
(Additional reporting by Orhan Coskun; Editing by Jason Neely)