US embassy cable - 03ANKARA1351

UNCLAS SECTION 01 OF 03 ANKARA 001351 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE AND EB/IFD/OMA 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, TU 
SUBJECT: TURKEY'S ECONOMY MARCH 3 AM: GUL AND IMF STATEMENT 
CONTAIN SELL-OFFS 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary: Early March 3 public statements by PM Gul, 
IMF Mission Chief and the Central Bank all helped contain 
market sell-offs on the morning of March 3.  Some investors' 
hope that the parliament's decision might not be final also 
helped limit the damage.  The good news is that the GOT and 
IMF reached agreement late March 2 on a 2003 budget that 
achieves a 6.5 percent of GNP primary budget surplus 
(however, the new measures are largely tax increases and not 
spending cuts).  PM Gul said the GOT would submit the budget 
to the parliament March 3.  Turkish Treasury has cash 
reserves of TL 4.2 quadrillion, so it can comfortably limit 
the March 4 T-bill bids to keep interest rates from going too 
high.  As markets begin to refocus on Turkey's economic 
fundamentals, and carefully examine the 2003 budget 
assumptions, there will likely be renewed concerns over the 
2003 financing gap.  End Summary. 
 
 
A Market Sell-Off is Contained 
------------------------------ 
 
 
2.  (SBU) Turkish financial markets opened March 3 sharply 
lower than Friday's close, but then recovered somewhat by 
noon (except the always volatile stock market), based largely 
on statements by PM Gul, IMF, Central Bank described below. 
 
 
--  Yields on lira-denominated T-bills jumped at market 
opening to 62 percent in annually compounded terms, before 
recovering to 59.5 percent by mid-day.  Turkey's 2030 
maturity Eurobond followed a similiar path, down 5 percentage 
points in early trading, before recovering to be down 3 
percentage points at mid-day. 
 
 
--  The lira depreciated 6 percent at market opening, 
reaching TL 1,675,000 to the dollar, before settling at TL 
1,645,000 to the dollar at noon. 
 
 
--  The Istanbul Stock Exchange 100 index was down 11 percent 
in morning trading. 
 
 
3.  (SBU) JP Morgan/Chase bond trader Sinan Gumisdis 
explained that the sellers were foreign hedge funds, though 
he added that some foreign funds were staying in and hoping 
that the GOT will submit a second troop deploymment 
resolution to the parliament.  "If the U.S. doesn't wait, or 
the GOT doesn't try again, then the markets will weaken 
further."   Goldman Sachs Turkey analyst Buchanan agreed that 
some investors were still hoping parliament's March 1 vote 
was not final, and that the U.S. assistance package was not 
yet dead.  Turkish banks, primarily Akbank, bought T-bills 
this morning, helping to limit the sell-off.  IN the currency 
market, Turkish corporate exporters sold dollars helping to 
contain the lira's depreciation. 
 
 
The March 4 Auction 
------------------- 
 
 
4.  (SBU) Turkish Treasury Deputy U/S in charge of public 
finance Hakan Ozyildiz told us this morning that Treasury 
will go ahead with its March 4 T-bill auction as planned.  As 
or Friday COB, Treasury's cash balance was TL 4.2 
quadrillion, he said.  The March 5 debt redemption totaled TL 
3.9 quadrillion.  Thus, Ozyildiz commented, Treasury could 
afford to limit the successful bids in the March 4 auction to 
keep interest rates as low as possible (informally, he 
believes Treasury will try to raise TL 2.5 quadrillion in the 
auction). 
 
 
PM Gul Shows Determination on Budget 
------------------------------------ 
 
 
5.  (SBU) At 9:10 local time March 3, PM Gul held a press 
conference and read a televised statement flanked by Deputy 
PM Sener, State Minister Babacan, Foreign Minister Yakis, and 
Finance Minister Unakitan.  Gul said the GOT would submit the 
full-year 2003 budget to parliament on March 3, and this 
budget exceeded the 6.5 percent of GNP primary surplus 
target.  The highlights of the statement follow: 
 
 
--  "Any development that might distort budget balances, 
including the primary surplus target, will be prevented.  A 
healthy tax system, and increasing tax collections are vital 
to meet the primary surplus.  In addition, there will not be 
any further tax amnesties or other reschedulings of public 
sector receivables. (Note:  This is a commitment in the draft 
LOI which IMF staff insisted on, and which last week the GOT 
refused to commit to, per IMF resrep.  End Note.) 
 
