Cablegate: Turkish Economy March 26: U.S. Aid Proposal Sparks

Published: Wed 26 Mar 2003 12:31 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
Sensitive but unclassified, and not for internet
1. (SBU) Summary: Markets rallied March 26 am with T-bill
yields dropping six percentage points, on news of the U.S.
war supplemental for Turkey. But market sentiment remains
pessimistic about upcoming debt roll-overs, and the GOT's
credibility with the markets remains rock bottom. IMF resrep
reports overnight progress towards finalizing the LOI, which
now could be signed by mid-next week. State Planning Chief
told us the GOT is serious about moving forward quickly on
reforms to help restore market confidence. End Summary.
Markets Improve, But Foreigners
Stay Out for Now
2. (SBU) Turkish markets rallied on March 26 am, on further
news that the USG's supplemental budget request to Congress
includes a $1 billion grant to Turkey, potentially
convertible into as much as $8.5 billion in loans.
-- Lira-denominated T-bill yields dropped to 64 percent
compounded (yesterday's close was 70 percent.)
-- The lira appreciated nearly 3 percent, trading at TL
1,690,000 to the dollar at mid-day.
-- The Istanbul Stock Exchange 100 index closed up 3.4
percent in light trading.
3. (SBU) Foreign investors are staying out of Turkish
markets for now, per local brokers and bond traders. Some
market analysts (Bender Securities Golkan, Eurosource's Ucer)
believe Turkish banks are driving down T-bill yields partly
for end of quarter "window dressing" purposes, i.e., making
the asset side of their balance sheets (stuffed with T-bills)
look temporarily better as of Monday March 31. We agree that
in general markets remain unhappy with the GOT, and there is
ongoing concern with the GOT's ability to comfortably
roll-over debt in advance of large debt redemption dates
(April 9, May 21, June 4 and June 18). We note the managers
of the top four Turkish banks are in Ankara in talks with
MinState Babacan to express their concerns. State Bank Board
Chairman Ocak told Econ Counselor March 26 that "Istanbul
remains furious with the GOT;" he believes immediate credible
steps are needed to repair market sentiment.
4. (SBU) Comment: Nevertheless, with yesterday's
announcement on the war supplemental, analysts here see the
possibility of a good scenario based on two elements: the GOT
repairing relations with IMF, finishing the Fourth Review and
continuing to implement reforms; the reduced but still
existing perception that the USG won't let Turkey's economy
meltdown during the Iraq war. End Comment.
Progress on the IMF Fourth Review
5. (SBU) IMF resrep briefed us this morning on the results
of his March 25 evening meeting with Turkish Treasury U/S
Oztrak. Resrep said if the progress continued, he could
foresee signing the LOI as early as mid-next week, with a
possible Board date as early as mid-April.
-- Timing. Oztrak was pushing for signing the LOI this
Friday, and IMF staff seeking a Board date before the $3
billion debt redemption on April 9. Resrep said this was
over-optimistic. If progress continued, the IMF could issue
a positive statement on the Fourth Review in advance of the
April 9 redemption.
-- Macro-Economic Targets. Treasury asked the IMF to delay
revising the program's macro framework until the Fifth
Review, in order to expedite consideration of the Fourth
Review. IMF staff was weighing this request. Current
volatilities (market roller coaster, uncertain growth
projections, possible need to revise inflation targets) all
argued in favor of postponing until the Fifth Review, he
noted. But he wouldn't second guess the decision of IMF
-- Issues for Signing the LOI. If the IMF agrees to
postpone revision of the macro-economic framework, there are
still at least two policy issues left to be resolved before
the LOI can be signed, per Resrep. First, the GOT must
identify the sources for the TL 4 quadrillion in spending
delays announced on March 24. Oztrak said the plan is to
pass the budget as planned on March 28, and then within five
days thereafter to issue a circular to all ministries
indicating which expenditures must be delayed. For LOI
purposes, however, these additional 2003 spending delays or
blocks must be reflected in the central government primary
balances annex (there is a bimonthly performance criterion
for this balance), and the IMF won't agree to delay this
until the Fifth Review. Second, the GOT has not yet canceled
the pending investigations into the BRSA over the June 2002
intervention of Pamukbank.
-- Prior Actions for Finishing the Fourth Review. Resrep
reported progress also on the four key prior actions. First,
the parliament would vote on the 2003 budget on March 28.
Second, IMF staff have approved the draft Direct Tax Reform
bill, which is slated to be submitted to the parliament's
budget and planning commission on March 27 (the prior action
is passage through this commission). Third, the GOT is
preparing two regulatory measures to address over-staffing in
state enterprises (a Cabinet decree to cancel earlier decrees
that prevent forcible retirements; a new schedule and
strategy for eliminating redundant positions by year-end).
Fourth, the TEKEL privatization plan faces one last obstacle:
the Competition Board currently wants to break up the
tobacco and spirits units into smaller pieces, while the
privatization plan is to sell them as entire units to
maximize buyer interest and GOT revenue from the sale. The
World Bank is advising to proceed with the existing plan, and
amend it later if the Competition Board's final ruling
requires splitting up the privatization tenders.
State Planning Chief Asserts GOT is Serious
About Reforms
6. (SBU) In a March 26 meeting with Econ Counselor, State
Planning U/S Ahmet Tiktik said the government understood the
need to take significant steps to bolster market confidence,
and was beginning to take those steps. Most important, per
Tiktik, the government would implement the March 24
announcement on TL 4 quadrillion of spending delays by
freezing non-compulsory spending, including public
investments and certain transfers. He described this as a
temporary, emergency measure to build up Treasury's cash
reserves. Tiktik said the government would also try to
accelerate structural reforms, including privatization. We
noted the precariousness of Turkey's financial situation and
the lack of confidence among investors, and stressed the need
for bold action -- not just rhetoric -- in the coming days.
We also suggested that the government consider steps outside
of the IMF program -- such as accelerating telecom
liberalization -- to demonstrate to investors that it has a
long-term plan to promote growth and competitiveness, in
addition to a short-term plan to avoid financial collapse.
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