Cablegate: Turkey's Economy May 6: Good News On Inflation And

This record is a partial extract of the original cable. The full text of the original cable is not available.

061616Z May 03





E.O. 12958: N/A

Sensitive but unclassified. Not for internet distribution.

1. (SBU) Summary: On May 6, Turkish markets continued the
recent positive trend. Treasury raised TL 4.9 quadrillion
(nearly $3 billion) in three T-bill auctions, achieving a
debt roll-over rate this week of over 100 percent. April
inflation data was under market expectations, with CPI at 2.1
percent. The Central Bank began its daily auctions of $20
million in dollars to strong demand; this will help build
CenBank reserves. As usual in Turkey, however, the news is
mixed, and the bad news of late is on the structural reform
side. Turkey's largest foreign investor, Telecom Italia with
an estimated $3.5 billion stake, announced that it may pull
out of Turkey if it can't solve regulatory disputes with the
GOT. The GOT should take this threat seriously, especially
given the absence of large foreign investor interest. End

Markets Relaxing for Summer

2. (U) Good Treasury Auctions. Turkish Treasury raised TL
4.9 quadrillion (nearly $3 billion) in three T-bill auctions
this week, in advance of TL 4.5 quadrillion in debt service
due May 7. With a debt roll-over rate of over 100 percent in
these auctions, Treasury debt manager Volkan Taskin told us
"so far a good week." Interest rates in the auctions, at
53-54 percent compounded, were a bit high, but Taskin
explained that the Turkish banks held the rates high for the
auctions. He expects rates to come down after tomorrow's
redemptions. The banks will then make money on selling the
T-bills to clients.

3. Strong Demand in Central Bank's Dollar Auction. On May
6, the Central Bank held the first of its planned daily
auction of $20 million in dollars, to strong demand. Total
bids were $130 million, per the Central Bank. Central Banker
Ilker Domac told us this intervention in the f/x market is a
good way of building up foreign exchange reserves gradually,
in a rule-based way. He noted that Mexico's Central Bank has
been doing this for a while. He claimed the Central Bank is
not doing the auctions to affect the foreign exchange rate.
Though exporters always complain, he noted, in fact export
performance so far this year has been good.

4. Good April Inflation Numbers: April inflation came in
slightly under market expectations, boosting market hopes for
another Central Bank rate cut which would in turn boost
T-bill values. CPI inflation was 2.1 percent; WPI was 1.8
percent. However, cumulative four-month inflation is now 14
percent WPI (year-end target of 17 percent) and 10 percent
CPI (year-end target 20 percent). Central Banker Domac
dismissed the talk here of another rate cut as "another ploy
by banks to make money." Asked if the Central Bank would
seek to revise the inflation targets in the IMF Fifth Review,
Domac said he would advise against it. The inflation target
is CPI not WPI, and CPI is still in reach, he said. "If we
miss the target, we'll explain it. But it cannot be a moving
target for credibility reasons."

Turkey's Largest Foreign Investor Threatens to Pull Out
--------------------------------------------- ----------

5. (SBU) As always in Turkey, the news is mixed. Though
sentiment in the financial markets is improving, there are
troubling signs on the critical issue of improving the
investment climate. With only $540 million in net foreign
direct investment inflows in 2002, Turkey needs to attract
more long-term capital to achieve macro-economic stability .
However on May 6, Turkey's single largest foreign investor -
Telecom Italia (TIM) - announced that it may pull out of
Turkey in several months. Telecom Italia invested $2.5
billion in a cellphone license joint venture in Turkey in
2000/2001, and then proceeded to invest another $1 billion in
infrastructure. TIM says the GOT has not honored the terms
of its license agreement, including granting roaming rights,
and alleges unfair competition favoring the other two wholly
Turkish owned cellphone operators (Cukurova Holding's
Turkcell and the Uzan family's Telsim). Comment: TIM's
threat may be a negotiating ploy, but the GOT should
nevertheless take it seriously, given the absence of other
investor interest in Turkey. End Comment.

© Scoop Media

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