US embassy cable - 03ANKARA2039

UNCLAS SECTION 01 OF 02 ANKARA 002039 
 
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 28: CONTINUING PROBLEMATIC 
GOT ACTIONS 
 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary: Markets remained quiet on March 28 am, 
with T-bill yields weakening slightly to 65.7 percent.  Two 
economic policy developments in the past day, however, 
indicate that AK continues to take actions that won't improve 
its credibility gap with the markets.  First, according to 
press reports, AK deputies introduced a floor amendment to 
the 2003 budget bill which excludes energy contracts from the 
new Public Procurement Law.  Second, the Government appointed 
a new state bank board, replacing experienced and respected 
bankers with AK friends from the tiny and less reputable 
Islamic banks.  End Summary. 
 
 
Markets Weaken Slightly 
----------------------- 
 
 
2.  (U) In morning trading March 28, yields on lira T-bills 
rose one percentage point to 65.7 percent compounded.  The 
lira was stable at TL 1,720,000.  The Istanbul Stock Exchange 
100 index close down 1.3 percent.  Analysts expect markets to 
remain quiet through Monday, March 31, the end of the first 
quarter, when publicly traded banks will file reports and 
want to limit the losses from their T-bill holdings. 
Thereafter, however, markets expect T-bill yields to rise 
ahead of the large April 8 T-bill auction. 
 
 
3.  (SBU)  T-bill trader Gumisdis of JP Morgan pointed us to 
three key areas uncertainty:  "IMF Review uncertain, U.S. aid 
uncertain, Northern Iraq situation uncertain.  It's 
impossible to predict where markets will be on April 8 
without the Government providing clarity on these three 
areas." 
 
 
Surprise Amendment to the 2003 Budget 
------------------------------------- 
 
 
4.  (U) According to press reports March 28, AKP 
parliamentary deputies submitted a floor amendment to the 
2003 budget bill.  The budget is now slated to be voted (and 
passed) on Saturday, March 29.  The amendment reportedly says 
state enterprises in the energy sector are excluded from the 
provisions of the Public Procurement Law which went into 
effect January 1, 2003. 
 
 
5.  (SBU) Comment:  The Public Procurement Law is a key 
reform under both the IMF and EU Accession programs, and the 
proposed amendment looks like bad news.  It appears to breach 
a key commitment in the draft LOI, para 21:  "We will 
steadfastly implement the new Public Procurement Law....If 
improvements are deemed necessary, we will consult with World 
Bank and IMF staff on possible amendments."  In separate 
conversations March 28, Finance Ministry DDG for the Budget 
Kesik and World Bank economist Arslan told us of an informal 
GOT commitment to the IFIs to not change the Public 
Procurement for one year, i.e., until next January.  AK 
members have complained about this law, which requires open 
bidding procedures and makes it more difficult to simply 
award contracts to friends. End Comment. 
 
 
New State Bank Board - Not Confidence Enhancing 
--------------------------------------------- -- 
 
 
6.  (U) On March 27, the Government replaced the entire 
11-person board of the two giant state banks (Ziraat and 
Halk), at the state banks' regularly scheduled annual 
meeting.  Markets expected AKP-related figures to be 
appointed.  However, the names appointed to run the two 
largest deposit-taking banks in Turkey are raising questions. 
 The new Chairman of the State Bank Board, replacing the 
respected Istanbul banker Safa Ocak, is Zeki Sayin - a 
"right-hand man" of PM Erdogan when Erdogan served as mayor 
of Istanbul. Sayin managed the Istanbul muncipality-owned 
supermarket chain Belpa, and later served on the board of the 
Islamic bank Family Finans.  The new GM of Ziraat Bank, Can 
Caglar, was formerly GM of Family Finans and assistant GM of 
Egebank (the latter went bankrupt in the year 2000 amidst 
criminal embezzlement charges and some prison sentences.) 
The new GM of Halk Bank  is the 35-year old Tevik Bilgin, a 
sworn bank auditor. 
 
 
7.  (SBU) Comment: Islamic banks (which give depositors a 
share of equity returns rather than interest) represent less 
than five percent of banking assets in Turkey, and have a 
reputation for poor management.   Many former Islamic bank 
managers (e.g., MinFinance Unakitan and MinIndustry Coskun) 
have ended up in GOT leadership positions.  Putting AKP 
friends with questionable banking credentials in charge of 
the two state banks at this sensitive time, however, is not 
helping the pessimistic mood in the markets.  Market 
expectations are that the new managers will attempt, despite 
legal reforms, to revert to the old ways of using the state 
banks as funnels for providing off-budget subsidies for 
populist and political reasons. 
PEARSON