US embassy cable - 03ANKARA2233

UNCLAS SECTION 01 OF 02 ANKARA 002233 
 
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 APRIL 7: FIRST T-BILL AUCTION OF 
WEEK GOES WELL 
 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
1.  (SBU) Summary:  On April 7, Treasury raised $844 million 
in the first of three T-bill auctions scheduled for April 
7-8.  Treasury's target is to raise a total of $3 billion 
ahead of $3.2 billion in debt service payments on April 9. 
Today's auction results came in at market expectations; the 
major focus will be on the one-year bond to be auctioned 
tomorrow.  Markets expect rates to remain in the 62/63 
percent range in that auction, declining to about 60 percent 
in the secondary market.   MinState Babacan's April 6 
announcement that the LOI had been signed, and the IMF 
announcement of an April 18 board date, were well received. 
Markets also welcomed the news that the Fourth Review 
disbursement had been reduced, and that more IMF reviews had 
been added, indicating to commentators here that the IMF 
shares their view that this government needs the extra 
supervision.  End Summary. 
 
 
Markets Agree with Revised IMF 
Disbursement Schedule 
------------------------------- 
 
 
2.  (U) On April 7 am, Turkish markets were pleased with 
MinState's April 6 announcement that the IMF letter of intent 
had been signed, and with the IMF announcement of an April 18 
board date for the Fourth Review.   The lira appreciated 
slightly to TL 1,650,000 (from TL 1,656,000 at Friday's 
close); T-bill yields were slightly lower at 62.5 percent 
(from 63 percent on Friday); the Istanbul Stock Exchange was 
up 2 percent in morning trading. 
 
 
3.  (SBU) Markets greeted news of the revised IMF 
disbursement schedule, which reduced the Fourth Review 
tranche from $1.6 billion to about $660 million, and which 
added reviews during 2003 and 2004 (details at para 8.)   As 
Yapi Kredi Treasurer Imece told us, "The IMF confirms the 
market's view that there's no reason to trust this 
government." Hurriyet columnist Erdal Saglam wrote in his 
April 7 column that the IMF had tried to reduce the Fourth 
Review to $300 million, but raised it at GOT insistence. 
Saglam's column also applauds the IMF move to increase the 
frequency of reviews. 
 
 
Successful Four-Month T-bill Auction 
------------------------------------- 
 
 
4.  (U) On April 7, Turkish Treasury raised TL 1.393 
quadrillion ($844 million) by auctioning a four-month T-bill. 
 The interest rate was  56.5 percent in annual, compounded 
terms. 
 
 
5.  (U) Today's auction is the first of three T-bill auctions 
this week. On Tuesday April 8, Treasury will auction two 
longer dated papers:  a six-month bill (October 8 maturity); 
and a one-year bond (April 28, 2004 maturity).  Treasury's 
target is to raise TL 5 quadrillion ($3 billion) in these 
three auctions, per Treasury's Volkan Taskin, ahead of 
Wednesday's TL 5.3 quadrillion ($3.2 billion) in debt service. 
 
 
6.  (SBU) According to banking sector contacts, Turkish banks 
bought today's four-month bill largely for their retail 
customers, and will look at tomorrow's auctions, especially 
the one-year bond, for their own investment portfolios. 
Interest rates on the one-year bond are expected to remain 
62-63 percent at the auction, but then declining to the 60 
percent range in the secondary market.  Treasury offered the 
six-month bill, trying to limit the duration of the current 
relatively high rates, but investors told us they expect 
little demand for that paper. 
 
 
Highlights of the April 6 Babacan Press Conference 
--------------------------------------------- ----- 
 
 
7.  (U) State Minister Babacan held a televised press 
conference on Sunday afternoon April 6 to announce signing of 
the IMF letter of intent, and World Bank letters of 
commitment (extending the Bank's Economic Reform and 
Programmatic Public and Finance Sector Adjustment Loans).  TV 
networks only partially covered his conference, cutting away 
to a meeting of PM Erdogan in Istanbul.  Highlights from his 
statement, as posted on Treasury's website in Turkish, 
follow.  (Full text will be e-mailed to Washington agencies.) 
 
 
--  The 2003 budget will meet the 6.5 percent of GNP primary 
surplus target, and we will implement the budget with 
decisiveness.  In addition, in order to ameliorate the impact 
on Turkey of the continuing war in Iraq, the Government has 
taken measures to generate TL 4 quadrillion in cash, which 
amounts to 1.2 percent of GNP. 
 
 
--  The primary surplus realized at year-end 2002 was 4 
percent of GNP because of loose fiscal policies in the second 
half of the year.   This required taking additional 
tightening measures to meet the 6.5 percent target in 2003. 
All measures add to TL 15.8 quadrillion.  The primary surplus 
realizations in the first two months exceeded our targets. 
 
 
--  The primary surplus target is important for increasing 
confidence in the Government's reform program, and it also 
helps to decrease the net public sector debt to GNP ratio. 
This ratio has declined from 92 percent at year-end 2001 to 
79.6 percent at year-end 2002. 
 
 
--  State Economic Enterprises - Excess Employment: 
Originally an excess of 45,800 positions was identified in 
the state economic enterprises.  As of January 2003, this 
excess was decreased by 20,718 through retirement.  We will 
fully resolve this problem by year-end. A legal arrangement 
to strengthen SEE management will be implemented before 
end-June this year. 
 
 
--  Privatization:  The Council of Ministers will adopt a 
privatization plan for Turk Telekom by end April.  The High 
Privatization Council will adopt a privatization calendar for 
the sugar refineries by end June.  Work continues to 
liberalize the energy sector, leading to free competition 
through market mechanisms. 
 
 
--  State Banks.  Ziraat and Halk will not make any subsidies 
without a budget allocation. 
 
 
--  Improving the Business Environment:  A draft law on 
direct foreign investment, currently in the parliament, is 
expected to be adopted by end April. 
 
 
8.  (U) Local press also released details of the revised IMF 
Stand-By Disbursement schedule.   Following the $660 million 
in the Fourth Review (board date of April 18), the IMF is 
planning seven further reviews over the next 20 months, each 
with about $500 million.  The Fifth and Sixth Reviews will be 
bi-monthly (staff missions in late May and late July), to be 
followed by quarterly reviews starting with the Seventh 
(staff mission tentatively in late October). 
 
 
Uzans, but No Foreigners, Bid on PETKIM 
--------------------------------------- 
 
 
9.  (U) On April 4, the Privatization Administration 
announced that five firms had bid on PETKIM, the state 
petrochemical monopoly that is the first large privatization 
of the year.  There were no foreign bidders, despite PA hopes 
for bids from Russian oil and gas giants Lukoil and Gazprom. 
Among the five bidders were two prominent Turkish exporters - 
Zorlu (Vestel TV screens) and Sanko (textiles), one state 
bank (Vakif), and two relatively petrochemical traders 
Standard Chemical and Chemorbis.  Standard Chemical is owned 
by the Uzan family, of Motorola infamy. 
PEARSON