US embassy cable - 03ANKARA4956

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 004956 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
 
 
E.O. 12958: DECL: 08/05/2008 
TAGS: EFIN, PGOV, TU 
SUBJECT: MEETINGS WITH CENTRAL BANK GOVERNOR AND TREASURY 
U/S COINCIDE WITH INTEREST RATE CUT, MARKET OPTIMISM 
 
 
1. (U) CLASSIFIED BY ECONOMIC COUNSELOR SCOT MARCIEL FOR 
REASONS 1.5 (B), (D). 
 
 
2. (C) SUMMARY: CENTRAL BANK GOVERNOR SERDENGECTI AND 
TREASURY U/S CANAKCI EXPRESSED CAUTIOUS OPTIMISM ABOUT THE 
NEAR-TERM MACROECONOMIC OUTLOOK IN MEETINGS WITH EMBOFFS THAT 
COINCIDED WITH A CENTRAL BANK INTEREST RATE CUT.  THE RATE 
CUTS FOLLOWED A TWO-DAY MARKET RALLY SPARKED BY THE IMF'S 
APPROVAL OF TURKEY'S FIFTH REVIEW AND A RESCHEDULING 
OF TURKEY'S 2004 AND 2005 REPAYMENTS TO THE FUND. SERDENGECTI 
THOUGHT THE IMF HAD BEEN SOFT ON THE GOT AND NOTED 
THAT MANY PEOPLE BELIEVE THIS IS DUE TO POLITICAL INFLUENCE 
FROM THE USG.  SERDENGECTI AND CANAKCI AGREED ON THE 
IMPORTANCE OF TIMELY APPROVAL OF THE IMF'S SIXTH REVIEW. 
REGARDING THE UPCOMING MEETINGS IN WASHINGTON ON THE U.S. 
ASSISTANCE MOU, TREASURY OFFICIALS WOULD ONLY SAY THAT ONE OR 
TWO ISSUES THAT WERE SUBSTANTIVE RATHER THAN MERELY 
TECHNICAL.  END SUMMARY. 
 
 
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CENTRAL BANK GOVERNOR LESS SKEPTICAL: 
------------------------------------ 
 
 
3.  (U) EMBOFFS PERIODIC MEETING WITH CENTRAL BANK (CB) 
GOVERNOR SUREYYA SERDENGECTI COINCIDED WITH A CENTRAL BANK 
INTEREST RATE REDUCTION OF 3 PERCENTAGE POINTS.  THE RATE CUT 
FOLLOWED A STRONG TWO-DAY RALLY IN THE ISTANBUL 
MARKETS AFTER THE IMF BOARD APPROVED TURKEY'S FIFTH REVIEW 
AND INFLATION NUMBERS ANNOUNCED OVER THE WEEKEND BEAT 
EXPECTATIONS. 
4.  (C) WITH THE GOVERNMENT HAVING PULLED OFF THE IMF 
APPROVAL AND INFLATION COMING DOWN, THE NORMALLY SKEPTICAL 
SERDENGECTI (STRICTLY PROTECT) AGREED THAT TURKEY HAD A REAL 
OPPORTUNITY TO TAKE ADVANTAGE OF THE RECENT IMPROVEMENT 
IN THE MACROECONOMIC SITUATION.  IN HIS DISCUSSIONS WITH 
GOVERNMENT MINISTERS, SERDENGECTI SAID HE WOULD CONTINUE TO 
STRESS THE IMPORTANCE OF MEETING THE FUND'S DEADLINES, GIVEN 
THE GOVERNMENT'S TENDENCY TO BEHAVE AS IF THERE WERE 
NONE.  SERDENGECTI SAID HE WOULD BE TELLING HIS GOVERNMENT 
COUNTERPARTS THAT IF THEY MAKE MORE MISTAKES, TODAY'S 
 RATE CUT WILL BE THE LAST ONE FOR A LONG TIME. 
 
 
5. (C) IN NEGOTIATIONS WITH THE GOT OVER THE FIFTH REVIEW AND 
THE RESCHEDULED 2004-5 REPAYMENTS TO THE FUND, SERDENGECTI 
SAID HE HAD FOUND THE FUND SOMEWHAT SOFT.  HE PASSED ON THAT 
MANY OBSERVERS, ESPECIALLY IN TURKEY, 
BELIEVE THIS IS BECAUSE OF USG INFLUENCE WITH THE FUND, 
POSSIBLY RELATED TO IRAQ. 
 
