US embassy cable - 02ANKARA8112

UNCLAS SECTION 01 OF 02 ANKARA 008112 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR EUR/SE, EB/IFD/OMA AND E 
TREASURY FOR OASIA - MILLS AND GUNARATNE, AND OFFICE OF 
TRADE FINANCE 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: IMF AND TURKISH CENTRAL BANK ON NEXT STEPS FOR THE 
ECON PROGRAM:  FOCUS ON FISCAL TARGETS 
 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
 
1.  Summary:  While the post-election market rally largely 
continued on November 8, with T-bill rates dropping a further 
2.5 percent, there was by the week's end greater press and 
market attention to the likely policies of the new GOT.  IMF 
resrep reviewed with us the outstanding structural and fiscal 
conditions on the Fourth Review; he hopes to have AK 
agreement to a November visit by IMF's Deppler, followed by a 
full Mission visit in December.  The AK figures have yet to 
meet with the economic bureaucrats, but Central Bank staff 
told us they plan to stress to AK leaders:  "stick with the 
6.5 percent of GNP primary surplus target."  End Summary. 
 
 
2.  (U) The strong market rallies largely continued on 
November 8, on the back of local buying (Central Bank sources 
say they didn't see large foreign inflows this week). 
Lira-denominated T-bills dropped another 2.5 percentage 
points to close at 53 percent compounded.  The lira 
appreciated one percent to close at TL 1,619,000.  Profit 
taking in the Istanbul stock exchange led to a 1.8 percent 
decline, after a record week for trading volume.  Volume in 
the stock market today was $1.55 billion (versus prior daily 
averages of about $200 million.) 
 
 
IMF Resrep on Next Steps 
------------------------ 
 
 
3.  (SBU) IMF resrep Brekk, meeting with visiting EUR/SE 
director, said he spoke with AK's Ali Babacan today.  Brekk 
believes AK will agree to a courtesy visit by IMF's Europe 1 
director Michael Deppler in late November, to be followed by 
a full fledged IMF Mission visit in December, once the new 
government is fully in place.  Brekk noted that AK leadership 
had focused first on EU accession, and had been briefed by 
bureaucrats on EU issues, but had not yet engaged the 
bureaucracy on the economic reform program issues.  When they 
did meet with Treasury and Central Bank, AK would learn of 
the outstanding conditions on the Fourth Review. 
 
 
4.  (SBU) Among the key outstanding structural reform 
conditions are: 
 
 
--  Banking Board's resolution of Yapi Kredi Bank's share 
ownership (still being negotiated with controlling 
shareholder Mehmet Karamehmet.) 
 
 
--  Submission to parliament of the direct tax reform bill. 
(IMF has not seen a draft law, though there was agreement in 
principle with MinFin Oral on contents of such a law. 
Finance Ministry DG told us he will wait to show draft to new 
AK MinFin before giving to IMF.) 
 
 
--  Reducing redundant jobs in state companies.  (GOT is 
about 10,000 short of the 31,000 jobs identified as redundant 
in a GOT study of state companies.  This will require 
lay-offs, which remains sensitive.) 
--  Adoption of Tekel privatization plan. (The planned 
restructuring of state alcohol and tobacco giant TEKEL goes 
beyond the mandate of the Privatization Administration, since 
it requires lay-offs and ending tobacco price supports.  Thus 
the plan must be submitted to the new GOT.) 
 
 
5.  (SBU) The most important concern under the IMF program 
remains the primary budget surplus, see septel. 
 
 
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Central Bank Staff Optimistic About 2003, 
If AK Government Keeps Budget Tight 
---------------------------------------- 
 
 
6.  (SBU) Central Bank Markets DG Akil Ozcay told us November 
8 that he is optimistic about 2003, provided the new GOT 
keeps a tight fiscal policy.  "We'll tell the new government 
that the 6.5 percent primary surplus target is not the IMF 
target, it's the Treasury's and Central Bank's target.  It's 
the anchor of our reform program, th the key to bringing down 
real interest rates and reducing the government's borrowing 
costs in 2003." 
 
 
7.  (SBU) On inflation trends, Ozcay said the latest 
expectations survey showed a year-end 2002 expectation of 31 
percent CPI growth - well under the year-end 35 percent 
target.  However, the year-end 2003 expectation was currently 
24 percent - above the program target of 20 percent.  Ozcay 
is confident that this expectation could be lowered by 
maintaining tight monetary and fiscal policies.  He recalled 
that no one expected at the beginning of 2002 that the CPI 
target of 35 percent would be met.  Ozcay noted the market 
pressures for the Central Bank to lower its overnight rates, 
now that inflation was under program targets.  He said the 
Central Bank was hesitant to join the "exuberance bandwagon" 
and thus might wait a bit before cutting rates. 
 
 
8.  (SBU) Other economic indicators were also good, per 
Ozcay.  On the balance of payments, current account numbers 
were stronger than projected - the Central Bank now sees a 
year-end current account deficit of about $500 million 
(versus the projected $1.5 billion).  He attributed this 
performance both to over-performing export growth, despite 
the real lira appreciation and to the record year for tourism 
- expected revenue of just under $10 billion.  He expects net 
capital inflows in 2003, pointing to this week's successful 
Eurobond offering. 
 
 
PEARSON