US embassy cable - 03ANKARA1392

UNCLAS SECTION 01 OF 02 ANKARA 001392 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE AND EB/IFD 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PREL, TU 
SUBJECT: TURKEY'S ECONOMY MARCH 4 COB 
 
 
REF: ANKARA 1351 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary: Markets were relieved this afternoon that 
today's Treasury auctions had gone relatively well, with the 
lira and equities gaining for the day (though t-bill yields 
closed up 2.5 percentage points).  Treasury raised a total of 
TL 2.3 quadrillion that, together with some of Tresaury's 
cash reserves of TL 4.2 quadrillion, will be used to meet the 
March 5 debt redemption of TL 3.9 quadrillion.  Looking ahead 
towards the March 19 redemption of TL 5.2 quadrillion to the 
domestic market, Treasury plans to schedule several auctions, 
including possibly an F/X-linked auction next week.  IMF 
resrep briefed us on the status of the Fourth Review.  He 
agrees in general with MinState Babacan's prognosis that the 
Fourth Review could be held early April, but IMF is concerned 
with possible delays stemming from formation of an Erdogan 
govenrment. End Summary. 
 
 
Markets Improve Slightly On 
Treasury Auction Results 
-------------------------- 
 
 
2.  (U) Afternoon trading today reflected market relief that 
the two Treasury auctions earlier in the day had raised over 
TL 2 quadrillion, sufficient to enable Treasury to meet the 
March 5 TL 3.9 quadrillion debt redemption.  The lira firmed 
nearly one percent from yesterday (closing at TL 1,637,000 to 
the dollar), and the Istanbul Stock Exchange rose 4.8 percent 
on the day.  Yields on T-bills remained at the 62.5 percent 
level of the auction, reflecting overall investor concerns on 
GOT financing prospects.  (Note:  Today's yields are some 16 
percentage points above the GOT's targeted average interest 
rate for the year.) 
 
 
3.  (SBU) Treasury's Deputy DG for public finance Volkan 
Taskin was relieved after the March 4 auctions, telling us 
"every auction is a new experience."  He added that, in 
addition to the TL 2 quadrillion raised from the market, the 
Treasury sold about TL 300 trillion to public institutions 
(primarily the unemployment insurance fund) before the 
auction.  This brings the total amount raised to TL 2.3 
quadrillion.  Looking ahead to the March 19 redemption of TL 
5.2 quadrillion ($3 billion), Taskin said Treasury would 
schedule several auctions, including probably a F/X-linked 
auction next week. 
 
 
Status of IMF Fourth Review 
--------------------------- 
 
 
4.  (SBU) On March 4, IMF resrep gave us the following status 
report on the IMF Fourth Review: 
 
 
--  Timing:  State Minister Babacan told the press March 4 he 
expected an IMF Board review in late March or early April, 
followed by disbursement of the entire $1.6 billion tranche. 
Resrep didn't disagree with Babacan's timing.  In principle, 
the IMF staff could wrap up LOI discussions this week, and 
take back to headquarters ad ref agreement on it.  But IMF 
staff have questions regarding the March 9 parliamentary 
by-elections.  Assuming Erdogan becomes Prime Minister, would 
the Gul government's ad ref agreement on the LOI bind an 
Erdogan government?  IMF staff project that an Erdogan 
government would take about 3 weeks to form, thus potentially 
slowing down the LOI and Fourth Review process (though there 
are no pending conditions requiring parliamentary action, 
other than passage of the 2003 budget, in the Fourth Review.) 
 
 
 
 
--  Budget and World Bank Problem:  IMF staff are confident 
that the budget now delivers a 6.5 percent primary surplus, 
but there are two budget problems: 
 
 
First, World Bank staff object to the draft budget's delay of 
TL 1.4 quadrillion (nearly $1 billion) in "Direct Income 
Support" to farmers, a key ag sector reform.  A one-year 
delay of this program means farmers cannot rely on this new 
program, meaning they will instead lobby for traditional 
support, such as further restructuring Ziraat Bank loans. 
Per WB Staff, World Bank country director Chhibber told 
Babacan March 3 this budget measure would make it impossible 
for the World Bank to disburse its existing budget support 
loan programs (a total of $1.375 billion in loan tranches, 
which are due to expire at end March 2003).  This would leave 
the World Bank limited to existing project financing (also 
affected by 2003 budget cuts to public investment projects.) 
Babacan said he would get back to Chhibber, per World Bank 
staff. 
 
 
Second, the IMF staff see a financing gap in the 2003 budget, 
and they would need to explain to the IMF board how this gap 
will be filled (in addition to their lending) before taking 
the Fourth Review to the Board.  Resrep said the size of the 
gap was still being studied. 
 
 
--  Key structural reforms.  The direct tax reform bill 
appears to be on track:  it has been prepared, IMF staff have 
commented on the draft and it could in theory be submitted to 
parliament (the Foruth Review condition) soon. The TEKEL 
privatization plan should be passed soon by the Higher 
Privatization Council (another condition).  Two other 
conditions require work:  there is no clarity in reducing 
redundancies in the state enterprise staffing, with a GOT 
proposal (to offer early retirement) unacceptable because it 
fails to target actual redundancies.  To remedy deficiencies 
in banking sector reform (especially the BRSA's agreement on 
Pamuk/Yapi Kredi connected lending rescheduling), the new LOI 
will require new legislation to strenghten BRSA's hand by 
limiting the time for legal appeals to its decisions, and by 
a new bankruptcy law which will improve the value of the 
BRSA's non-performing loan assets, and lead to sales of these 
assets. 
PEARSON