US embassy cable - 04ANKARA4528

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004528 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND MSHWARZMAN 
STATE FOR E, EUR/SE, AND EB/IFD 
NSC FOR MBRYZA AND TMCKIBBEN 
 
E.O. 12958: DECL: 08/11/2014 
TAGS: EFIN, ECON, PGOV, ECIN, TU 
SUBJECT: IMF OFFICIAL ON GOT'S DECISION TO SEEK A NEW 
DISBURSING STANDBY 
 
REF: ANKARA 4455 
 
Classified By: ACTING ECONOMIC COUNSELOR ANDREW SNOW FOR REASONS 1.4 (B 
) AND (D). 
 
1. (C) Summary:  Following IMF Mission Chief Moghadam,s 
surprise visit to Ankara last week, and 
public statements by PM Erdogan and Economy Minister Babacan 
that the GOT had decided to seek a 
follow-on disbursing Standby Arrangement(SBA), Econoffs met 
with IMF Deputy Resident Representative 
Christoph Klingen on 10 August.  Klingen confirmed  that the 
GOT had informed the IMF that Turkey would 
seek a follow-on disbursing SBA.  The IMF was not  informed 
of the GOT decision, however, until the end 
of the Moghadam visit, which centered on the GOT,s 
internally-developed three-year program for economic 
policy for 2005-2007.  According to Klingen the GOT program 
was much more of a financing framework with 
macroeconomic targets than a policy program, as it gave a 
detailed picture of financing gaps for the next three 
years but was very limited in terms of specific policy reform 
measures to be taken during the same period. 
Klingen said the GOT, using reasonable assumptions, has 
identified a cumulative three-year financing gap 
of between $8 and $20 billion, for which it would seek IMF 
financing, with the key variable in the size of 
the gap being the primary surplus.  Klingen emphasized that 
these numbers are extremely sensitive and 
close-hold. He said the IMF staff tried to dampen GOT 
expectations, particularly since Fund staff is not 
yet authorized to begin negotiations on a new program. 
Klingen briefly touched on the issues of the current 
account deficit and the 2005 budget as well, and predicted 
2004 growth could be between 7 and 8 percent. 
End Summary. 
 
Surprise mission 
--------------------- 
 
2. (Sbu) Although portrayed as a last minute visit to Ankara 
on the invitation of State Minister of Economy 
Ali Babacan, Klingen said Moghadam,s mission had actually 
been in the works for some time.  The GOT 
requested an August mission some time ago in hopes of being 
able to react to a Fund proposal for a new 
program.  The Fund was not comfortable with this approach, 
preferring that the Turks create ownership of 
any new program by first developing it on their own and then 
presenting it to the IMF.  The Turks seem to 
have agreed with the IMF approach, as the focus of the 
mission was for the GOT to present its internally- 
developed three-program (reftel) to the IMF, rather than 
vice-versa. 
 
3. (Sbu) Klingen explained that the announcement of the 
mission was made only just before Moghadam,s 
departure from Washington in order to prevent the board 
discussion of the 8th review of the current 
Stand-By arrangement from being more of a discussion on a 
potential future program.  The IMF preferred 
instead that the board focus on the details of the 8th review. 
 
4. (Sbu) The mission focused almost exclusively on looking at 
the GOT three-year program.  The subject of 
a successor SBA was only broached in the waning hours and 
only in so far as the Turks stated they wished 
to seek one; &the details of a new SBA were not discussed8, 
said Klingen.  However, he then described that 
because the GOT program was largely a demonstration of the 
financing gaps that Turkey would face over the 
next three years, the Fund had to be careful only to listen 
and offer general comments rather begin a negotiation. 
(Note:  the Fund cannot formally begin negotiations with an 
exceptional access country like Turkey until it 
receives explicit permission from the board.)  The IMF did 
feel compelled, though, to try and lower expectations 
about how flexible it could be in any negotiations, 
particularly with regard to the amount of funding it could 
offer 
and flexibility in setting program targets, both structural 
and quantitative. 
 
Financing Gaps 
------------------- 
 
5. (C) The GOT presented a financing framework that produced 
a range of financing gaps based on differing 
scenarios for the primary surplus.  Klingen commented that it 
seemed thorough, coherent and &quite neatly done. 
Using central government primary surplus scenarios ranging 
from 4%-5% of GNP (these figures correspond to 
consolidated public sector primary surpluses of 5.5%-6.5% of 
GNP), the framework produced financing gaps, 
cumulative for the next three years ranging from $8 billion- 
$20 billion.  Note: Klingen repeatedly stressed how 
sensitive these numbers are.  He said that because of  the 
danger of leaks, that only a small group in Turkish Treasury 
and only Minister Unakitan in the Ministry of Finance were 
party to these numbers.  In a subsequent briefing to 
western diplomats, Klingen did not reveal these numbers.  End 
Note. These results assume the following set of 
conditions: 
 
Ex-ante domestic debt market rollover ratio of 92%-93% 
World Bank high case lending scenario 
No bilateral loan from the U.S. 
$1 billion in combined privatization proceeds and SDIF assets 
sales per year 
$5 billion in Eurobond issuance per year 
Real interest rate of 8% 
GNP growth of 5% 
2005 Exchange rate of 1.67 new TL/$ (TL 1,670,000/$) 
Current account deficit of 3% of GNP 
Moving $4 billion of Fund repayments from ,06-,07 (although 
this makes no difference to the cumulative 
three-year financing gap) 
 
6. (C)  Klingen said that for the IMF,s purposes, the upshot 
of these results is that it will be very difficult for 
Turkey to target anything but a 6.5% primary surplus for the 
consolidated public sector (5% for the Central 
Government).  Speaking again about the Fund,s lack of 
flexibility, Klingen remarked that he was not sure the 
GOT understood that it is very difficult to ask the Fund to 
fill a gap resulting from a lower primary surplus. 
He predicted  that board members would not be happy to 
provide financing that allows for looser fiscal policy. 
 
