Cablegate: Turkish Markets Soften As Imf Concerns Re-Emerge

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

260356Z Jun 03





E.O. 12958: N/A


Sensitive but unclassified. Not for internet distribution.

1. (SBU) Summary: Turkish markets have softened in recent
days on worries about delays in completion of the IMF
program's fifth review. Two leading brokerages (JPMorgan and
Merrill Lynch) reduced their exposure to Turkish assets in
their models, citing IMF worries. Some progress has been
registered since IMF Resident Representative Odd Per Brekk
urged government action to complete the structural benchmarks
required under the review, but a number of measures remain
outstanding, and new proposals to lower interest rates
charged by state banks to small businesses and to hire
additional civil servants for the Religious Affairs
Directorate have sparked concern. End Summary.


2. (SBU) After an extended rally in recent months, Turkish
markets have weakened in recent days on worries about
government delays in implementing the fifth review, generally
regarded as one of the easier ones facing the government.
While GOT spokesmen, including State Minister Babacan, have
reiterated the government's commitment to the program and
have argued that all is on track, markets have paid more
attention to IMF Resident Representative Odd Per Brekk's
comments in Antalya last weekend that the government needed
to "address a number of issues to ensure continuity in the
reform effort." Concerns about the delays led both JP Morgan
and Merrill Lynch to reduce their exposure to Turkish assets
last week to underweight and neutral respectively. Central
Bank market department officials tell us that the recent
market declines stem from foreign investors' concerns about
slippage in the IMF program, and their desire to cash in on
the high profits they have received recently and avoid giving
back any of those gains. Those liquidated positions did not
come back into the market but instead were converted to
foreign exchange, causing the lira's recent decline, despite
a continuing dollar inflow to finance tax payments. JP
Morgan's Sinan Gumusdis told us that markets are now pricing
in delays in the review, and are anticipating that the fifth
and the sixth reviews will be combined, delaying release of
further tranches of IMF money (and U.S. assistance) until

3. (U) The rush to the exits has not been a stampede,
however: declines to date have been modest and controlled.
The stock market closed on June 25 at 10,740, down roughly
four percent from its highs last week, while interest rates
on benchmark July 2004 government debt edged up to just over
51.23 percent (higher than they were before the Central
Bank's latest rate cut). The Turkish lira has fallen from
1.439 million to the dollar from its peak of 1.415 million.
With no major auctions or redemptions this week, the market
is largely in a holding pattern, in anticipation of next
week's TL 5 quadrillion Treasury redemption and the auctions
that will finance it.

3. (SBU) All eyes are now on whether the government can pick
up the pace in finalizing the fifth review. A positive
initial step was taken on June 24 with parliamentary approval
of the restructuring of the state unemployment agency Is-Kur,
one of the key social security reforms the review requires.
Still pending is legislation to restructure Bagkur (for
self-employed individuals) and SSK (for workers), generally
regarded as more complex than the Is-Kur legislation, as well
as new bankruptcy legislation. MinFin Budget Deputy Director
General Ahmet Kesik told us on June 23 that taken together
the social security measures are critical for the
government's fiscal position in the second half of the year.
The three institutions' deficit for the year to date has
exceeded projections by TL 700-800 trillion, and that gap can
only be closed by speedy implementation of the administrative
reforms the laws provide. Kesik also emphasized the
importance of ongoing labor negotiations with civil servants.
The budget, he said, can only accommodate a 10 percent
increase for the year, anything greater will cause serious
problems. (The government's initial offer of no raise for
the first half of the year and 7 percent for the second half
has been welcomed as a signal of toughness.) The market is
looking for further positive signals from the Wednesday, June
25 cabinet meeting.


4. (SBU) Two new "populist" measures also sparked concern in
the markets on June 25. First was a GOT decision to decrease
Halk Bank interest rates for self-employed individuals and
small businesses from 44 to 30 percent. A written statement
from the bank claimed that the bank would not need an
additional allotment from the government to cover the
decrease, as it could be financed from TL 75 trillion in the
budget for unexpected losses, together with TL 33 trillion
left unused from last year's budget. Kesik confirmed that
the TL 75 trillion is available, but indicated that no unused
amount is left from 2002. (While economists consulted by
CNBC-e, a leading business channel, speculated that the
program could cost up to TL 700 trillion.)

5. (SBU) Initially of even greater concern to the markets was
a decision by Parliament's Budget and Planning commission to
allocate 15,000 new positions to the State Religious
Directorate to employ additional imams. The decision went
against efforts to rein in personnel expenditures, and also
raised the specter of a renewed clash between AK and the
establishment. Finance Minister Unakitan, whose signature is
needed to fill the positions, swiftly disavowed any plans to
do so this year, however.


4. (U) Meanwhile, local economists are expressing guarded
optimism on economic growth, at least for the first quarter.
A new Reuters' poll of leading banks and brokerages found
expectation for 6.2 percent GDP growth in the first quarter,
in part due to the base year effect stemming from 2002's poor
outcome. Expectations for the year were more modest at 4.3


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