US embassy cable - 03ANKARA2695

UNCLAS SECTION 01 OF 02 ANKARA 002695 
 
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 25: POSITIVE NEWS ON 
TREASURY APPOINTMENT; CENTRAL BANK CUTS SHORT-TERM RATES 
 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
1.  (SBU) Summary:  Some positive news came at the end of a 
relatively quiet week in Turkish markets:  the GOT announced 
a well-regarded macro-economist bureaucrat, Ibrahim Canakci, 
to replace Faik Oztrak at Treasury.  The Central Bank 
announced a 3 percentage point cut in its short-term 
borrowing rate, which led immediately to a one percentage 
point decline in T-bill yields.  Market sentiment at end 
April is much improved from earlier in the month, but 
investors both local and foreign remain wary of AK's 
commitment to the reform program.  Further improvements on 
interest rates (below the low 50's) are likely only to follow 
tangible progress on reforms, as measured by the next IMF 
staff mission, now scheduled to start May 21.  End Summary. 
 
 
Markets Quiet, T-Bill Rates Decline 
----------------------------------- 
 
 
2.  (U) On April 25, yields on the lira T-bills declined 
about one percentage point to 55 percent compounded, 
immediately following the Central Bank's announcement of a 
rate cut (see below).  T-bill yields, trading all week at the 
56-57 percent level, are now expected to decline to the low 
50's.  The lira was flat, trading at TL 1,595,000 to the 
dollar while the Istanbul Stock Exchange 100 index was up 1.3 
percent. 
 
 
Central Bank Cuts Key 
Lira Borrowing Rate 
--------------------- 
 
 
3.  (SBU) At OOB April 25, the Central Bank announced a cut 
in its short-term borrowing rates:  the key lira borrowing 
rate, one week maturity, went from 44 to 41 percent simple 
(or to about 51.5 percent compounded). 
 
 
4.  (SBU) Comment: The markets exerted some pressure for this 
rate cut and responded immediately by lowering T-bill yields. 
 PM Erdogan also predicted interest rates declines in his 
weekly meeting with AK parliamentarians April 24.   In an 
April 24 meeting with Central Bank Governor Serdengecti on 
other topics (Iraqi assets), the Governor told us such 
political pressure didn't work on him - former MinState 
Dervis's many attempts to dictate interest rate policy had 
just slowed down the Central Bank decision making process. 
However, he continued, the outlook on inflation was turning 
positive.  Serdengecti spoke about the need for an 
inflation-targeting Central Bank to help shape expectations 
through interest rate policy, not just react to market 
perceptions.  Today's decision may be viewed by some analysts 
as premature (given continuing strong concerns in the 
market), but it may also help bring down inflationary 
expectations.  End Comment. 
 
 
New Treasury Undersecretary A Good Choice 
----------------------------------------- 
 
 
5.  (U) On April 26, MinState Ali Babacan announced the 
appointment of Ibrahim Canakci as Treasury Undersecretary, 
replacing Faik Oztrak.  (Note:  "Undersecretary" in case of 
Treasury and some other GOT agencies is the head of the 
agency.)  Canakci, 41 years old, worked at the State Planning 
Organization from 1986-2000, rising to head of the Economic 
Forecasting Department.  While at SPO, he earned a Masters in 
Economics from Michigan State University.  In 2000, he moved 
to the Bank Regulatory and Supervision Agency, first to run 
the research department, later to be the Deputy Chairman. 
he is married, with two children and speaks fluent English. 
 
 
6. (SBU)  Comment:  The Treasury Undersecretary runs the 
GOT's main economic policy agency and serves as the 
day-to-day contact with the IMF and World Bank.  Canakci, 
well known to the Embassy since his SPO days, is an excellent 
choice; markets are likely to be relieved given the other, 
less credible names bandied about.  He has a strong 
macro-economic background (and worked for Faik Oztrak when 
they both were at SPO), understands and supports the reform 
program, and furthermore has a good background on banking 
sector issues.  Canakci is religiously observant (observes 
the dawn-dusk Ramadan fast), though he is not an AK partisan 
and has independent views on the party's economic policies. 
His low-key, mild-mannered approach may well help in 
educating AK politicians on economic reforms in a 
non-confrontational way. 
PEARSON