What the GOT 3-year program is not 
--------------------------------------------- 
 
7. (Sbu) Other than the financing framework, the three-year 
program appeared to the Fund to be light on 
specifics.  Particularly on matters such as fiscal structural 
reform, the banking sector and improving the 
investment climate there was no description of the underlying 
policies that would allow them to achieve 
the quantitative targets they had laid out. 
 
GOT Leadership Confirms its Decision 
--------------------------------------------- ---- 
 
8. (Sbu) Over the past few days Prime Minister Erdogan and 
Minister Babacan have made public statements 
saying the GOT has decided to seek a follow-on disbursing 
SBA.  At a private meeting with an American 
company which econoff attended, Babacan confirmed that the 
GOT,s priority in seeking the new program 
was the IMF seal of approval on their policies, though the 
financing would also be useful.  Turkish press reports 
have suggested that Babacan had only convinced Erdogan to 
overrule doubters in the Government by pointing 
out the risk of higher oil prices to the already-expanding 
current account deficit.  In the meeting with econoffs, 
Klingen opined that the GOT had also come to realize that, 
rather than the EU anchor providing a potential 
substitute for the IMF, an IMF-approved program would 
strengthen the GOT,s EU accession efforts, by making 
Turkey a more attractive candidate.  A chorus of voices 
(Central Bank, the leading business groups and the entire 
financial community) had been calling on the GOT to seek a 
SBA since late spring, and  Klingen told econoffs 
that GOT economic technocrats were convinced of the need for 
a SBA for some time, but had yet to obtain the 
Government,s decision. 
 
Process for new SBA 
-------------------------- 
 
9. (Sbu) Klingen explained that early next month the Fund 
plans to present a &high access paper8 to the board 
in accordance with its policy on exceptional access 
countries.  The paper will establish a ceiling for the size 
of 
any new program.  Provided the board approves of the paper 
and sanctions the beginning of negotiations, a 
mission will come to Ankara during the second week of 
September.  According to Klingen the Turks hope that 
the mission can agree on the terms of a new program before 
the World Bank/IMF annual meetings in Washington 
at the end of that month.  In the meantime the GOT has &a 
lot of homework to do8 as they fill in the empty spaces 
 in their three-year program.  Klingen offered that it is not 
likely that this timeline will be realized.  At the western 
diplomats, briefing, Klingen noted that, if agreement were 
reached on a new program, the Fund would cancel 
the last two reviews of the existing SBA and replace them 
with the first reviews of the new program, with 
virtually identical conditions.  If the two sides take more 
time to agree, the existing SBA would continue to be 
in effect. 
 
 
Current Account, 2005 budget, and Growth 
---------------------------------------- 
 
10. (Sbu) In the context of the current program, Klingen 
briefly recounted the dialogue that occurred on the issues 
of the current account deficit and next year,s budget.  On 
the current account, he pointed out that deficit is already 
approaching 4 percent of GNP with nearly half the year still 
to go, albeit the half that includes most tourism receipts. 
He described the potential fiscal measures that the IMF 
proposed in the event the deficit continues to widen to the 
point of necessary action: not spending revenue over 
performance, passing through high international oil prices, 
doing away with the current  incentive to trade in old cars 
when purchasing new ones, and resuming F/X purchases 
on the part of the central bank.  At a press conference later 
the same day, Finance Minister Unakitan revived the earlier, 
IMF-rejected idea of increasing banks, resource utilization 
tax, as a means of  slowing the import-attracting growth of 
credit.  Unakitan also warned banks against fast credit 
growth and announced continued strong fiscal performance in 
July.  Klingen, however, noted that the fiscal 
overperformance*while notable at the central government 
level--was 
not so impressive for the entire public sector, because of 
loss-making parastatals. In the Fund team,s discussions 
last week, Klingen said  the two sides spoke about how to 
arrive at a 5% (6.5%) primary surplus.  Here Klingen 
commented that it was not clear that the politicians 
understood exactly what would be entailed in achieving the 
targets announced in the recent budget call. 
 
11. (Sbu) Both Babacan, in the private meeting, and Klingen 
were very bullish about this year,s GNP growth number 
coming in well above the 5 percent target.  Babacan declined 
to say a number but seemed not to be in disagreement 
to a suggestion it would be as high as 7 percent.  He said 
they would not revise the target, however.  Klingen, at the 
diplomats, briefing said real GDP growth could well be 
between 7 and 8 percent this year, and that assumes a 
slowdown from the first half. 
EDELMAN