Cablegate: Turkey's Economy March 3 Am: Gul and Imf Statement

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: Early March 3 public statements by PM Gul,
IMF Mission Chief and the Central Bank all helped contain
market sell-offs on the morning of March 3. Some investors'
hope that the parliament's decision might not be final also
helped limit the damage. The good news is that the GOT and
IMF reached agreement late March 2 on a 2003 budget that
achieves a 6.5 percent of GNP primary budget surplus
(however, the new measures are largely tax increases and not
spending cuts). PM Gul said the GOT would submit the budget
to the parliament March 3. Turkish Treasury has cash
reserves of TL 4.2 quadrillion, so it can comfortably limit
the March 4 T-bill bids to keep interest rates from going too
high. As markets begin to refocus on Turkey's economic
fundamentals, and carefully examine the 2003 budget
assumptions, there will likely be renewed concerns over the
2003 financing gap. End Summary.

A Market Sell-Off is Contained

2. (SBU) Turkish financial markets opened March 3 sharply
lower than Friday's close, but then recovered somewhat by
noon (except the always volatile stock market), based largely
on statements by PM Gul, IMF, Central Bank described below.

-- Yields on lira-denominated T-bills jumped at market
opening to 62 percent in annually compounded terms, before
recovering to 59.5 percent by mid-day. Turkey's 2030
maturity Eurobond followed a similiar path, down 5 percentage
points in early trading, before recovering to be down 3
percentage points at mid-day.

-- The lira depreciated 6 percent at market opening,
reaching TL 1,675,000 to the dollar, before settling at TL
1,645,000 to the dollar at noon.

-- The Istanbul Stock Exchange 100 index was down 11 percent
in morning trading.

3. (SBU) JP Morgan/Chase bond trader Sinan Gumisdis
explained that the sellers were foreign hedge funds, though
he added that some foreign funds were staying in and hoping
that the GOT will submit a second troop deploymment
resolution to the parliament. "If the U.S. doesn't wait, or
the GOT doesn't try again, then the markets will weaken
further." Goldman Sachs Turkey analyst Buchanan agreed that
some investors were still hoping parliament's March 1 vote
was not final, and that the U.S. assistance package was not
yet dead. Turkish banks, primarily Akbank, bought T-bills
this morning, helping to limit the sell-off. IN the currency
market, Turkish corporate exporters sold dollars helping to
contain the lira's depreciation.

The March 4 Auction

4. (SBU) Turkish Treasury Deputy U/S in charge of public
finance Hakan Ozyildiz told us this morning that Treasury
will go ahead with its March 4 T-bill auction as planned. As
or Friday COB, Treasury's cash balance was TL 4.2
quadrillion, he said. The March 5 debt redemption totaled TL
3.9 quadrillion. Thus, Ozyildiz commented, Treasury could
afford to limit the successful bids in the March 4 auction to
keep interest rates as low as possible (informally, he
believes Treasury will try to raise TL 2.5 quadrillion in the

PM Gul Shows Determination on Budget

5. (SBU) At 9:10 local time March 3, PM Gul held a press
conference and read a televised statement flanked by Deputy
PM Sener, State Minister Babacan, Foreign Minister Yakis, and
Finance Minister Unakitan. Gul said the GOT would submit the
full-year 2003 budget to parliament on March 3, and this
budget exceeded the 6.5 percent of GNP primary surplus
target. The highlights of the statement follow:

-- "Any development that might distort budget balances,
including the primary surplus target, will be prevented. A
healthy tax system, and increasing tax collections are vital
to meet the primary surplus. In addition, there will not be
any further tax amnesties or other reschedulings of public
sector receivables. (Note: This is a commitment in the draft
LOI which IMF staff insisted on, and which last week the GOT
refused to commit to, per IMF resrep. End Note.)

-- "A direct tax reform bill will be sent to parliament

-- "Our government believes in the independence to the
Banking Regulatory and Supervision Agency (BRSA), and will
continue to support BRSA actions." He added that banking
sector reforms and restructuring will continue.

-- Privatization is at the top of our agenda. The
privatization plan for TEKEL (state tobacco and alcohol
company) will be submitted to the Higher Privatization
Council in the coming days."

-- "A detailed timetable regarding redundant state
enterprise employment will be announced."

-- Decreasing the inflation rate is also a top concern. The
GOT together with the Central Bank have set an inflation
target of 20 percent. The Central Bank will exercise monetary
policy to achieve this target free of any political

New Fiscal Savings Measures in the Budget

6. (U) PM Gul also distributed a list of fiscal saving
measures at the press conference, which incorporate measures
previously announced together with new measures. (Embassy is
obtaining the list and will report septel).

7. (SBU) IMF resrep told us March 3 that the new measures do
result in a budget yielding a 6.5 percent of GNP primary
surplus, per IMF calculations. The IMF and GOT broke the
budget impasse at about 2:00 am March 3; the gap between the
two had been 1.5 percent of GNP (about TL 5 quadrillion or $3

-- The IMF had agreed to include in the budget the
GOT-suggested measure of delaying into 2004 the 2003 "Direct
Income Support" payments to farmers (worth TL 1.5 quadrillion
or 0.5 percent of GNP). Comment: The World Bank is opposed
to this measures because it guts a key agricultural sector
reform, and thus may endanger disbursements of World Bank
loans to Turkey. End Comment.

-- The GOT had come up with new tax increases - mainly a
doubling of a special tax on vehicles and real estate tax
increase (worth about TL 2.4 quadrillion or 0.67 percent of

-- The GOT had also come up with a series of new, but small
expenditure cuts, the largest of which was additional cuts to
public investment projects (worth about TL 1.1 quadrillion or
0.33 percent of GNP).

IMF Mission Chief Statement also Helps

8. (U) Shortly after PM Gul's televised statement on March
3, IMF Mission Chief Juha Kahkonen, in Ankara, released the
following statement:

-- "The steps announced by the government are welcome. The
budget, in particular, appears consistent with a primary
surplus of 6.5 percent of GNP. Discussions are continuing on
other aspects of the Fourth Review."

Central Bank Statement Provides Further

9. (SBU) The Central Bank also released a statement at
market opening March 3. Its warning of a possible
intervention to address extreme exchange rate fluctuations
was effective in dampening down lira sell-offs, per Bender
Securities trader Murat Golkan. Central Bank market's
department chief Ozcay told us at noon that the Central Bank
had not intervened to date and didn't plan to do so. The
statement reads in part:

-- "As a result of the parliament's decision on the subject
of deploying Turkish and foreign troops to the border,
fluctuations should be expected in the foreign exchange and
interest rate markets.

-- "The Central Bank will closely monitor all market
developments and, if needed, measures will be taken to help
the markets functions effectively.... If there are extreme
fluctuations in the exchange rate because of a drop in the
market's liquidity or speculative moves that hurt stability,
the Central Bank could intervene in the exchange rate from
either direction."

Comment - 2003 Financing Gap

10. (SBU) As markets begin to refocus on the economic
fundamentals, and carefully examine the 2003 budget, concerns
over a 2003 financing gap are likely to re-emerge. The
Turkish Treasury's financing assumptions for 2003 include an
average interest rate on new TL borrowing of 45 percent for
year. Interest rates need to start coming down soon, in order
for the government's financing scenario to be credible.

© Scoop Media

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