Cablegate: Turkish Economy March 21: Steady Deterioration

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

Markets Start to Re-focus on IMF Program,
Await GOT Action

1. (SBU) On the morning of March 21, foreign investors were
selling both Turkish stocks and Turkish Eurobonds. Lehman
Bros Turkey analyst told us rumors of a Moody's downgrade of
the Turkish sovereign debt is motivating some Eurobond

-- The lira depreciated one percent in the morning to TL 1,
720,000 to the dollar.
-- The benchmark lira T-bill is currently trading at 68
percent compounded (up from 66.5 percent at yesterday's
-- The Turkish 30-year maturity Eurobond is trading at about
1000 basis points wide of U.S. Treasuries (from 815 basis
points on March 19).
-- The Istanbul Stock Exchange 100 index closed down 6
percent in morning trading.

2. (SBU) Comment: With foreign investors increasingly
selling out of Turkish stocks and Eurbonds (they are already
out of the local T-bill market), it will be hard for the GOT
to complain about "hot money" speculators (they'll wish they
had some).
Local investors now fully control the markets. According to
bond and stock traders, the local investors were not happy to
hear the morning TV news that the GOT is still negotiating
with the U.S. on overflight rights (i.e., further reducing
prospects of any U.S. aid). Locals are re-focusing their
hopes for an optimistic scenario based now on two elements:
a short war in Iraq (with smaller tourism and trade effects
on Turkey); and quick GOT action to complete the Fourth IMF

Budget Update

3. (SBU) A key prior action under the IMF Fourth Review is
passage of the full-year 2003 budget, which must in any case
be adopted by April 1. According to Finance Ministry Deputy
DG Ahmet Kesik, the current plan is for parliamentary floor
debate to begin on Sunday, March 23 and finish five days
later on Friday, March 28. President Sezer will then have
until Monday, March 31 to ratify the budget law (though the
Constitution gives the President up to 10 days to take action
on legislation).

4. (SBU) Kesik told us there is one potential problem for
the 2003 budget. Two new revenue raising measures - on motor
vehicles and real estate - are contained in separate bills
stuck in the parliament's Budget and Planning Commission.
Parliament must pass those bills quickly as well, to avoid
exacerbating existing serious concerns on budget financing.
Kesik said the GOT plans to limit pass the bills out of the
Budget and Planning Commission on March 28.

Rising Inflationary Expectations

5. (U) The Central Bank publishes twice monthly a survey of
expectations regarding forward-looking inflation. On March
21, the Central Bank published its second survey taken in
March. It shows a steady increase in average expectations
for year-end Consumer Price Index inflation. In February the
expectations remained at 25 percent, while now they are 27
percent (the GOT target is 20 percent).

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