 
6.  (SBU) SERDENGECTI WAS ENCOURAGED BY THE WEEKEND 
ANNOUNCEMENT OF IMPROVED INFLATION NUMBERS (PRICES ACTUALLY 
FELL SLIGHTLY IN JULY).  ALTHOUGH SOME ANALYSTS ATTRIBUTED 
THE REDUCTION IN INFLATION TO SOFT AGRICULTURAL PRICES OR THE 
STRONG LIRA,  SERDENGECTI NOTED THAT TURKEY HAS EXPERIENCED 
HIGH INFLATION IN THE PAST WHEN THESE CONDITIONS WERE 
PRESENT.  PROVIDED THERE WAS NO NEW CRISIS OR GOVERNMENT 
MISTAKE, THE TURKISH AUTHORITIES HAVE A REAL CHANCE TO 
CONVINCE PUBLIC OPINION THAT INFLATION IS UNDER CONTROL BY 
BRINGING THE INFLATION RATE DOWN TO THE TEENS IN 2004 OR EVEN 
TO THE 12 PERCENT TARGET.  BUT IN ORDER TO SUSTAIN THE 
IMPROVED INFLATION SITUATION, THE GOVERNMENT HAS TO EXERCISE 
STRONG CONTROL OVER FISCAL AND INCOMES POLICIES. 
 
 
7.  (C) SERDENGECTI POINTED OUT THAT, IF THINGS GO WRONG, A 
SUDDEN FALL IN THE LIRA WOULD UNDERMINE THE IMPROVED 
INFLATION SITUATION.  PROVIDED THE LIRA REMAINED BELOW TL 1.5 
MILLION TO THE DOLLAR, THERE WOULD BE NO SERIOUS RISK 
TO THE PROGRESS ON INFLATION. DESPITE MUCH HAND-WRINGING IN 
THE BUSINESS COMMUNITY AND THE GOVERNMENT ABOUT THE 
STRONG LIRA'S POTENTIAL EFFECT ON EXPORTS, AND THE EU'S 
DELAYED RECOVERY, SERDENGECTI POINTED OUT TURKEY'S CONTINUED 
STRONG EXPORT PERFORMANCE. AS FOR THE CAUSES OF THE LIRA'S 
SURPRISINGLY STRONG PERFORMANCE IN RECENT MONTHS, THE CENTRAL 
BANK HAD FOLLOWED UP ON RUMORS THAT MONEY FROM IRAQ WAS AN 
IMPORTANT FACTOR IN THE LIRA'S APPRECIATION. ITS CONCLUSION 
WAS THAT SHARPLY-INCREASED BORDER TRADE FROM IRAQ HAS PLAYED 
A ROLE AS IRAQIS SOUGHT A VARIETY OF GOODS 
FROM  SOUTHEAST TURKEY.  BUT THE CENTRAL BANK DISMISSED 
RUMORS THAT SENIOR IRAQI OFFICIALS MIGHT BE MOVING MONEY 
INTO TURKISH LIRA: EVEN IF SADDAM AND OTHER IRAQIS WERE 
MOVING FUNDS THROUGH TURKEY, THEY WERE UNLIKELY TO VIEW 
TURKEY OR TURKISH LIRA 
AS A SAFE HAVEN. 
 
 
8.  (SBU) SERDENGECTI SAID THAT THE CENTRAL BANK HAD HAD TO 
PUT OFF MOVING TO INFLATION TARGETING FROM MONETARY TARGETING 
BECAUSE THE CONDITIONS ARE NOT YET RIGHT.  INSTEAD, IT IS 
USING A SORT OF HYBRID SYSTEM IN WHICH THE USE 
OF BASE MONEY IS A LESS CENTRAL BENCHMARK. 
 
 
8.  (C) SERDENGECTI REVEALED THAT THE CENTRAL BANK HAD 
WRITTEN TO THE GOVERNMENT ABOUT POSSIBLE IRREGULARITIES AT 
IMAR BANK SIX YEARS AGO, BUT THAT NO ACTION HAD BEEN TAKEN 
UNTIL RECENTLY.  SERDENGECTI EXPRESSED CONCERN THAT THE 
IMAR PROBLEM MIGHT HURT THE INDEPENDENT BANK REGULATORY 
BODY'S (BRSA) CREDIBILITY OR HURT CONFIDENCE IN THE BANKING 
SYSTEM, PARTICULARLY WHEN DEPOSITORS REALIZE THEY MAY NOT GET 
THEIR MONEY FOR A LONG TIME.  ON THE POSITIVE SIDE, 
THE REVELATIONS ABOUT IMAR BANK HAVE AT LEAST SLOWED DOWN THE 
UZANS' POLITICAL MOMENTUM. 
 
 
--------------------------------------------- --- 
TREASURY CAUTIOUSLY OPTIMISTIC ON MACRO OUTLOOK, 
CLOSE-MOUTHED ON BILATERAL ASSISTANCE DISCUSSIONS: 
--------------------------------------------- ---- 
 
