US embassy cable - 03ANKARA3815

UNCLAS SECTION 01 OF 02 ANKARA 003815 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE AND EB 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUANRUD AND BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
USDA FOR FAS FOR EC AND CCC/FSA 
 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, PGOV, TU 
SUBJECT: TURKEY ECONOMIC UPDATE 
 
 
REF: ANKARA 3693 
 
 
1.  (SBU) Summary:  The increasing likelihood of a delay 
beyond end-June in the Fifth Review under Turkey's IMF 
program so far has not dampened the relatively buoyant mood 
in the markets, as the lira continues to trade strongly 
against the dollar.  The Central Bank intervened again this 
week, to the tune of $550 million, while also issuing a 
public statement warning that inflationary pressures persist. 
 That said, the Bank's latest survey shows a decline in 
inflationary expectations coupled with improved expectations 
for growth.   Amid anecdotal evidence of a pick-up in demand, 
the latest figures for industrial production indicate 
continued, albeit modest, growth.  The Treasury this week 
successfully placed $760 million in Euro-denominated bonds, 
while raising another $1.2 billion via the sale of 
lira-denominated t-bills.  The government launched tenders 
for two key privatizations -- involving oil refiner Tupras 
and spirits/cigarette producer Tekel -- but is hinting it 
might not bless the results of the just-concluded tender for 
the privatization of petrochemical company Petkim.  End 
Summary. 
 
 
2.  (SBU) The GOT continues to move slowly on meeting the 
conditions for the Fifth Review under its IMF-supported 
economic program.  Parliamentary Budget Committee Chairman 
Sait Acba told us June 9 that Parliament was still debating a 
proposal to put key pending legislation, including on 
strengthening social security institutions, on to the Turkish 
equivalent of "fast-track."  Treasury officials advised June 
12 that they hope Parliament will vote on this procedural 
question on June 19, with the vote on passing the legislation 
itself coming sometime later.  IMF ResRep told us there has 
been little progress on the fiscal side.  On the one hand, 
the government keeps coming up with new, populist spending 
ideas that would increase the fiscal gap, including a 50 
percent cut in electricity prices for exporters, a reduction 
in the special consumption tax on cars, and a possible 
reduction in the VAT on certin foods.  On the other hand, at 
the political level, it has so far been unwilling to approve 
serious measures to reduce the gap.  Per ResRep, Minister 
Babacan and Treasury U/S Canakci presented the bureaucracy's 
proposed fiscal measures to Prime Minister Erdogan on June 8; 
he apparently was unenthusiastic, particularly about raising 
electricity prices.  Instead, the government is coming up 
with measures -- such as extending the partial spending 
freeze and offering a "discount" to those signed up for the 
tax amnesty proposal if they pay all their arrears up front 
-- that would bring short-term fiscal benefits but would not 
address the fundamental problem.  With Babacan heading off to 
Malaysia and Pakistan today (with the Prime Minister) for 
five days (after which the Minister will go to London and 
Jordan), IMF ResRep does not expect rapid closure on the LOI. 
 
 
 
 
3.  (SBU) Markets so far have not reacted significantly to 
the increasing prospects of a delay, although t-bill yields 
have leveled off at the 48-49 percent range.  Treasury this 
week successfully placed $760 million in Euro-denominated 
bonds (yielding 9.7 percent), while raising another $1.2 
billion via the sale of 13-month lira-denominated bills with 
a 48.4 percent yield.  The lira's continuing strength 
prompted the Central Bank to intervene again on June 9, 
buying some $550 million.  The intervention pushed the lira 
back from a high of TL 1.409 million/dollar to TL 1.445 
million/dollar, but it quickly strengthened again and was 
trading this morning at TL 1.423 million/dollar.  Monetary 
Policy Council member Professor Guven Sak told us June 11 
that officials remain puzzled at the lira's strength, but 
believe it is mostly the result of reverse currency 
substitution by local residents.  Other Central Bank 
officials have told us that, while the main reason for the 
CB's intervention was to temper excessive volatility, the 
Bank also saw an opportunity to build its dollar reserves 
while ensuring sufficient lira liquidity in the market. 
 
 
4.  (SBU)  Also on June 9, the Central Bank issued a 
statement warning of continuing inflationary pressures:  "The 
increase in May of public-sector prices and signals that 
domestic demand is increasing are seen as risk elements that 
could limit inflation's fall."  Analysts read the statement 
as indicating the Bank would not further reduce short-term 
interest rates anytime soon, despite the lira's strength. The 
next day, however, the Bank announced that its latest survey 
indicated that expectations for year-end inflation had fallen 
from 26 to 25.6 percent, against a CPI target of 20 percent. 
 
 
5.  (SBU) The survey also revealed that expectations for 2003 
GNP growth had risen from 4.1 to 4.4 percent.  This fits with 
anecdotal information we have been hearing from business 
contacts, who detect a small pick-up in domestic demand. 
April industrial production figures, up 4.2 percent over 
April 2002, lend further support to this view.  The press 
attributes much of the growth to booming exports -- up 30.6 
percent through the first four months of the year -- but 
economists point out that imports are rising even faster (up 
32.3 percent), so in fact foreign trade is not spurring 
growth. Exports are, however, boosting confidence, at least 
in some sectors (the auto sector's exports rose nearly 50 
percent through April). 
 
 
6.  (SBU) Unfortunately for Turkey, the sharp rise in foreign 
trade has not been matched by an increase in foreign direct 
investment, which is -- at best -- trickling in.  Turkish 
Treasury officials have been hoping that implementation of 
long-delayed privatization plans might boost FDI (as well as 
provide them with much-needed revenue), and the government 
finally is beginning to move on this front.  The 
Privatization Administration announced that it had received a 
best bid of $605 million for a controlling stake in 
petrochemicals firm Petkim.  Shortly thereafter, it launched 
tenders for oil refining monopoloy Tupras and tobacco/spirts 
giant Tekel.  The latter, in particular, is expected to 
attract substantial foreign interest. 
 
 
7.  (SBU) The Petkim tender has sparked controversy.  First, 
Prime Minister Erdogan, opposition CHP leader Deniz Baykal, 
and a host of others have complained that the $605 million 
leading bid was far below Petkim's "market" value, and have 
questioned whether the State should carry out the sale.  The 
Prime Minister warned that the Higher Privatization Council, 
which must give final approval to the sale, would look into 
this question.  The other controversial aspect was that the 
winning bid was made by Standart Kimya, owned by the Uzan 
family of Motorola (and Genc Party) fame.  (Comment:  Unless 
there is evidence of monkey business in the bidding process, 
concerns about the size of the highest bid are unwarranted, 
given that the priority here is to get these companies into 
the private sector.  However, given the Uzan's track record, 
there is reason to be concerned about the family taking 
control of another major enterprise.  End Comment.) 
 
 
PEARSON