Cablegate: Turkish Economy: Pm Gul Announces Some Fiscal

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. Not for internet distribution.

1. (SBU) Summary: The GOT reacted to the market concerns
over the 2003 budget by agreeing on a list of fiscal saving
measures, which PM Gul announced late afternoon January 8.
Following the announcement, T-bill rates dropped half a
percentage point. The "saving measures" are a mix of
expenditure cuts and revenue increases that at face value
amount to TL 6.225 quadrillion or 1.75 percent of projected
2003 GNP. Assuming IMF calculations that the GOT's first
quarter budget presents a 2 percent of GNP primary surplus,
then these measures, again if taken at face value, represent
slightly less than half of the measures needed to achieve the
6.5 percent primary surplus target. PM Gul came close to
announcing January 8 that 6.5 percent is the GOT's target.
Treasury Deputy U/S Karaoz told us, after an all-night GOT
meeting to adopt these measures, that Gul is "determined" to
push through measures needed to reach this target. End

Market Wake-Up Call

2. (U) Concerns in the Turkish financial markets, focused on
the 2003 budget, led to weak demand in the January 7 T-bill
auctions (reftel), and continued in the secondary T-bill
market on January 8.

-- T-bill yields reached 59.5 percent in compounded terms
during January 8 trading (from yesterday's close of 58
percent). But following PM Gul's late afternoon announcement
of fiscal saving measures (see below), bill rates declined
half a percentage point. Opening quotes for tomorrow trading
are 58.7 percent.

-- The stock market rose 4 percent January 8 (2 percent came
after Gul's announcement).

-- The lira depreciated slightly, closing at TL 1,682,000 to
the dollar (versus yesterday's TL 1,677,000).

3. (SBU) Comment: Thin trading volumes make single-day
movements in the financial markets here not very meaningful
(though the bill market had a relatively giant day - over $1
billion in transactions.) One relatively large trade by a
"big player" can move the entire market that day. For
instance, two weeks ago when the Central Bank intervened to
slow lira depreciation in the foreign exchange market - they
were able to do so by selling only $9 million in foreign
exchange. However, the month-long trend which should
continue to worry the GOT is the steady rise of T-bill rates,
now up 11 percentage points since early December. The good
news is the GOT is worried, and beginning to react, see
below. End Comment.

PM Gul Announces Fiscal Saving Measures

4. (SBU) PM Gul emerged from a cabinet meeting in late
afternoon of January 8 and made a televised announcement of a
series of fiscal savings measures. (The list of measures was
handed out at the press conference and is translated at para
7 below.) The bottom line is that through these measures the
GOT projects 2003 budgetary savings of TL 6.225 quadrillion
(about $3.8 billion), divided into TL 2.505 of spending cuts
and TL 3.720 of revenue increases.

5. (U) Gul told the press:

-- Nobody should have any hesitation about our economic
policy...Fiscal discipline is important. We all know that
fiscal discipline was distorted before the elections.

-- The Finance Ministry is preparing the full-year 2003
budget and the GOT will submit the budget in the coming

-- "We will secure a 6.5 percent primary surplus in the
future. The primary surplus is particularly important for
Turkey's debt dynamics."

6. (U) A summary of the saving measures follow:

Expenditure Cuts: Total of TL 2.505 quadrillion.

- Personnel. Limit total new hires to 35,000 (such as
teachers, health workers, police), TL 60 trillion.
- Health. Deduct pharmaceutical co-payments from civil
servant wages; introduce prescription controls to prevent
abuses, total of TL 316 trillion.
- Public Investment. Stop all new vehicle procurement. TL 90
- "Transfer Budget" (central budget funds that go to state
economic enterprises, extra-budgetary funds and social
security funds). Stop all vehicle maintenance expenditures,
introduce prescription controls on social security funds'
pharmaceutical prescriptions, total of TL 559 trillion.
- Extra-budgetary Funds. The separate tax and fee revenues
that used to go these funds own administrative budgets will
be given to the central government budget, TL 1 quadrillion.
(Comment: One of the largest remaining extra-budgetary funds
is the Military Industry Support Fund, the main military
procurement agency, which has its own revenues from cigarette
and alcohol taxes).

Revenue Increases: Total of TL 3.720 quadrillion.

- Restructuring of Delinquent Tax Claims Through the "Tax
Peace" Law, total new revenue of TL 2.4 quadrillion.
(Comment: This law will restructure some 180,000 outstanding
tax disputes, but we should be skeptical of the claim that it
will net this amount of tax collection.) - 20 percent
increase in the "Special Consumption Tax" (mainly tobacco and
alcohol), TL 1.250 quadrillion.
- Raising rents on public housing, TL 70 trillion.

Comment: Good First Step, But Less than Halfway There
--------------------------------------------- ---------

7. (SBU) How important are the saving measures announced
today to the 2003 primary surplus target of 6.5 percent? If
we take the measures at face value (and some analysts like
Bender Securities have already told us the savings are
exaggerated), then we calculate as follows:

-- Assuming the 2003 growth target of 5 percent and
inflation target of 20 percent are achieved, then 2003 GNP
will be about TL 355 quadrillion. The face value of savings
is TL 6.225 quadrillion.

-- This represents 1.75 percent of GNP.

-- Assuming IMF calculations that the first quarter budget
is at 2 percent of GNP, meaning a 4 percent of GNP shortfall
in the primary surplus, then these saving measures represent
less than half of the measures needed to reach the 6.5
percent target.

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