Cablegate: Turkey's Economy March 4 Cob

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: Markets were relieved this afternoon that
today's Treasury auctions had gone relatively well, with the
lira and equities gaining for the day (though t-bill yields
closed up 2.5 percentage points). Treasury raised a total of
TL 2.3 quadrillion that, together with some of Tresaury's
cash reserves of TL 4.2 quadrillion, will be used to meet the
March 5 debt redemption of TL 3.9 quadrillion. Looking ahead
towards the March 19 redemption of TL 5.2 quadrillion to the
domestic market, Treasury plans to schedule several auctions,
including possibly an F/X-linked auction next week. IMF
resrep briefed us on the status of the Fourth Review. He
agrees in general with MinState Babacan's prognosis that the
Fourth Review could be held early April, but IMF is concerned
with possible delays stemming from formation of an Erdogan
govenrment. End Summary.

Markets Improve Slightly On
Treasury Auction Results

2. (U) Afternoon trading today reflected market relief that
the two Treasury auctions earlier in the day had raised over
TL 2 quadrillion, sufficient to enable Treasury to meet the
March 5 TL 3.9 quadrillion debt redemption. The lira firmed
nearly one percent from yesterday (closing at TL 1,637,000 to
the dollar), and the Istanbul Stock Exchange rose 4.8 percent
on the day. Yields on T-bills remained at the 62.5 percent
level of the auction, reflecting overall investor concerns on
GOT financing prospects. (Note: Today's yields are some 16
percentage points above the GOT's targeted average interest
rate for the year.)

3. (SBU) Treasury's Deputy DG for public finance Volkan
Taskin was relieved after the March 4 auctions, telling us
"every auction is a new experience." He added that, in
addition to the TL 2 quadrillion raised from the market, the
Treasury sold about TL 300 trillion to public institutions
(primarily the unemployment insurance fund) before the
auction. This brings the total amount raised to TL 2.3
quadrillion. Looking ahead to the March 19 redemption of TL
5.2 quadrillion ($3 billion), Taskin said Treasury would
schedule several auctions, including probably a F/X-linked
auction next week.

Status of IMF Fourth Review

4. (SBU) On March 4, IMF resrep gave us the following status
report on the IMF Fourth Review:

-- Timing: State Minister Babacan told the press March 4 he
expected an IMF Board review in late March or early April,
followed by disbursement of the entire $1.6 billion tranche.
Resrep didn't disagree with Babacan's timing. In principle,
the IMF staff could wrap up LOI discussions this week, and
take back to headquarters ad ref agreement on it. But IMF
staff have questions regarding the March 9 parliamentary
by-elections. Assuming Erdogan becomes Prime Minister, would
the Gul government's ad ref agreement on the LOI bind an
Erdogan government? IMF staff project that an Erdogan
government would take about 3 weeks to form, thus potentially
slowing down the LOI and Fourth Review process (though there
are no pending conditions requiring parliamentary action,
other than passage of the 2003 budget, in the Fourth Review.)

-- Budget and World Bank Problem: IMF staff are confident
that the budget now delivers a 6.5 percent primary surplus,
but there are two budget problems:

First, World Bank staff object to the draft budget's delay of
TL 1.4 quadrillion (nearly $1 billion) in "Direct Income
Support" to farmers, a key ag sector reform. A one-year
delay of this program means farmers cannot rely on this new
program, meaning they will instead lobby for traditional
support, such as further restructuring Ziraat Bank loans.
Per WB Staff, World Bank country director Chhibber told
Babacan March 3 this budget measure would make it impossible
for the World Bank to disburse its existing budget support
loan programs (a total of $1.375 billion in loan tranches,
which are due to expire at end March 2003). This would leave
the World Bank limited to existing project financing (also
affected by 2003 budget cuts to public investment projects.)
Babacan said he would get back to Chhibber, per World Bank

Second, the IMF staff see a financing gap in the 2003 budget,
and they would need to explain to the IMF board how this gap
will be filled (in addition to their lending) before taking
the Fourth Review to the Board. Resrep said the size of the
gap was still being studied.

-- Key structural reforms. The direct tax reform bill
appears to be on track: it has been prepared, IMF staff have
commented on the draft and it could in theory be submitted to
parliament (the Foruth Review condition) soon. The TEKEL
privatization plan should be passed soon by the Higher
Privatization Council (another condition). Two other
conditions require work: there is no clarity in reducing
redundancies in the state enterprise staffing, with a GOT
proposal (to offer early retirement) unacceptable because it
fails to target actual redundancies. To remedy deficiencies
in banking sector reform (especially the BRSA's agreement on
Pamuk/Yapi Kredi connected lending rescheduling), the new LOI
will require new legislation to strenghten BRSA's hand by
limiting the time for legal appeals to its decisions, and by
a new bankruptcy law which will improve the value of the
BRSA's non-performing loan assets, and lead to sales of these

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