US embassy cable - 03ANKARA1078

UNCLAS SECTION 01 OF 02 ANKARA 001078 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EB AND EUR/SE 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND MOWERY 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKEY'S ECONOMY: MARKETS HOPEFUL, IMF SEES SOME 
PROGRESS ON PRIMARY SURPLUS 
 
 
REF: ANKARA 861 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Turkish Financial Markets Remain Hopeful 
---------------------------------------- 
 
 
1.  (U) On February 18, Turkish financial markets continued 
to ignore the news of a deadlock in negotiations over a U.S. 
assistance package:  the lira appreciated nearly one percent 
to close at TL 1,626,000 from yesterday's TL 1.642,000); 
TL-denominated T-bills dropped one percentage point to 57 
percent compounded; the Istanbul Stock Exchange was up 4 
percent (and up 2.5 percent February 17).  Bond and stock 
market transactional volume February 18 was quite strong 
(bond was nearly one quadrillion, stocks was TL 700 
trillion). 
 
 
2.  (SBU) JP Morgan/Chase's local bond trader Sinan Gumisdis 
explained to us the sentiment as follows:  "market players 
see a few more days of tough bargaining (between the U.S. and 
Turkey), but a positive result by week's end, based on the 
perception that both sides want a deal."  Sinan says the 
Turkish corporate sector had already hedged its lira 
positions (manufacturers relying on imports have already 
imported several months worth in advance; exporters are 
holding onto their dollars).  He concluded that if there's no 
deal by early next week, sentiment will change. 
 
 
3.  (SBU) Istanbul Stock Exchange (ISE) analyst Murat Golkan 
of Bender Securities said the ISE rally over past two days is 
being driven by foreign buyers, including "quality" 
longer-term institutions (not just the in-and-out hedge 
funds).  Golkan said leaks of cross-conditionality between 
the U.S. package and IMF program is seen as very encouraging, 
since "everyone knows by now that AK would squander the money 
if it could." Goldman Sachs Turkey analyst told us separately 
that he agreed clear reform conditionality, especially on 
ongoing fiscal adjustments, was key to market acceptance of 
the U.S. package. 
 
 
Some Progress on 2003 Budget 
---------------------------- 
 
 
4.  (SBU) The GOT has made some progress in meeting the 6.5 
percent primary surplus target, according to Ministry of 
Finance Deputy DG for budget Ahmet Kesik (though IMF and 
World Bank reps are more negative, see below).  Kesik told us 
February 18 that the GOT and IMF teams are agreed on measures 
that result in a primary surplus of about 5.4 percent of GNP. 
 The largest issue outstanding is IMF and World Bank 
opposition to the GOT proposal to delay into 2004 the "Direct 
Income Support" payments to farmers originally budgeted for 
2003, which amounts to about TL 1.5 quadrillion or about 0.4 
percent of GNP, per Kesik.   He added that senior bureaucrats 
are urging the Cabinet to reach closure with the IMF this 
week, in order to get the draft 2003 budget submitted to 
parliament by early next week. 
 
 
5.  (SBU) World Bank Operations Director Zeillon confirmed 
that delaying the direct income support (DIS) program was a 
serious problem for the Bank, and would endanger pending Bank 
loan tranches (nearly $1 billion now scheduled for end 
March).  In effect it rolls back this key reform, which is a 
more efficient way of supporting farmers, in favor of the 
traditional Turkish practice of discretionary price supports 
for certain products (e.g., hazelnuts and tobacco) which AK 
is reviving.  Zeillon said this belies the AK slogan of 
increasing social spending for the poor, since DIS targets 
the poorest farmers, while AK has focused instead on middle 
class spending measures such as increasing the civil service 
pension fund. 
 
 
6.  (SBU) IMF resrep also confirmed that the primary surplus 
shortfall is now about 1.1 percent of GNP, that the DIS delay 
(which he said would in effect cancel the program) is a major 
issue of contention.  He did note that the GOT had agreed to 
include in the definition of primary surplus some TL 2.7 
quadrillion (about 0.75 percent of GNP) of in-kind foreign 
suppliers' credits (used, e.g., for the GOT to import 
construction and medical equipment).  IMF resrep said the IMF 
team has a meeting late February 18 with State Minister 
Babacan, and that he would brief us on the results February 
19. 
PEARSON