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Cablegate: Turkey's Economy: Markets Hopeful, Imf Sees Some

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

UNCLAS SECTION 01 OF 02 ANKARA 001078

SIPDIS


SENSITIVE


STATE FOR E, P, EB AND EUR/SE
TREASURY FOR U/S TAYLOR AND OASIA - MILLS AND LEICHTER
STATE PASS USTR - NOVELLI AND MOWERY


E.O. 12958: N/A
TAGS: ECON EFIN PREL TU
SUBJECT: TURKEY'S ECONOMY: MARKETS HOPEFUL, IMF SEES SOME
PROGRESS ON PRIMARY SURPLUS


REF: ANKARA 861


Sensitive but unclassified, and not for internet
distribution.


Turkish Financial Markets Remain Hopeful
----------------------------------------


1. (U) On February 18, Turkish financial markets continued
to ignore the news of a deadlock in negotiations over a U.S.
assistance package: the lira appreciated nearly one percent
to close at TL 1,626,000 from yesterday's TL 1.642,000);
TL-denominated T-bills dropped one percentage point to 57
percent compounded; the Istanbul Stock Exchange was up 4
percent (and up 2.5 percent February 17). Bond and stock
market transactional volume February 18 was quite strong
(bond was nearly one quadrillion, stocks was TL 700
trillion).


2. (SBU) JP Morgan/Chase's local bond trader Sinan Gumisdis
explained to us the sentiment as follows: "market players
see a few more days of tough bargaining (between the U.S. and
Turkey), but a positive result by week's end, based on the
perception that both sides want a deal." Sinan says the
Turkish corporate sector had already hedged its lira
positions (manufacturers relying on imports have already
imported several months worth in advance; exporters are
holding onto their dollars). He concluded that if there's no
deal by early next week, sentiment will change.


3. (SBU) Istanbul Stock Exchange (ISE) analyst Murat Golkan
of Bender Securities said the ISE rally over past two days is
being driven by foreign buyers, including "quality"
longer-term institutions (not just the in-and-out hedge
funds). Golkan said leaks of cross-conditionality between
the U.S. package and IMF program is seen as very encouraging,
since "everyone knows by now that AK would squander the money
if it could." Goldman Sachs Turkey analyst told us separately
that he agreed clear reform conditionality, especially on
ongoing fiscal adjustments, was key to market acceptance of
the U.S. package.


Some Progress on 2003 Budget
----------------------------


4. (SBU) The GOT has made some progress in meeting the 6.5
percent primary surplus target, according to Ministry of
Finance Deputy DG for budget Ahmet Kesik (though IMF and
World Bank reps are more negative, see below). Kesik told us
February 18 that the GOT and IMF teams are agreed on measures
that result in a primary surplus of about 5.4 percent of GNP.
The largest issue outstanding is IMF and World Bank
opposition to the GOT proposal to delay into 2004 the "Direct
Income Support" payments to farmers originally budgeted for
2003, which amounts to about TL 1.5 quadrillion or about 0.4
percent of GNP, per Kesik. He added that senior bureaucrats
are urging the Cabinet to reach closure with the IMF this
week, in order to get the draft 2003 budget submitted to
parliament by early next week.


5. (SBU) World Bank Operations Director Zeillon confirmed
that delaying the direct income support (DIS) program was a
serious problem for the Bank, and would endanger pending Bank
loan tranches (nearly $1 billion now scheduled for end
March). In effect it rolls back this key reform, which is a
more efficient way of supporting farmers, in favor of the
traditional Turkish practice of discretionary price supports
for certain products (e.g., hazelnuts and tobacco) which AK
is reviving. Zeillon said this belies the AK slogan of
increasing social spending for the poor, since DIS targets
the poorest farmers, while AK has focused instead on middle
class spending measures such as increasing the civil service
pension fund.


6. (SBU) IMF resrep also confirmed that the primary surplus
shortfall is now about 1.1 percent of GNP, that the DIS delay
(which he said would in effect cancel the program) is a major
issue of contention. He did note that the GOT had agreed to
include in the definition of primary surplus some TL 2.7
quadrillion (about 0.75 percent of GNP) of in-kind foreign
suppliers' credits (used, e.g., for the GOT to import
construction and medical equipment). IMF resrep said the IMF
team has a meeting late February 18 with State Minister
Babacan, and that he would brief us on the results February
19.
PEARSON

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