Cablegate: Turkey's Inflation/Growth Overperforming; But

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS ANKARA 008797

SIPDIS

SENSITIVE

STATE FOR EUR/SE, EB/IDF/OMA AND E
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR FOR NOVELLI AND BIRDSEY

E.O. 12958: N/A
TAGS: ECON EFIN PREL TU
SUBJECT: TURKEY'S INFLATION/GROWTH OVERPERFORMING; BUT
FISCAL/STRUCTURAL CONCERNS REMAIN

REF: ANKARA 8369

Sensitive but Unclassified. Not for internet distribution.

Economy Overperforming on Inflation and Growth Targets
--------------------------------------------- ----------

1. (U) November inflation data, released December 3, were
slightly better than market expectations: Wholesale price
increase was 1.6 percent (versus market expectations of 1.9
percent); Consumer price increase was 2.9 percent (market
average expectation was 3.0 percent).

2. (U) November declining inflation rats reflect the
post-election lira appreciation, particularly evident in the
wholesale sector, which relies on imported goods. Markets
now predict a year-end CPI of 31 percent (under the 35
percent target), and year-end WPI of about 31 percent (right
on target).

3. (SBU) Growth is another area of good economic news: third
quarter 2002 industrial production figures show a 10.9
percent increase from the third quarter of 2001. One local
market analyst, Bender Securities, now projects year-end GNP
growth of 7 percent. (Comment: Bender is the most optimist
we've seen on growth; Treasury Undersecretary privately
predicts 5 percent GNP growth (reftel). The official target
is still 4 percent. In any case, the 2002 growth story is
not based solely on inventory rebuilding after a terrible
decline of 9.7 percent in 2001. Part of this year's story is
also very strong export performance, though exports only
equal about 18 percent of GNP).
Comment: Need for Continuing Fiscal Reforms
--------------------------------------------

4. (SBU) The macro-economic news will likely cheer the
markets. But the market focus is now on the new government's
meetings with IMF Europe Director Deppler (we will get
read-out December 4), and EU/Cyprus developments. The
initial press is good: Deputy PM Sener, after meeting with
IMF's Deppler, announced that the GOT would commit to a 6.5
percent primary surplus target in 2003.

5. (SBU) The IMF Mission scheduled to begin December 9 will
need to examine closely how the GOT plans to meet its fiscal
targets in 2003, not just the headline number. Finance
Ministry Deputy DG for the Budget Ahmet Kesik told us the
main fiscal problem lies in the three large GOT pension
funds: he estimates their total 2002 deficits at about 3
percent of GNP (about $5 billion). To date, the GOT has been
funding these pension fund deficits to some extent by
delaying discretionary social spending (e.g., farmers direct
income payments, unemployment payments), which the new GOT is
committed to correcting. Pension fund reform, an effort
started in 1999 but left undone per Kesik, now becomes an
immediate priority for the GOT's 2003 budget and financing
problems. We will report more septel on the prospects for
pension fund reform.
PEARSON

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