US embassy cable - 03ANKARA1587

UNCLAS SECTION 01 OF 02 ANKARA 001587 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EUR/SE AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, PREL, TU 
SUBJECT: TURKEY'S ECONOMY MARCH 13: TREASURY U/S OZTRAK 
SAYS DEBT SUSTAINABLE IF REFORMS STAY ON TRACK 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary: Treasury Undersecretary Faik Oztrak told 
us March 13 that the key to debt sustainability this year is 
economic reform program implementation, not the U.S. package. 
 Oztrak is concerned that the new Erdogan government will 
view the U.S. package as "an excuse not to implement the 
reforms."  If so, the effect of the U.S. package will be 
short-lived, per Oztrak.  He sees Turkey finishing the prior 
actions for the Fourth Review by end March.  Meanwhile, the 
Turkish financial markets are beginning to reflect some 
concern with the lack of confirmation that the new GOT is 
planning a second troop resolution.  End Summary. 
 
 
Markets Start to Worry about Timing of 
Second Resolution 
-------------------------------------- 
 
 
2.  (U) On the morning of March 13, Turkish financial markets 
began to reflect increasing concerns with the lack of news 
about a hoped-for second U.S. troop deployment resolution. 
Yields on lira-denominated T-bills inched upwards to 58 
percent compounded (yesterday's close was 57.4 percent); lira 
depreciated slightly to TL 1,625,000 to the dollar; the 
Istanbul Stock Exchange slid another 1 percent (third 
straight day of over 1 percent declines).   Lehman Bros 
analyst for Turkey Ediz told us he is recommending investors 
stay out until the GOT's intentions on the second resolution 
are clearer. 
 
 
Treasury U/S Oztrak:  The Key is Strong Policies, 
Not the U.S. Package 
--------------------------------------------- ---- 
 
 
3.  (SBU) In a March 13 meeting, Treasury U/S Oztrak stressed 
to us that "the key is strong implementation of the economic 
reform program, not the U.S. package.  If the government 
treats the U.S. package as an excuse not to implement 
reforms, then the effect of the U.S. funds will be 
short-lived."  Oztrak's other points: 
 
 
--  He doesn't foresee a problem with debt sustainability 
this year, provided the GOT moves quickly to strongly 
implement the reform program.  The Treasury's financing 
assumptions for 2003 - 45 percent average interest rate on TL 
debt; 87 percent debt roll-over rate; 8 month average 
maturity of TL debt - are currently on track.  This interest 
rate path has March rates at 56 percent, declining to the 
lower 50's and upper 40's in April and May.  The year-end 
interest rate should be 34 percent under this scenario. 
 
 
--  Treasury's financing assumptions do not take into account 
an "event risk" related to Iraq.  However, Oztrak said he has 
been telling the GOT that the prescription for this event 
risk is the same as the general problem: "showing the 
determination and ability to deliver strong policies." 
 
 
--  On timing of enacting the 2003 budget, a prior action for 
the Fourth Review, it is scheduled to be reported out of the 
Budget Commission on March 16.  He expects the final steps 
(floor debate, full parliamentary vote, signing into law by 
President) to take another ten days. 
 
 
--  On timing of other Fourth Review prior actions, Oztrak 
also believes they will be completed by end March.  They are: 
 passage of the direct tax reform law through the budget 
commission (but not full parliamentary vote); adoption of 
TEKEL privatization plan by the Higher Privatization Council; 
Council of Ministry decrees to address redundancies in the 
state enterprise (e.g., eliminate the ban on forcibly 
retiring workers before age 50.) 
 
 
--  The GOT will seek two waivers for the Fourth Review: 
missing the 2002 primary surplus criterion; missing the state 
enterprise job lay-off criterion. 
 
 
--  On the GOT's disagreement with the World Bank over 
delaying direct income support (DIS) payments for farmers in 
2003, Oztrak said the Bank is wrong to hurry this program 
into early implementation before all farmers' land holdings 
had been registered.  (Note: Despite Oztrak's criticism, 
World Bank sources told us they reached agreement with the 
GOT overnight to add back into the budget nearly TL 1 
quadrillion in DIS payments for this year, and instead to 
further cut the public investment budget for state 
enterprises.  To be effective, this agreement must be 
reflected in an amended budget before the bill gets reported 
out of Commission on March 16, per the Bank. End Note.) 
 
 
--  On an impending cabinet reshuffle, Oztrak said he didn't 
know when or who.  MinState Babacan is a "good asset" in the 
Cabinet, since he and PM Gul are among the minority arguing 
for the reform program.  Most ministers don't understand the 
program and see it as IMF and WB imposing conditions on 
Turkey. 
 
 
--  Strong economic policy management in Turkey requires 
three agencies to be related to one minister - Treasury, 
State Planning Organization, and Central Bank (the last, 
while independent, reports to the Council of Ministers via a 
minister).  To ensure coordination, this minister must also 
be senior to the Finance Minister, preferably a PM or strong 
Deputy PM. 
 
 
--  The economy overall is not slowing down.  The January 
industrial production figures show IP has reached the highest 
level of the last five years (in 1997).  But external demand 
is still driving growth, which means provinces with export 
industries are doing well while more remote and rural areas 
are still sluggish. 
PEARSON