 
9. (SBU) IN A SEPARATE MEETING WITH TREASURY UNDERSECRETARY 
IBRAHIM CANAKCI AND DEPUTY DIRECTOR GENERAL MELIH NEMLI, 
CANAKCI AGREED WITH EMBOFFS' ASSERTION THAT THE GOT NOW HAD A 
REAL OPPORTUNITY TO BUILD ON THE IMF APPROVAL AND 
RECENT MACRO TRENDS, PROVIDED IT QUICKLY PUSHED THROUGH THE 
REFORMS NEEDED TO OBTAIN IMF APPROVAL OF THE SIXTH 
REVIEW.  ACCORDING TO CANAKCI, "HAVING CLARIFIED THE 
FINANCING ISSUES, THE NEXT STEP IS TO CLARIFY THE BUDGET 
PICTURE WITH A CREDIBLE BUDGET FOR 2004."  CANAKCI CLAIMED 
THAT ECONOMY MINISTER BABACAN AND THE PRIME MINISTER NOW 
UNDERSTAND THE IMPORTANCE OF SECURING TIMELY APPROVAL OF THE 
SIXTH REVIEW IN ORDER TO CONVINCE MARKET PARTICIPANTS 
OF THE GOVERNMENT'S COMMITMENT TO REFORM.  CANAKCI BELIEVED 
SENIOR GOT OFFICIALS HAD LEARNED FROM THE NEGATIVE 
CONSEQUENCES OF EARLIER DELAYS. 
 
 
10.  (SBU) CANAKCI NOTED THE IMPROVEMENT IN THE DEBT-TO-GDP 
RATIO. THE CURRENT ESTIMATE IS THAT THE RATIO WILL FALL 
TO 69.4 PERCENT AT YEAR-END AS COMPARED TO AN EARLIER 
PROJECTION OF 77.2 PERCENT. THOUGH MOST OF THE IMPROVEMENT 
WAS DUE TO THE APPRECIATION OF THE TURKISH LIRA, THE STATE 
PLANNING ORGANIZATION IS NOW UNOFFICIALLY PROJECTING A 
2003 GROWTH RATE OF SLIGHTLY ABOVE THE PROGRAM TARGET OF 5 
PERCENT, GIVING HOPE FOR FURTHER IMPROVEMENT IN DEBT/GDP. 
CANAKCI DESCRIBED A RELATIVELY COMFORTABLE GOVERNMENT DEBT 
MANAGEMENT SITUATION FOR THE REMAINDER OF 2003, DUE TO A 
COMBINATION OF LOWER INTEREST RATES AND A HIGH ROLLOVER RATE 
IN THE FIRST HALF OF THE YEAR.  TREASURY PROJECTS A ROLLOVER 
RATIO OF 77 PERCENT FOR THE LAST 5 MONTHS OF 2003, AS 
COMPARED TO 92 PERCENT IN THE FIRST SEVEN MONTHS.  IF 
TREASURY CAN BORROW MORE THAN THE $500 MILLION PROJECTED ON 
THE EUROBOND MARKET DURING THE REST OF THE YEAR AND WITH $700 
MILLION OF  PRIVATIZATION RECEIPTS EXPECTED, TREASURY SHOULD 
BE IN A GOOD POSITION FOR THE REMAINDER OF 2003. 
 
 
11. (SBU) ACCORDING TO CANAKCI, TREASURY IS TRYING TO REDUCE 
THE GOVERNMENT'S FOREIGN EXCHANGE RISK PROFILE ON BORROWINGS 
BY BORROWING MORE IN TURKISH LIRA. THE ROLLOVER RATIO ON 
FOREIGN EXCHANGE BORROWINGS, FOR EXAMPLE, WAS 
ONLY 80 PERCENT IN THE FIRST SEMESTER.  CANAKCI AGREED WITH 
EMBOFFS THAT CORPORATE FOREIGN EXCHANGE RISK BEARS WATCHING. 
CENTRAL BANK ECONOMIST GUVEN SAK HAD RECENTLY ESTIMATED THAT 
THE TOP 100 TURKISH CORPORATIONS HAD A TOTAL OPEN POSITION OF 
$4.5 BILLION.  CANAKCI BELIEVED IT WAS DIFFICULT TO GET A 
GOOD HANDLE ON THESE CORPORATES' NET 
FOREIGN EXCHANGE POSITION, HOWEVER, AS THEY ALSO HAVE 
SIGNIFICANT ASSETS IN FOREIGN EXCHANGE. 
 
 
12. (C) CANAKCI WOULD NOT BE DRAWN OUT ON WHO WOULD 
PARTICIPATE IN THE GOT'S DELEGATION TO WASHINGTON THE WEEK OF 
AUGUST 18 TO DISCUSS THE PROPOSED ASSISTANCE MOU.  ACCORDING 
TO CANAKCI, THE MAKE-UP OF THE DELEGATION HAS NOT YET 
BEEN DETERMINED.  WHEN PRESSED ON WHETHER THE GOT SHARED THE 
U.S. VIEW THAT THESE WERE TECHNICAL DISCUSSIONS TO GO 
OVER THE DETAILS OF THE AGREEMENT, NEMLI SAID THERE WERE AT 
LEAST A COUPLE OF ISSUES THAT WERE MORE THAN TECHNICAL, 
BUT WOULD NOT ELABORATE FURTHER.  HE ADDED THAT HE EXPECTED 
THE TALKS TO BE CONCLUDED QUICKLY. 
 
 
 
 
 
 
DEUTSCH