US embassy cable - 03ANKARA1810

UNCLAS ANKARA 001810 
 
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: TURKISH ECONOMY MARCH 21: STEADY DETERIORATION 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
Markets Start to Re-focus on IMF Program, 
Await GOT Action 
------------------------------------------ 
 
 
1.  (SBU) On the morning of March 21, foreign investors were 
selling both Turkish stocks and Turkish Eurobonds.  Lehman 
Bros Turkey analyst told us rumors of a Moody's downgrade of 
the Turkish sovereign debt is motivating some Eurobond 
selling. 
 
 
--  The lira depreciated one percent in the morning to TL 1, 
720,000 to the dollar. 
--  The benchmark lira T-bill is currently trading at 68 
percent compounded (up from 66.5 percent at yesterday's 
close). 
--  The Turkish 30-year maturity Eurobond is trading at about 
1000 basis points wide of U.S. Treasuries (from 815 basis 
points on March 19). 
-- The Istanbul Stock Exchange 100 index closed down 6 
percent in morning trading. 
 
 
2.  (SBU) Comment:  With foreign investors increasingly 
selling out of Turkish stocks and Eurbonds (they are already 
out of the local T-bill market), it will be hard for the GOT 
to complain about "hot money" speculators (they'll wish they 
had some). 
Local investors now fully control the markets.  According to 
bond and stock traders, the local investors were not happy to 
hear the morning TV news that the GOT is still negotiating 
with the U.S. on overflight rights (i.e., further reducing 
prospects of any U.S. aid).  Locals are re-focusing their 
hopes for an optimistic scenario based now on two elements: 
a short war in Iraq (with smaller tourism and trade effects 
on Turkey);  and quick GOT action to complete the Fourth IMF 
Review. 
 
 
Budget Update 
------------- 
 
 
3.  (SBU) A key prior action under the IMF Fourth Review is 
passage of the full-year 2003 budget, which must in any case 
be adopted by April 1.  According to Finance Ministry Deputy 
DG Ahmet Kesik, the current plan is for parliamentary floor 
debate to begin on Sunday, March 23 and finish five days 
later on Friday, March 28.  President Sezer will then have 
until Monday, March 31 to ratify the budget law (though the 
Constitution gives the President up to 10 days to take action 
on legislation). 
 
 
4.  (SBU) Kesik told us there is one potential problem for 
the 2003 budget.  Two new revenue raising measures - on motor 
vehicles and real estate - are contained in separate bills 
stuck in the parliament's Budget and Planning Commission. 
Parliament must pass those bills quickly as well, to avoid 
exacerbating existing serious concerns on budget financing. 
Kesik said the GOT plans to limit pass the bills out of the 
Budget and Planning Commission on March 28. 
 
 
Rising Inflationary Expectations 
-------------------------------- 
 
 
5.  (U) The Central Bank publishes twice monthly a survey of 
expectations regarding forward-looking inflation.  On March 
21, the Central Bank published its second survey taken in 
March.  It shows a steady increase in average expectations 
for year-end Consumer Price Index inflation.  In February the 
expectations remained at 25 percent, while now they are 27 
percent (the GOT target is 20 percent). 
PEARSON