Cablegate: Turkish Economy March 24: Erdogan Speech Doesn't

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

REF: FBIS WAX20030323000248

Sensitive but unclassified, and not for internet

1. (SBU) Summary: On Sunday evening March 23, PM Erdogan
addressed the nation committing the new GOT to continue the
economic reform program and to take additional reform
measures if needed. But markets weren't buying, and yields
on T-bills rose 5.5 percentage points in morning trading
March 24. Bankers told us they are concerned with a steady
outflow of dollar deposits, not large amounts and not panic
withdrawals, but still a cause of concern. At 1:30 pm local
time, GOT spokesman Cicek made a press statement on further
reform measures adopted by the Cabinet. End Summary.

Markets Weaken Sharply

2. (U) In morning trading March 24, the lira depreciated
about one percent to TL 1,748,000 and the Istanbul Stock
Exchange dropped 3 percent. Yields on the benchmark
lira-denominated T-bill rose to 73.5 percent compounded.
Trading volumes were low in all markets, as foreign investors
had largely exited the markets last week.

PM Erdogan Commits to Continue Reforms

3. (U) In a televised address to the nation at 9:00 pm Sunday
March 23, PM Erdogan committed the new GOT to continuing the
reform program and to take additional measures, if needed.
The speech was mostly about calming the public on the effects
of the Iraq war in general (see reftel for full text.) In
the economic portion, he said he expects to finish the IMF
Fourth Review in the first half of April, mentioned the need
to reduce public sector employment, and warned ministers
against freelancing statements or actions. The economic
portion of the speech follows:

-- "Our government has the political will to proceed with
the existing program carefully and meticulously. We will not
allow the economic program to collapse by giving as an excuse
the difficult conditions. I believe we have to strengthen
our fiscal and economic policies."

-- "The 2003 budget will provide a primary surplus of 6.5
percent of GNP. Measures to prevent waste in the social
security and health care systems have been undertaken. In the
past two months, the primary surplus targets have been met
and tax revenue was TL 580 trillion more than expected. The
arrangements to eliminate redundant employment (in the public
sector) are being dealt with urgently and will be resolved by
the year-end."

-- "We expect the Fourth Review to be concluded in the first
half of April....I have given the necessary instructions to
all the ministers and civil servants. No one should take
into consideration any statements or behavior which are
outside the program."

4. (SBU) IMF resrep in Ankara told Reuters March 24 am that
"the IMF welcomes the commitments to economic policies made
by Prime Minister Erdogan last night, and looks forward to
working with the Government to finalize the letter of intent
for the Fourth Review." Resrep told us Erdogan had dropped
specific policy measures contained in an earlier Treasury
draft of the economic portion of the speech. Nevertheless,
resrep saw Erdogan's speech as an important first commitment
by the new GOT to the IMF program. He said he understood
Treasury was seeking to get full GOT approval for further
fiscal measures, possibly as early as the March 24 pm Council
of Ministers meeting.

5. (SBU) Erdogan's speech is partly a reaction to a tough
message from IMF headquarters delivered by resrep to Treasury
U/S Oztrak on March 21. This message came after recent
negative statements and actions by GOT ministers. On March
21, Energy Minister Guler announced he was seeking Cabinet
approval to lower electricity prices by 1.5 percent, and
would also reschedule outstanding electricity payment
arrearages amounting to TL 2.4 quadrillion lira. (This would
contravene an LOI commitment not to reschedule any public
sector receivables.) Also on March 21, the Public Works
Minister announced he was moving forward on amending the
Public Procurement Law (contravenes a commitment in the draft
LOI). World Bank economist Jim Parks told us March 24 that
Treasury told the Bank it would seek to kill both of these
initiatives before they got before the Cabinet.

6. (U) At 1;45 pm local time, GOT spokesman (and Justice
Minister) Cicek told reporters after a Cabinet meeting that
the draft 2003 budget would include an additional $2.3
billion of spending cuts and would obtain approval for the
privatization of TEKEL.

Markets Not Impressed;
Concern with Dollar Outflow

7. (SBU) Erdogan's speech did not lift the general
pessimistic mood prevailing in the markets. Credit Suisse's
Istanbul analyst Berna Bayazitoglu wrote on March 24 am,
"henceforth, actions will be far more important than words."
Zafer Kurtul, General manager of Turkey's largest private
sector bank, Akbank, told us "Erdogan said nothing new."

7. (SBU) Kurtul said the major concern in the banks is with
the outflow of foreign currency deposits. He said about 55
percent of deposits in Turkish banks are currently
F/X-denominated. Akbank has about $6.5 billion in F/X
deposits and about 4 quadrillion ($2.5 billion) in lira
deposits. He estimated about $20 million outflow of F/X
deposits from Akbank in the past two days, and he surmised
that in Turkey's less solid medium-size banks the outflow
would be larger. F/X outflow takes the form of bank
withdrawals in cash which stay in Turkey and transfers of
deposits to foreign banks overseas. Kurtul added that this
dollar outflow would not directly affect the GOT's ability to
borrow from the banks in lira terms, since the banks' lira
funding costs are not increasing at the moment. Turkish
banks fund lira debt purchases currently from two sources,
the overnight money markets and lira deposits, and interest
rates in both markets are currently stable. But he noted
that the GOT has a major debt redemption in June in F/X
terms, which would be affected by the F/X outflow. For now,
he predicted that Turkish banks will raise their F/X deposit
rates to try to stem the F/X outflow.

8. (U) The worried tone of some press commentary may be
supporting the beginnings of outflow of dollars from the
banks. For instance, Star newspaper (tabloid-style, owned by
Motorola deadbeat Cem Uzan) of March 23 carried an editorial
entitled, "Stay in cash, Keep your money in a Safe Place," by
Salih Neftci, a widely read columnist. The column warns
readers that Turkey is headed towards bankruptcy and advises
to pull money out of the banks. As of March 24 mid-day,
there is no sign of panic in the public or any runs on banks.

© Scoop Media

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