Cablegate: Turkey's Economy March 13: Treasury U/S Oztrak

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: Treasury Undersecretary Faik Oztrak told
us March 13 that the key to debt sustainability this year is
economic reform program implementation, not the U.S. package.
Oztrak is concerned that the new Erdogan government will
view the U.S. package as "an excuse not to implement the
reforms." If so, the effect of the U.S. package will be
short-lived, per Oztrak. He sees Turkey finishing the prior
actions for the Fourth Review by end March. Meanwhile, the
Turkish financial markets are beginning to reflect some
concern with the lack of confirmation that the new GOT is
planning a second troop resolution. End Summary.

Markets Start to Worry about Timing of
Second Resolution

2. (U) On the morning of March 13, Turkish financial markets
began to reflect increasing concerns with the lack of news
about a hoped-for second U.S. troop deployment resolution.
Yields on lira-denominated T-bills inched upwards to 58
percent compounded (yesterday's close was 57.4 percent); lira
depreciated slightly to TL 1,625,000 to the dollar; the
Istanbul Stock Exchange slid another 1 percent (third
straight day of over 1 percent declines). Lehman Bros
analyst for Turkey Ediz told us he is recommending investors
stay out until the GOT's intentions on the second resolution
are clearer.

Treasury U/S Oztrak: The Key is Strong Policies,
Not the U.S. Package
--------------------------------------------- ----

3. (SBU) In a March 13 meeting, Treasury U/S Oztrak stressed
to us that "the key is strong implementation of the economic
reform program, not the U.S. package. If the government
treats the U.S. package as an excuse not to implement
reforms, then the effect of the U.S. funds will be
short-lived." Oztrak's other points:

-- He doesn't foresee a problem with debt sustainability
this year, provided the GOT moves quickly to strongly
implement the reform program. The Treasury's financing
assumptions for 2003 - 45 percent average interest rate on TL
debt; 87 percent debt roll-over rate; 8 month average
maturity of TL debt - are currently on track. This interest
rate path has March rates at 56 percent, declining to the
lower 50's and upper 40's in April and May. The year-end
interest rate should be 34 percent under this scenario.

-- Treasury's financing assumptions do not take into account
an "event risk" related to Iraq. However, Oztrak said he has
been telling the GOT that the prescription for this event
risk is the same as the general problem: "showing the
determination and ability to deliver strong policies."

-- On timing of enacting the 2003 budget, a prior action for
the Fourth Review, it is scheduled to be reported out of the
Budget Commission on March 16. He expects the final steps
(floor debate, full parliamentary vote, signing into law by
President) to take another ten days.

-- On timing of other Fourth Review prior actions, Oztrak
also believes they will be completed by end March. They are:
passage of the direct tax reform law through the budget
commission (but not full parliamentary vote); adoption of
TEKEL privatization plan by the Higher Privatization Council;
Council of Ministry decrees to address redundancies in the
state enterprise (e.g., eliminate the ban on forcibly
retiring workers before age 50.)

-- The GOT will seek two waivers for the Fourth Review:
missing the 2002 primary surplus criterion; missing the state
enterprise job lay-off criterion.

-- On the GOT's disagreement with the World Bank over
delaying direct income support (DIS) payments for farmers in
2003, Oztrak said the Bank is wrong to hurry this program
into early implementation before all farmers' land holdings
had been registered. (Note: Despite Oztrak's criticism,
World Bank sources told us they reached agreement with the
GOT overnight to add back into the budget nearly TL 1
quadrillion in DIS payments for this year, and instead to
further cut the public investment budget for state
enterprises. To be effective, this agreement must be
reflected in an amended budget before the bill gets reported
out of Commission on March 16, per the Bank. End Note.)

-- On an impending cabinet reshuffle, Oztrak said he didn't
know when or who. MinState Babacan is a "good asset" in the
Cabinet, since he and PM Gul are among the minority arguing
for the reform program. Most ministers don't understand the
program and see it as IMF and WB imposing conditions on

-- Strong economic policy management in Turkey requires
three agencies to be related to one minister - Treasury,
State Planning Organization, and Central Bank (the last,
while independent, reports to the Council of Ministers via a
minister). To ensure coordination, this minister must also
be senior to the Finance Minister, preferably a PM or strong
Deputy PM.

-- The economy overall is not slowing down. The January
industrial production figures show IP has reached the highest
level of the last five years (in 1997). But external demand
is still driving growth, which means provinces with export
industries are doing well while more remote and rural areas
are still sluggish.

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