US embassy cable - 03ANKARA1965

UNCLAS SECTION 01 OF 02 ANKARA 001965 
 
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 26: U.S. AID PROPOSAL SPARKS 
LIMITED RALLY; IMF REPORTS PROGRESS ON FOURTH REVIEW 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary:  Markets rallied March 26 am with T-bill 
yields dropping six percentage points, on news of the U.S. 
war supplemental for Turkey.  But market sentiment remains 
pessimistic about upcoming debt roll-overs, and the GOT's 
credibility with the markets remains rock bottom.  IMF resrep 
reports overnight progress towards finalizing the LOI, which 
now could be signed by mid-next week.  State Planning Chief 
told us the GOT is serious about moving forward quickly on 
reforms to help restore market confidence.  End Summary. 
 
 
Markets Improve, But Foreigners 
Stay Out for Now 
------------------------------- 
 
 
2.  (SBU) Turkish markets rallied on March 26 am, on further 
news that the USG's supplemental budget request to Congress 
includes a $1 billion grant to Turkey, potentially 
convertible into as much as $8.5 billion in loans. 
 
 
--  Lira-denominated T-bill yields dropped to 64 percent 
compounded (yesterday's close was 70 percent.) 
 
 
--  The lira appreciated nearly 3 percent, trading at TL 
1,690,000 to the dollar at mid-day. 
 
 
--  The Istanbul Stock Exchange 100 index closed up 3.4 
percent in light trading. 
 
 
3.  (SBU) Foreign investors are staying out of Turkish 
markets for now, per local brokers and bond traders.  Some 
market analysts (Bender Securities Golkan, Eurosource's Ucer) 
believe Turkish banks are driving down T-bill yields partly 
for end of quarter "window dressing" purposes, i.e., making 
the asset side of their balance sheets (stuffed with T-bills) 
look temporarily better as of Monday March 31.  We agree that 
in general markets remain unhappy with the GOT, and there is 
ongoing concern with the GOT's ability to comfortably 
roll-over debt in advance of large debt redemption dates 
(April 9, May 21, June 4 and June 18).  We note the managers 
of the top four Turkish banks are in Ankara in talks with 
MinState Babacan to express their concerns.  State Bank Board 
Chairman Ocak told Econ Counselor March 26 that "Istanbul 
remains furious with the GOT;" he believes immediate credible 
steps are needed to repair market sentiment. 
 
 
4.  (SBU) Comment:  Nevertheless, with yesterday's 
announcement on the war supplemental, analysts here see the 
possibility of a good scenario based on two elements: the GOT 
repairing relations with IMF, finishing the Fourth Review and 
continuing to implement reforms; the reduced but still 
existing perception that the USG won't let Turkey's economy 
meltdown during the Iraq war. End Comment. 
 
 
Progress on the IMF Fourth Review 
--------------------------------- 
 
 
5.  (SBU) IMF resrep briefed us this morning on the results 
of his March 25 evening meeting with Turkish Treasury U/S 
Oztrak.  Resrep said if the progress continued, he could 
foresee signing the LOI as early as mid-next week, with a 
possible Board date as early as mid-April. 
 
 
--  Timing.  Oztrak was pushing for signing the LOI this 
Friday, and  IMF staff seeking a Board date before the $3 
billion debt redemption on April 9.  Resrep said this was 
over-optimistic.  If progress continued, the IMF could issue 
a positive statement on the Fourth Review in advance of the 
April 9 redemption. 
 
 
--  Macro-Economic Targets.  Treasury asked the IMF to delay 
revising the program's macro framework until the Fifth 
Review, in order to expedite consideration of the Fourth 
Review.  IMF staff was weighing this request.  Current 
volatilities (market roller coaster, uncertain growth 
projections, possible need to revise inflation targets) all 
argued in favor of postponing until the Fifth Review, he 
noted. But he wouldn't second guess the decision of IMF 
headquarters. 
 
 
--  Issues for Signing the LOI.  If the IMF agrees to 
postpone revision of the macro-economic framework, there are 
still at least two policy issues left to be resolved before 
the LOI can be signed, per Resrep.  First, the GOT must 
identify the sources for the TL 4 quadrillion in spending 
delays announced on March 24.  Oztrak said the plan is to 
pass the budget as planned on March 28, and then within five 
days thereafter to issue a circular to all ministries 
indicating which expenditures must be delayed.  For LOI 
purposes, however, these additional 2003 spending delays or 
blocks must be reflected in the central government primary 
balances annex (there is a bimonthly performance criterion 
for this balance), and the IMF won't agree to delay this 
until the Fifth Review.  Second, the GOT has not yet canceled 
the pending investigations into the BRSA over the June 2002 
intervention of Pamukbank. 
--  Prior Actions for Finishing the Fourth Review.  Resrep 
reported progress also on the four key prior actions.  First, 
the parliament would vote on the 2003 budget on March 28. 
Second, IMF staff have approved the draft Direct Tax Reform 
bill, which is slated to be submitted to the parliament's 
budget and planning commission on March 27 (the prior action 
is passage through this commission).  Third, the GOT is 
preparing two regulatory measures to address over-staffing in 
state enterprises (a Cabinet decree to cancel earlier decrees 
that prevent forcible retirements; a new schedule and 
strategy for eliminating redundant positions by year-end). 
Fourth, the TEKEL privatization plan faces one last obstacle: 
 the Competition Board currently wants to break up the 
tobacco and spirits units into smaller pieces,  while the 
privatization plan is to sell them as entire units to 
maximize buyer interest and GOT revenue from the sale.  The 
World Bank is advising to proceed with the existing plan, and 
amend it later if the Competition Board's final ruling 
requires splitting up the privatization tenders. 
 
 
State Planning Chief Asserts GOT is Serious 
About Reforms 
-------------------------------------------- 
 
 
6.  (SBU) In a March 26 meeting with Econ Counselor, State 
Planning U/S Ahmet Tiktik said the government understood the 
need to take significant steps to bolster market confidence, 
and was beginning to take those steps.  Most important, per 
Tiktik, the government would implement the March 24 
announcement on TL 4 quadrillion of spending delays by 
freezing non-compulsory spending, including public 
investments and certain transfers.  He described this as a 
temporary, emergency measure to build up Treasury's cash 
reserves.  Tiktik said the government would also try to 
accelerate structural reforms, including privatization.   We 
noted the precariousness of Turkey's financial situation and 
the lack of confidence among investors, and stressed the need 
for bold action -- not just rhetoric -- in the coming days. 
We also suggested that the government consider steps outside 
of the IMF program -- such as accelerating telecom 
liberalization -- to demonstrate to investors that it has a 
long-term plan to promote growth and competitiveness, in 
addition to a short-term plan to avoid financial collapse. 
PEARSON