US embassy cable - 03ANKARA1905

UNCLAS SECTION 01 OF 02 ANKARA 001905 
 
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 24: ERDOGAN SPEECH DOESN'T 
STEM MARKET DOWNTURN 
 
 
REF: FBIS WAX20030323000248 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1. (SBU) Summary:  On Sunday evening March 23, PM Erdogan 
addressed the nation committing the new GOT to continue the 
economic reform program and to take additional reform 
measures if needed.  But markets weren't buying, and yields 
on T-bills rose 5.5 percentage points in morning trading 
March 24.  Bankers told us they are concerned with a steady 
outflow of dollar deposits, not large amounts and not panic 
withdrawals, but still a cause of concern.  At 1:30 pm local 
time, GOT spokesman Cicek made a press statement on further 
reform measures adopted by the Cabinet.  End Summary. 
 
 
Markets Weaken Sharply 
----------------------- 
 
 
2.  (U) In morning trading March 24, the lira depreciated 
about one percent to TL 1,748,000 and the Istanbul Stock 
Exchange dropped 3 percent.  Yields on the benchmark 
lira-denominated T-bill rose to 73.5 percent compounded. 
Trading volumes were low in all markets, as foreign investors 
had largely exited the markets last week. 
 
 
PM Erdogan Commits to Continue Reforms 
-------------------------------------- 
 
 
3. (U) In a televised address to the nation at 9:00 pm Sunday 
March 23, PM Erdogan committed the new GOT to continuing the 
reform program and to take additional measures, if needed. 
The speech was mostly about calming the public on the effects 
of the Iraq war in general (see reftel for full text.)   In 
the economic portion, he said he expects to finish the IMF 
Fourth Review in the first half of April, mentioned the need 
to reduce public sector employment, and warned ministers 
against freelancing statements or actions.  The economic 
portion of the speech follows: 
 
 
--  "Our government has the political will to proceed with 
the existing program carefully and meticulously.  We will not 
allow the economic program to collapse by giving as an excuse 
the difficult conditions.  I believe we have to strengthen 
our fiscal and economic policies." 
 
 
--  "The 2003 budget will provide a primary surplus of 6.5 
percent of GNP.  Measures to prevent waste in the social 
security and health care systems have been undertaken. In the 
past two months, the primary surplus targets have been met 
and tax revenue was TL 580 trillion more than expected.  The 
arrangements to eliminate redundant employment (in the public 
sector) are being dealt with urgently and will be resolved by 
the year-end." 
 
 
--  "We expect the Fourth Review to be concluded in the first 
half of April....I have given the necessary instructions to 
all the ministers and civil servants.  No one should take 
into consideration any statements or behavior which are 
outside the program." 
 
 
4.  (SBU)  IMF resrep in Ankara told Reuters March 24 am that 
"the IMF welcomes the commitments to economic policies made 
by Prime Minister Erdogan last night, and looks forward to 
working with the Government to finalize the letter of intent 
for the Fourth Review."  Resrep told us Erdogan had dropped 
specific policy measures contained in an earlier Treasury 
draft of the economic portion of the speech. Nevertheless, 
resrep saw Erdogan's speech as an important first commitment 
by the new GOT to the IMF program.  He said he understood 
Treasury was seeking to get full GOT approval for further 
fiscal measures, possibly as early as the March 24 pm Council 
of Ministers meeting. 
 
 
5.  (SBU) Erdogan's speech is partly a reaction to a tough 
message from IMF headquarters delivered by resrep to Treasury 
U/S Oztrak on March 21.  This message came after recent 
negative statements and actions by GOT ministers.  On March 
21, Energy Minister Guler announced he was seeking Cabinet 
approval to lower electricity prices by 1.5 percent, and 
would also reschedule outstanding electricity payment 
arrearages amounting to TL 2.4 quadrillion lira.  (This would 
contravene an LOI commitment not to reschedule any public 
sector receivables.)  Also on March 21, the Public Works 
Minister announced he was moving forward on amending the 
Public Procurement Law (contravenes a commitment in the draft 
LOI).   World Bank economist Jim Parks told us March 24 that 
Treasury told the Bank it would seek to kill both of these 
initiatives before they got before the Cabinet. 
 
 
6.  (U) At 1;45 pm local time, GOT spokesman (and Justice 
Minister) Cicek told reporters after a Cabinet meeting that 
the draft 2003 budget would include an additional $2.3 
billion of spending cuts and would obtain approval for the 
privatization of TEKEL. 
 
 
Markets Not Impressed; 
Concern with Dollar Outflow 
--------------------------- 
 
 
7.  (SBU)  Erdogan's speech did not lift the general 
pessimistic mood prevailing in the markets.  Credit Suisse's 
Istanbul analyst Berna Bayazitoglu wrote on March 24 am, 
"henceforth, actions will be far more important than words." 
Zafer Kurtul, General manager of Turkey's largest private 
sector bank, Akbank, told us "Erdogan said nothing new." 
 
 
7.  (SBU) Kurtul said the major concern in the banks is with 
the outflow of foreign currency deposits.  He said about 55 
percent of deposits in Turkish banks are currently 
F/X-denominated.  Akbank has about $6.5 billion in F/X 
deposits and about 4 quadrillion ($2.5 billion) in lira 
deposits.  He estimated about $20 million outflow of F/X 
deposits from Akbank in the past two days, and he surmised 
that in Turkey's less solid medium-size banks the outflow 
would be larger.  F/X outflow takes the form of bank 
withdrawals in cash which stay in Turkey and transfers of 
deposits to foreign banks overseas.  Kurtul added that this 
dollar outflow would not directly affect the GOT's ability to 
borrow from the banks in lira terms, since the banks' lira 
funding costs are not increasing at the moment.  Turkish 
banks fund lira debt purchases currently from two sources, 
the overnight money markets and lira deposits, and interest 
rates in both markets are currently stable.  But he noted 
that the GOT has a major debt redemption in June in F/X 
terms, which would be affected by the F/X outflow.  For now, 
he predicted that Turkish banks will raise their F/X deposit 
rates to try to stem the F/X outflow. 
 
 
8.  (U) The worried tone of some press commentary may be 
supporting the beginnings of outflow of dollars from the 
banks.  For instance, Star newspaper (tabloid-style, owned by 
Motorola deadbeat Cem Uzan) of March 23 carried an editorial 
entitled, "Stay in cash, Keep your money in a Safe Place," by 
Salih Neftci, a widely read columnist.  The column warns 
readers that Turkey is headed towards bankruptcy and advises 
to pull money out of the banks.  As of March 24 mid-day, 
there is no sign of panic in the public or any runs on banks. 
PEARSON