US embassy cable - 03ANKARA4074

UNCLAS SECTION 01 OF 02 ANKARA 004074 
 
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, ECON, EINV, TU 
SUBJECT: TURKISH MARKETS SOFTEN AS IMF CONCERNS RE-EMERGE 
 
 
REF: ANKARA 3916 
 
 
 Sensitive but unclassified.  Not for internet distribution. 
 
 
1.  (SBU) Summary: Turkish markets have softened in recent 
days on worries about delays in completion of the IMF 
program's fifth review.  Two leading brokerages (JPMorgan and 
Merrill Lynch) reduced their exposure to Turkish assets in 
their models, citing IMF worries.  Some progress has been 
registered since IMF Resident Representative Odd Per Brekk 
urged government action to complete the structural benchmarks 
required under the review, but a number of measures remain 
outstanding, and new proposals to lower interest rates 
charged by state banks to small businesses and to hire 
additional civil servants for the Religious Affairs 
Directorate have sparked concern.  End Summary. 
 
 
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WAIT AND SEE 
------------ 
 
 
2. (SBU) After an extended rally in recent months, Turkish 
markets have weakened in recent days on worries about 
government delays in implementing the fifth review, generally 
regarded as one of the easier ones facing the government. 
While GOT spokesmen, including State Minister Babacan, have 
reiterated the government's commitment to the program and 
have argued that all is on track, markets have paid more 
attention to IMF Resident Representative Odd Per Brekk's 
comments in Antalya last weekend that the government needed 
to "address a number of issues to ensure continuity in the 
reform effort."  Concerns about the delays led both JP Morgan 
and Merrill Lynch to reduce their exposure to Turkish assets 
last week to underweight and neutral respectively.  Central 
Bank market department officials tell us that the recent 
market declines stem from foreign investors' concerns about 
slippage in the IMF program, and their desire to cash in on 
the high profits they have received recently and avoid giving 
back any of those gains.  Those liquidated positions did not 
come back into the market but instead were converted to 
foreign exchange, causing the lira's recent decline, despite 
a continuing dollar inflow to finance tax payments. JP 
Morgan's Sinan Gumusdis told us that markets are now pricing 
in delays in the review, and are anticipating that the fifth 
and the sixth reviews will be combined, delaying release of 
further tranches of IMF money (and U.S. assistance) until 
August. 
 
 
3. (U) The rush to the exits has not been a stampede, 
however: declines to date have been modest and controlled. 
The stock market closed on June 25 at 10,740, down roughly 
four percent from its highs last week, while interest rates 
on benchmark July 2004 government debt edged up to just over 
51.23 percent (higher than they were before the Central 
Bank's latest rate cut).  The Turkish lira has fallen from 
1.439 million to the dollar from its peak of 1.415 million. 
With no major auctions or redemptions this week, the market 
is largely in a holding pattern, in anticipation of next 
week's TL 5 quadrillion Treasury redemption and the auctions 
that will finance it. 
 
 
3.  (SBU) All eyes are now on whether the government can pick 
up the pace in finalizing the fifth review.  A positive 
initial step was taken on June 24 with parliamentary approval 
of the restructuring of the state unemployment agency Is-Kur, 
one of the key social security reforms the review requires. 
Still pending is legislation to restructure Bagkur (for 
self-employed individuals) and SSK (for workers), generally 
regarded as more complex than the Is-Kur legislation, as well 
as new bankruptcy legislation.  MinFin Budget Deputy Director 
General Ahmet Kesik told us on June 23 that taken together 
the social security measures are critical for the 
government's fiscal position in the second half of the year. 
The three institutions' deficit for the year to date has 
exceeded projections by TL 700-800 trillion, and that gap can 
only be closed by speedy implementation of the administrative 
reforms the laws provide.  Kesik also emphasized the 
importance of ongoing labor negotiations with civil servants. 
 The budget, he said, can only accommodate a 10 percent 
increase for the year, anything greater will cause serious 
problems.  (The government's initial offer of no raise for 
the first half of the year and 7 percent for the second half 
has been welcomed as a signal of toughness.)  The market is 
looking for further positive signals from the Wednesday, June 
25 cabinet meeting. 
 
 
----------------------------- 
CHEAP LOANS AND NEW EMPLOYEES 
----------------------------- 
 
 
4. (SBU) Two new "populist" measures also sparked concern in 
the markets on June 25.  First was a GOT decision to decrease 
Halk Bank interest rates for self-employed individuals and 
small businesses from 44 to 30 percent.  A written statement 
from the bank claimed that the bank would not need an 
additional allotment from the government to cover the 
decrease, as it could be financed from TL 75 trillion in the 
budget for unexpected losses, together with TL 33 trillion 
left unused from last year's budget.  Kesik confirmed that 
the TL 75 trillion is available, but indicated that no unused 
amount is left from 2002.  (While economists consulted by 
CNBC-e, a leading business channel, speculated that the 
program could cost up to TL 700 trillion.) 
 
 
5. (SBU) Initially of even greater concern to the markets was 
a decision by Parliament's Budget and Planning commission to 
allocate 15,000 new positions to the State Religious 
Directorate to employ additional imams.  The decision went 
against efforts to rein in personnel expenditures, and also 
raised the specter of a renewed clash between AK and the 
establishment.  Finance Minister Unakitan, whose signature is 
needed to fill the positions, swiftly disavowed any plans to 
do so this year, however. 
 
 
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GROWTH EXPECTATIONS 
------------------- 
 
 
4. (U) Meanwhile, local economists are expressing guarded 
optimism on economic growth, at least for the first quarter. 
 A new Reuters' poll of leading banks and brokerages found 
expectation for 6.2 percent GDP growth in the first quarter, 
in part due to the base year effect stemming from 2002's poor 
outcome.  Expectations for the year were more modest at 4.3 
percent. 
 
 
PEARSON