 
--  "A direct tax reform bill will be sent to parliament 
soon." 
 
 
--  "Our government believes in the independence to the 
Banking Regulatory and Supervision Agency (BRSA), and will 
continue to support BRSA actions."  He added that banking 
sector reforms and restructuring will continue. 
 
 
--  Privatization is at the top of our agenda.  The 
privatization plan for TEKEL (state tobacco and alcohol 
company) will be submitted to the Higher Privatization 
Council in the coming days." 
 
 
--  "A detailed timetable regarding redundant state 
enterprise employment will be announced." 
 
 
--  Decreasing the inflation rate is also a top concern.  The 
GOT together with the Central Bank have set an inflation 
target of 20 percent. The Central Bank will exercise monetary 
policy to achieve this target free of any political 
pressures. 
 
 
New Fiscal Savings Measures in the Budget 
----------------------------------------- 
 
 
6.  (U) PM Gul also distributed a list of fiscal saving 
measures at the press conference, which incorporate measures 
previously announced together with new measures.  (Embassy is 
obtaining the list and will report septel). 
 
 
7.  (SBU) IMF resrep told us March 3 that the new measures do 
result in a budget yielding a 6.5 percent of GNP primary 
surplus, per IMF calculations.  The IMF and GOT broke the 
budget impasse at about 2:00 am March 3; the gap between the 
two had been 1.5 percent of GNP (about TL 5 quadrillion or $3 
billion). 
 
 
--  The IMF had agreed to include in the budget the 
GOT-suggested measure of delaying into 2004 the 2003 "Direct 
Income Support" payments to farmers (worth TL 1.5 quadrillion 
or 0.5 percent of GNP). Comment:  The World Bank is opposed 
to this measures because it guts a key agricultural sector 
reform, and thus may endanger disbursements of World Bank 
loans to Turkey. End Comment. 
 
 
--  The GOT had come up with new tax increases - mainly a 
doubling of a special tax on vehicles and real estate tax 
increase (worth about TL 2.4 quadrillion or 0.67 percent of 
GNP. 
 
 
--  The GOT had also come up with a series of new, but small 
expenditure cuts, the largest of which was additional cuts to 
public investment projects (worth about TL 1.1 quadrillion or 
0.33 percent of GNP). 
 
 
IMF Mission Chief Statement also Helps 
-------------------------------------- 
 
 
8.  (U) Shortly after PM Gul's televised statement on March 
3, IMF Mission Chief Juha Kahkonen, in Ankara, released the 
following statement: 
 
 
--  "The steps announced by the government are welcome.  The 
budget, in particular, appears consistent with a primary 
surplus of 6.5 percent of GNP.  Discussions are continuing on 
other aspects of the Fourth Review." 
 
 
Central Bank Statement Provides Further 
Confidence 
--------------------------------------- 
 
 
9.  (SBU) The Central Bank also released a statement at 
market opening March 3.  Its warning of a possible 
intervention to address extreme exchange rate fluctuations 
was effective in dampening down lira sell-offs, per Bender 
Securities trader Murat Golkan.  Central Bank market's 
department chief Ozcay told us at noon that the Central Bank 
had not intervened to date and didn't plan to do so. The 
statement reads in part: 
 
 
--  "As a result of the parliament's decision on the subject 
of deploying Turkish and foreign troops to the border, 
fluctuations should be expected in the foreign exchange and 
interest rate markets. 
 
 
--  "The Central Bank will closely monitor all market 
developments and, if needed, measures will be taken to help 
the markets functions effectively.... If there are extreme 
fluctuations in the exchange rate because of a drop in the 
market's liquidity or speculative moves that hurt stability, 
the Central Bank could intervene in the exchange rate from 
either direction." 
 
 
Comment - 2003 Financing Gap 
----------------------------- 
 
 
10.  (SBU) As markets begin to refocus on the economic 
fundamentals, and carefully examine the 2003 budget, concerns 
over a 2003 financing gap are likely to re-emerge.   The 
Turkish Treasury's financing assumptions for 2003 include an 
average interest rate on new TL borrowing of 45 percent for 
year. Interest rates need to start coming down soon, in order 
for the government's financing scenario to be credible. 
PEARSON