US embassy cable - 03ANKARA2950

UNCLAS SECTION 01 OF 02 ANKARA 002950 
 
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 MAY 6: GOOD NEWS ON INFLATION AND 
T-BILL AUCTIONS; BAD NEWS ON INVESTMENT CLIMATE 
 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
1.  (SBU) Summary: On May 6, Turkish markets continued the 
recent positive trend.  Treasury raised TL 4.9 quadrillion 
(nearly $3 billion) in three T-bill auctions, achieving a 
debt roll-over rate this week of over 100 percent.  April 
inflation data was under market expectations, with CPI at 2.1 
percent.  The Central Bank began its daily auctions of $20 
million in dollars to strong demand; this will help build 
CenBank reserves.   As usual in Turkey, however, the news is 
mixed, and the bad news of late is on the structural reform 
side.  Turkey's largest foreign investor, Telecom Italia with 
an estimated $3.5 billion stake, announced that it may pull 
out of Turkey if it can't solve regulatory disputes with the 
GOT.  The GOT should take this threat seriously, especially 
given the absence of large foreign investor interest.  End 
Summary. 
 
 
Markets Relaxing for Summer 
--------------------------- 
 
 
2.  (U) Good Treasury Auctions.  Turkish Treasury raised TL 
4.9 quadrillion (nearly $3 billion) in three T-bill auctions 
this week, in advance of TL 4.5 quadrillion in debt service 
due May 7.  With a debt roll-over rate of over 100 percent in 
these auctions, Treasury debt manager Volkan Taskin told us 
"so far a good week."  Interest rates in the auctions, at 
53-54 percent compounded, were a bit high, but Taskin 
explained that the Turkish banks held the rates high for the 
auctions.  He expects rates to come down after tomorrow's 
redemptions.  The banks will then make money on selling the 
T-bills to clients. 
 
 
3.  Strong Demand in Central Bank's Dollar Auction.  On May 
6, the Central Bank held the first of its planned daily 
auction of $20 million in dollars, to strong demand.  Total 
bids were $130 million, per the Central Bank.  Central Banker 
Ilker Domac told us this intervention in the f/x market is a 
good way of building up foreign exchange reserves gradually, 
in a rule-based way.  He noted that Mexico's Central Bank has 
been doing this for a while.  He claimed the Central Bank is 
not doing the auctions to affect the foreign exchange rate. 
Though exporters always complain, he noted, in fact export 
performance so far this year has been good. 
 
 
4. Good April Inflation Numbers:  April inflation came in 
slightly under market expectations, boosting market hopes for 
another Central Bank rate cut which would in turn boost 
T-bill values.  CPI inflation was 2.1 percent; WPI was 1.8 
percent.  However, cumulative four-month inflation is now 14 
percent WPI (year-end target of 17 percent) and 10 percent 
CPI (year-end target 20 percent).  Central Banker Domac 
dismissed the talk here of another rate cut as "another ploy 
by banks to make money."  Asked if the Central Bank would 
seek to revise the inflation targets in the IMF Fifth Review, 
Domac said he would advise against it.  The inflation target 
is CPI not WPI, and CPI is still in reach, he said.  "If we 
miss the target, we'll explain it. But it cannot be a moving 
target for credibility reasons." 
 
 
Turkey's Largest Foreign Investor Threatens to Pull Out 
--------------------------------------------- ---------- 
 
 
5.  (SBU) As always in Turkey, the news is mixed.  Though 
sentiment in the financial markets is improving, there are 
troubling signs on the critical issue of improving the 
investment climate.  With only $540 million in net foreign 
direct investment inflows in 2002, Turkey needs to attract 
more long-term capital to achieve macro-economic stability . 
However on May 6, Turkey's single largest foreign investor - 
Telecom Italia (TIM) - announced that it may pull out of 
Turkey in several months.  Telecom Italia invested $2.5 
billion in a cellphone license joint venture in Turkey in 
2000/2001, and then proceeded to invest another $1 billion in 
infrastructure.   TIM says the GOT has not honored the terms 
of its license agreement, including granting roaming rights, 
and alleges unfair competition favoring the other two wholly 
Turkish owned cellphone operators (Cukurova Holding's 
Turkcell and the Uzan family's Telsim).  Comment:  TIM's 
threat may be a negotiating ploy, but the GOT should 
nevertheless take it seriously, given the absence of other 
investor interest in Turkey. End Comment. 
PEARSON