Cablegate: Istanbul Economists Cheer Recent Good News, But

Published: Thu 14 Aug 2003 02:06 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
1. Sensitive but Unclassified. Not for internet
2.(SBU) Summary: Istanbul market analysts are pleasantly
surprised by recent positive developments in the economy, and
accept the rationale for the IMF's preemptive decision to
reschedule much of Turkey's 2004 and 2005 debt repayments.
They warn, however, that the government will have to use the
current opportunity to best advantage, and that much of the
recent good news (including on the inflation front) is
dependent on the strong Turkish lira, which may begin to give
back its gains in early fall. The market, they suggest, will
continue to take its cues from Turkish-IMF relations, and
from developments relating to promised U.S. assistance. Some
argue disbursement of the latter's initial tranche itself
could bring interest rates down 2-3 percent. End Summary.
3.(SBU) Good News: A range of senior bankers and market
analysts told Pol/Econ Chief and visiting Ankara Deputy Econ
Counselor on August 12 that they are relatively optimistic
about the Turkish economy for the short term, given recent
positive developments, including good inflation, industrial
production, and export figures, and most significantly the
IMF's decision to defer repayments of 2004 and 2005 debt.
They noted that the timing of the rescheduling had surprised
the market, though most believed it was unavoidable, given
the volume of debt coming due, particularly in 2004. In
Bender Securities' Murat Gulkan's view, the Fund made a
virtue of necessity, making the move at a time when it would
be welcomed by the market. Had it occurred in the fall, he
suggested, markets would have reacted negatively, viewing it
as a sign of IMF weakness.
4.(SBU) Lira Appreciation: Most analysts stress, however,
that much of the recent good news, including especially the
recent decline in inflation, is tied to the appreciation of
the Turkish lira. They suggest that the lira's strength may
not persist beyond October, given seasonal factors, and warn
too that its high level may also begin to negatively affect
exports, which have played a key role in leading the recent
recovery. Our contacts had a variety of explanations for the
lira's strength, but almost all now see money from Iraq
playing a significant role. Bender's Murat Gulkan and Emin
Ozturk noted the recent disconnect between the foreign
exchange and bondmaret, wththefomerriingstongy,
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rsl--ony lira puchasesaimed rimariy at cnsumption or
investments outsid the financial markets explain the
discrepancy, since otherwise bond yields would have fallen as
well. Another factor in the discrepancy may also be the
relative thinness of the foreign exchange market, a point
cited by an Akbank executive in a recent meeting with the
DCM. Ersel posited that many ordinary Turks, having sharply
curtailed consumption during the 2001 financial crisis,
finally feel enough short-term confidence to spend more.
Since their income has not increased, however, Ersel said
they are dipping into their wealth in the form of foreign
exchange holdings. HC Istanbul Chief economist Banturalp
Candemir credited promised U.S. assistance with calming the
market and permitting the lira to appreciate, and predicted
that actual loan disbursement would bring rates down another
2-3 percent.
5.(SBU) Future Steps: Candemir raised another cautionary note
for next year, noting that two-thirds of the government's
revenue measures this year have been "one off." Given that
many have been amnesties which are relatively painless but
which can only go so far, new more painful measures will be
required next year for Turkey to maintain a strong primary
surplus. That will be tough for the government, he
predicted, "since they want to avoid hurting people,"
especially in an election year. Bender's Gulkan and Ozturk
agreed that the government's fiscal performance has been a
problem, in that while "good" in Ozturk's view, it has not
kept pace with the IMF program's "extremely ambitious"
6.(SBU) A Weak Banking Sector: Banking contacts also hailed
the recent good news, but were less sanguine about the
banking sector itself. TEB CEO Akin Akbaygil identified the
size of Turkey's banking sector as the key problem facing the
country, arguing that the country's debt would be less of a
problem if the sector were more developed. Yapi Kredi Senior
Vice President and Chief Economist Hasan Ersel concurred,
noting that steps to increase bank capitalization last year
had been a "static solution to a dynamic problem." Both
expressed concern about the impact of the IMAR bank scandal
on the BRSA, with Akbaygil predicting that the scandal's
scope may ultimately eclipse that of the BCCI scandal. He
noted that banking regulators appear to have been fixated on
simply confirming basic measures such as the bank's capital
adequacy ratio, and were blind to the scope of the apparent
fraud being carried out at the bank. More generally, while
conceding that the BRSA has done an enormous amount to clean
up the sector, and "surviving banks" are appreciative of its
efforts, problems remain, including lack of liquidity (too
many bank assets are tied up in treasury paper, leaving the
banks "prisoners" of the system). Incentives remain skewed
against conducting actual banking, however, as good profits
are available only in buying and selling government paper.
7.(SBU) Comment: Our contacts were more sanguine about
prospects for the fall than they have been in the past, given
the IMF's surprise decision, and concurred that it, together
with promised U.S. assistance, could create a "virtuous
circle" that brings down interest rates and lessens the
financing burden on the Treasury. They warned of the extreme
fragility of this scenario, however. Candemir noted that AK
Party officials are convinced that their successful policies
brought down interest rates. In his view, however, the rate
decline is not a success story, in that it could have been
even more dramatic if the IMF review process had not been so
drawn out. End comment.
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