US embassy cable - 02ANKARA8797

UNCLAS ANKARA 008797 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR EUR/SE, EB/IDF/OMA AND E 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR FOR NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKEY'S INFLATION/GROWTH OVERPERFORMING; BUT 
FISCAL/STRUCTURAL CONCERNS REMAIN 
 
REF: ANKARA 8369 
 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
 
Economy Overperforming on Inflation and Growth Targets 
--------------------------------------------- ---------- 
 
 
1. (U) November inflation data, released December 3, were 
slightly better than market expectations:  Wholesale price 
increase was 1.6 percent (versus market expectations of 1.9 
percent); Consumer price increase was 2.9 percent (market 
average expectation was 3.0 percent). 
 
 
 
 
2. (U)  November declining inflation rats reflect the 
post-election lira appreciation, particularly evident in the 
wholesale sector, which relies on imported goods.  Markets 
now predict a year-end CPI of 31 percent (under the 35 
percent target), and year-end WPI of about 31 percent (right 
on target). 
 
 
 
 
3. (SBU) Growth is another area of good economic news: third 
quarter 2002 industrial production figures show a 10.9 
percent increase from the third quarter of 2001.   One local 
market analyst, Bender Securities, now projects year-end GNP 
growth of 7 percent.  (Comment:  Bender is the most optimist 
we've seen on growth; Treasury Undersecretary privately 
predicts 5 percent GNP growth (reftel).  The official target 
is still 4 percent.  In any case, the 2002 growth story is 
not based solely on inventory rebuilding after a terrible 
decline of 9.7 percent in 2001.  Part of this year's story is 
also very strong export performance, though exports only 
equal about 18 percent of GNP). 
Comment:  Need for Continuing Fiscal Reforms 
-------------------------------------------- 
 
 
4.  (SBU) The macro-economic news will likely cheer the 
markets.  But the market focus is now on the new government's 
meetings with IMF Europe Director Deppler (we will get 
read-out December 4), and EU/Cyprus developments.   The 
initial press is good: Deputy PM Sener, after meeting with 
IMF's Deppler, announced that the GOT would commit to a 6.5 
percent primary surplus target in 2003. 
 
 
5.  (SBU) The IMF Mission scheduled to begin December 9 will 
need to examine closely how the GOT plans to meet its fiscal 
targets in 2003, not just the headline number.  Finance 
Ministry Deputy DG for the Budget Ahmet Kesik told us the 
main fiscal problem lies in the three large GOT pension 
funds:  he estimates their total 2002 deficits at about 3 
percent of GNP (about $5 billion).  To date, the GOT has been 
funding these pension fund deficits to some extent by 
delaying discretionary social spending (e.g., farmers direct 
income payments, unemployment payments), which the new GOT is 
committed to correcting.  Pension fund reform, an effort 
started in 1999 but left undone per Kesik, now becomes an 
immediate priority for the GOT's 2003 budget and financing 
problems.   We  will report more septel on the prospects for 
pension fund reform. 
PEARSON