Cablegate: Turkish Economy March 28: Continuing Problematic

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 remained quiet on March 28 am,
with T-bill yields weakening slightly to 65.7 percent. Two
economic policy developments in the past day, however,
indicate that AK continues to take actions that won't improve
its credibility gap with the markets. First, according to
press reports, AK deputies introduced a floor amendment to
the 2003 budget bill which excludes energy contracts from the
new Public Procurement Law. Second, the Government appointed
a new state bank board, replacing experienced and respected
bankers with AK friends from the tiny and less reputable
Islamic banks. End Summary.

Markets Weaken Slightly

2. (U) In morning trading March 28, yields on lira T-bills
rose one percentage point to 65.7 percent compounded. The
lira was stable at TL 1,720,000. The Istanbul Stock Exchange
100 index close down 1.3 percent. Analysts expect markets to
remain quiet through Monday, March 31, the end of the first
quarter, when publicly traded banks will file reports and
want to limit the losses from their T-bill holdings.
Thereafter, however, markets expect T-bill yields to rise
ahead of the large April 8 T-bill auction.

3. (SBU) T-bill trader Gumisdis of JP Morgan pointed us to
three key areas uncertainty: "IMF Review uncertain, U.S. aid
uncertain, Northern Iraq situation uncertain. It's
impossible to predict where markets will be on April 8
without the Government providing clarity on these three

Surprise Amendment to the 2003 Budget

4. (U) According to press reports March 28, AKP
parliamentary deputies submitted a floor amendment to the
2003 budget bill. The budget is now slated to be voted (and
passed) on Saturday, March 29. The amendment reportedly says
state enterprises in the energy sector are excluded from the
provisions of the Public Procurement Law which went into
effect January 1, 2003.

5. (SBU) Comment: The Public Procurement Law is a key
reform under both the IMF and EU Accession programs, and the
proposed amendment looks like bad news. It appears to breach
a key commitment in the draft LOI, para 21: "We will
steadfastly implement the new Public Procurement Law....If
improvements are deemed necessary, we will consult with World
Bank and IMF staff on possible amendments." In separate
conversations March 28, Finance Ministry DDG for the Budget
Kesik and World Bank economist Arslan told us of an informal
GOT commitment to the IFIs to not change the Public
Procurement for one year, i.e., until next January. AK
members have complained about this law, which requires open
bidding procedures and makes it more difficult to simply
award contracts to friends. End Comment.

New State Bank Board - Not Confidence Enhancing
--------------------------------------------- --

6. (U) On March 27, the Government replaced the entire
11-person board of the two giant state banks (Ziraat and
Halk), at the state banks' regularly scheduled annual
meeting. Markets expected AKP-related figures to be
appointed. However, the names appointed to run the two
largest deposit-taking banks in Turkey are raising questions.
The new Chairman of the State Bank Board, replacing the
respected Istanbul banker Safa Ocak, is Zeki Sayin - a
"right-hand man" of PM Erdogan when Erdogan served as mayor
of Istanbul. Sayin managed the Istanbul muncipality-owned
supermarket chain Belpa, and later served on the board of the
Islamic bank Family Finans. The new GM of Ziraat Bank, Can
Caglar, was formerly GM of Family Finans and assistant GM of
Egebank (the latter went bankrupt in the year 2000 amidst
criminal embezzlement charges and some prison sentences.)
The new GM of Halk Bank is the 35-year old Tevik Bilgin, a
sworn bank auditor.

7. (SBU) Comment: Islamic banks (which give depositors a
share of equity returns rather than interest) represent less
than five percent of banking assets in Turkey, and have a
reputation for poor management. Many former Islamic bank
managers (e.g., MinFinance Unakitan and MinIndustry Coskun)
have ended up in GOT leadership positions. Putting AKP
friends with questionable banking credentials in charge of
the two state banks at this sensitive time, however, is not
helping the pessimistic mood in the markets. Market
expectations are that the new managers will attempt, despite
legal reforms, to revert to the old ways of using the state
banks as funnels for providing off-budget subsidies for
populist and political reasons.

© Scoop Media

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