Cablegate: Market Firms On Q1 Growth

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. Not for internet distribution.

1. (SBU) Summary: Turkish markets rebounded on July 1,
helped by strong growth figures for the first quarter and a
perception that relations with both the U.S. and IMF are on a
positive track, following announcements of both a July 9 IMF
mission and FM Gul's impending visit to Washington. The
Treasury's July 1 auction met its revenue targets, providing
more than enough cash to meet its USD 4 billion July 2
redemption. The government's privatization program also
received a boost on June 30, with the privatization council's
decision to okay the sale of the state petrochemical company
(Petkim) to the controversial Uzan family's Standart Kimya.
The move surprised most market analysts, who had expected the
council to veto the deal. End Summary.


Positive Auction

2. (SBU) After weakening in recent days on worries about
delays in implementation of Turkey's IMF program, markets
firmed on July 1 as they took new heart from perceived
positive developments in relations with both the U.S. and
IMF. Announcement that an IMF team will come to Turkey on
July 9 to continue work on the fifth review reassured
investors that a break with the fund is not on the near term
horizon, while indications that FM Gul will visit Washington
in the near future also provided hope that U.S.-Turkish
relations are mending. Markets benefited too from strong
growth figures for 2003's first quarter, which at 7.4 percent
growth in GNP came in above analysts' expectations.

3. (U) The positive sentiment enabled the Treasury to meet
its revenue targets in a July 1 auction and stockpile the
necessary reserves to meet its 5,681 trillion lira (USD 4
billion) July 2 redemption to the market. The government
sold 4.178.3 trillion lira of 413-day debt at a maximum yield
of 50.96 percent, and 1,904.9 trillion lira in 140-day debt
at a maximum yield of 44.5 percent. The yields were close to
market expectations, but volume exceeded expectations, as
total net sales reached 6,848 trillion lira, including
non-competitive bids and sales to public institutions. With
the total exceeding tomorrow's redemptions, some analysts
predict a lira shortage in coming days that could lead the
lira to appreciate further from its July 1 close of 1.409
million to the dollar. Only the stock market did not
strengthen on July 1, as it slipped slightly to 10,749, down
1.24 percent, in part as Petkim shares declined following
approval of its privatization (see below).

4. (SBU) Global Security's chief economist Cem Akyurek told
us markets have basically concluded that there will be no
break in the IMF program: the government will continue to
negotiate, and at the end of the day will "do the minimum
necessary" to keep things on track. Akyurek added that more
importantly "everything else is going well," with progress on
EU legislation and government determination to take on
corruption. Adding to Turkey's attraction are the limited
number of equally profitable alternative investment
opportunities. As a result, some foreign money is returning
to the country, a decision eased by the market's belief that
there is no reason for the lira to weaken below 1.45 million
to the dollar in coming months. As a result, foreign
investors figure they can clear 7-8 percent in dollar terms
over the summer, a figure that cannot be matched elsewhere.
As for the long bond, one of the longest maturity papers
issued by Turkey since 2001, Akyurek noted its attractiveness
as a benchmark issuance with a high degree of liquidity, and
the opportunities investors expect it to provide for capital
gains, provided that interest rates continue to decline.
That attractiveness was reflected in a total bid volume of
7,587.8 trillion lira.

Petkim Approved

5. (SBU) Meanwhile, in a development that surprised most
market analysts, the Privatization High Council (PHC) set
aside concerns about the fitness of Uzan-owned Standart Kimya
and approved its purchase of the state petrochemical company,
Petkim. Controversy had surrounded the issue, given the
Uzans' notoriety and government concerns about the purchase
price (reftel). The council apparently concluded, however,
that the Uzans' earlier dealings with the Privatization
Administration (PA) were blameless, and that there was no
legal impediment to the sale. The decision gives the PA a
good start on its ambitious USD 4 billion revenue target for
the year, as it prepares for the sale of the state refinery
(TUPRAS) and alcohol-tobacco monopoly (TEKEL). It also
provides a first sign that in contrast to previous
governments that paid lip service to the importance of
privatization but did little in practice, this government is
actually prepared to carry it out.

6. (SBU) Newly released Central Bank figures highlight the
extent of the bank's activity in recent months. Dollar
purchases in May-June totalled USD 2.115 billion, as the bank
sought to limit volatility in the market and accumulate
reserves. The bank announced that it will increase its daily
purchases to USD 40 million a day in July, for a monthly
total of USD 880 million

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