Cablegate: Treasury Undersecretary On Imf, U.S. Money

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

251537Z May 04





E.O. 12958: N/A

REF: A. STATE 108200
B. ANKARA 2874

1. (Sbu) Summary: Treasury U/S Canakci told Econoffs May 24
that the GOT would decide soon about both the U.S. Financial
Agreement and the future IMF role. Econoffs delivered ref a
financial points. Despite the recnt market downturn, Canakci
was confident about Treasury's financing position for 2004,
based on World Bank disbursements, strong fiscal performance,
and the structure of public debt. Adding to his confidence
was his expectation of above-target privatization receipts,
but later the same day a court halted the Tupras
privatization. Canakci admitted the Net Debt/GNP ratio could
end the year above the 67 percent target. He claimed the GOT
was not concerned about the current account deficit. He
admitted there was little FDI, and cited problems with the
judiciary system, among others. End Summary.

The FA, the IMF and post-2005 Financing:

2. (Sbu) In a meeting May 24, with Treasury U/S Ibrahim
Canakci and the newly-appointed Director General for External
Relations, Memduh Akcay, Econcouns went over ref a Financial
Agreement points, responding to the questions Minister
Babacan had raised with Secretary Snow. Canakci seemed to
understand the points about the interest rates and the
guarantees. He did not push back. Note: In a meeting May
18, the Ambassador had covered ref a's points on the language
in the amendment with MFA U/S Ziyal. End Note.

3. (Sbu) Econcouns noted the signs of Congressional concern
about non-ratification of the FA, and asked Canakci when he
thought the GOT would come to a decision. Canakci claimed
that the GOT would decide on both the FA and on what kind of
support to request from the IMF "in a short period of time."
He said that both his minister and the Government were aware
they could not postpone this decision for long. He said
these decisions were closely related to the GOT's projected
financing outlook for 2005 and beyond. In 2005, he said the
major issue was the $7.5 billion due to the IMF. Canakci
said Treasury is running simulations and will submit them to
Minister Babacan and the GOT for consideration.

4. (Sbu) Note: Separately from the meeting with Canakci,
press reports of the discussion of the FA at the
Congressional hearing last week had set off a paroxysm of
press coverage in Turkey, with Minister Babacan being asked
at press conferences about it, and opposition leader Baykal
referring to the "heavy conditions" of the U.S. loan.
Regarding the financing outlook for 2005, in a meeting last
week Treasury domestic debt manager Volkan Taskin told
econoffs that if he had to issue an additional $5 billion to
the domestic market in 2005, Treasury's rollover ratio would
probably surpass 100 percent, i.e. Treasury would be
borrowing more than it was repaying. Taskin also said the
average maturity of new issuances for the first five months
of 2004 was 14 months, and cautioned against overinterpreting
the newly-steepened yield curve on domestic debt since the
slope derives much more from diverse investor classes'
appetites than from risk perceptions or inflationary
expectations. End Note.

5. (Sbu) Canakci said there is a consensus view in the
financial community that Turkey should seek the strongest
possible arrangement from the IMF, a Precautionary or a
Standby. He noted, however, that a follow-on IMF program
could signal a lack of confidence that Turkey can stand on
its own. Econcouns commented that it may be that markets are
not sufficiently confident because of slow movement on
structural reforms, and noted as an example the widely-held
view that the draft law on independent regulatory boards
could undermine these boards' independence. Canakci did not


6. (Sbu) Econcouns inquired as to the status of Treasury's
understanding with the IFI's to withdraw capital from
state-owned banks in order to retire debt and help shrink the
banks for eventual privatization. Canakci revealed that all
the preparatory measures had been taken, including obtaining
permission from BRSA to reduce Ziraat Bank's capital, but
that the GOT had held off because of the recent market
volatility. Though the move would have reduced Treasury's
outstanding debt, Canakci said the markets might think the
GOT was taking panicky actions to respond to the volatility.
7. (Sbu) Canakci said privatization receipts in 2004 would
come in well above the program target of $1 billion. The GOT
has already received roughly $300 million from the sale of
the alcohol side of Tekel, and expected to receive the full
$1.3 billion from the Tupras privatization in the next week
or so. Later in the the day on which the meeting took place,
however, an administrative court stopped the Tupras sale on
the grounds that there were flaws in the tender process.

2004 Financing Outlook:

8. (Sbu) Canakci argued that, for a variety of reasons, the
recent fall in the exchange rate and the rise in interest
rates would not have a large effect on the GOT's 2004
financing outlook. Obviously, the significance of the impact
depends on how long the higher interest rates and weaker lira
persist. The fundamentals, however, have not deteriorated,
and Canakci said he expected interest rates to decline. When
Econcouns pointed out that some analysts believe the
pre-volatility low rates were "not normal" since they were
driven by global liquidity, Canakci claimed they were normal
and cited the very high real interest rates. He expressed
confidence that markets will reconsider the fundamentals and
the current account deficit and return TL interest rates to
levels lower than those currently prevailing.

9. (Sbu) Canakci said that only 18 percent of projected debt
service for the remainder of 2004 is denominated in foreign
exchange, limiting the impact of a weaker lira. Note: though
the percentage of foreign exchange denominated debt is much
higher than this, the lower interest rate on FX-linked debt
and the longer maturities (i.e. fewer principal payments in
the coming months) probably account for this low percentage
of debt service. End Note. Of the GOT's $5 billion target
for external financing from private lenders, Canakci said the
January and February Eurobond issues mean that only $2.2
billion more will need to be borrowed. He said they are
closely monitoring market conditions and could issue at any

10. (Sbu) World Bank financing has been forthcoming, with
Canakci citing the recent $375 million disbursment under the
Economic Recovery Loan (ERL) and the announcement last week
that the Bank would disburse $500 million by June 30 under
the PFPSAL 3 loan, with the remaining $500 million to be
disbursed by year-end. Canakci went on to cite the
above-target performance so far in 2004 on the primary
surplus: TL 1.8 Quadrillion ($1.2 billion) for the Central
Government for January through April. Canakci admitted that
the under-spending that contributed to this good performance
was unlikely to persist through the end of the year, but
nevertheless argued that for all these reasons, the GOT is in
a good position for its 2004 financing program.

11. (Sbu) Regarding debt sustainability measures, on the
other hand, Canakci said that the depreciation of the lira
raised the possibility that the Net Public Debt/GDP target of
67 percent might not be attained. This was particularly
likely if there were a real--rather than just
nominal--depreciation of the exchange rate. Beyond 2004,
however, Canakci was confident that there would be a
declining trend in Net Public Debt/GDP.

Current Account and Foreign Investment:

12. (Sbu) Canakci said neither the Central Bank, nor State
Planning Organization (SPO), nor Treasury officials were
overly concerned about the current account deficit, given the
automatic adjustment mechanism of the floating exchange rate.
In the program, Canakci said the GOT had projected a deficit
of 3 percent of GNP or $9.1 billion but that more recently,
the Central Bank and SPO were projecting $10 billion, and had
raised their assumption for oil prices. He said that in
addition to the likelihood of a strong tourist season, the
GOT expects the trade deficit to moderate due to the
depreciation of the exchange rate.

13. (Sbu) Canakci agreed there was very little foreign
investment. He attributed this to the history of
macroeconomic instability but also to "micro issues,"
especially the legal system, which lacks consistency and
predictability. He cited the recent court decision in favor
of the former owners of Demir and Kent Banks as an example.
With regard to the Cargill case, he said it had become more
complicated lately, without elaborating.

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