Cablegate: Us Treasury Official's Visit: Local Economists

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


1. (Sbu) Summary: In a round of meetings with visiting US
Treasury official Marshall Mills at
the end of July, GOT economic officials, IFI
representatives, and private sector analysts painted
a picture of Turkey being at an important juncture in
defining its policy direction over the next
1-3 years, particularly its fiscal stance and relationship
with the IMF. Prolonged uncertainty
over its eventual direction has made markets uneasy and
fragile. However, both technocrats
inside the government and the private sector believed that
the GOT will eventually decide on
the direction necessary for market confidence and financial
stability -- specifically, targeting a
primary surplus at or near 6.5% of GNP and concluding a new,
disbursing Stand-by Arrangement
with the IMF. Though the cost of delaying this decision has
been and continues to be substantial,
in the past few days the GOT has announced it will pursue a a
disbursing SBA. Judging by post
contacts, comments, the structural reform side continues to
be the weakest area in the Turkish
authorities, program. End Summary.

Near-term uncertainties

2. (Sbu) The fiscal framework - In meetings with Turkish
Treasury U/S Ibrahim Canakci, State
Planning Organization (SPO) U/S Ahmet Tiktik and others,
Mills and economic officers discussed
future fiscal policy measures such as the GOT,s new
three-year program (reftel) and the 2005
primary surplus target. On the three-year program, Turkish
officials generally offered consistent
explanations although some, such as Canakci, described it
being a broad effort encompassing
all areas of economic reform while others, like Tiktik,
focused more on the debt sustainability
elements. None were able to offer a date for an announcement
of the details of the program. On
the primary surplus the economic bureaucrats were unanimous
in wanting a "high" or "very high"
number but were unwilling to give specifics, stating only
that it was a decision that would be made
and announced later. Regarding the composition of
expenditure, U/S Tiktik asked for US support to
exempt some investment expenditure from the primary surplus
calculation citing the need for
increased spending in this area due to high unemployment.

3. (Sbu) Policy "anchors" - Mills met with private analysts
from the banking and manufacturing
sectors. The large majority of analysts were clear about
what was needed to maintain and/or improve
market sentiment: a new disbursing IMF program and a positive
EU decision in December. Most
also explained that the IMF was more important for near-term
economic stability, stating that the
EU will provide a more positive outlook only for the medium
term. (Note: the IMF Turkey mission
chief, Reza Moghadam, made an unexpected visit to Ankara last
week, to consult on the GOT 3-year
program. Post will report septel on the Moghadam visit).
Several of the market contacts said there
would be a significant loss of confidence if the GOT did not
seek a disbursing SBA and/or suffered
an unfavorable EU decision on accession negotiations. GOT
technocrats, Canakci, Tiktik and others,
are supportive of a new disbursing SBA, while also being
optimistic about the EU. However, until
the past few days, the political leadership delayed any
decisions or announcements, perturbing the
markets. Yapi Kredi Bank Vice President Huseyin Imece
likened the GOT,s behavior to an airline
pilot who does not provide information to passengers during
normal turbulence and thus makes
them more worried than they may need to be.

Market fragility

4. (Sbu) Why the delay? - Many of the private analysts
wondered out loud why the government
was delaying, particularly when the uncertainty costs them in
terms of credibility and higher interest
rates. They offered different explanations: the GOT is
waiting to see what the EU decision will be,
as indicated by the Commission,s October 6th report, in the
hopes that the EU anchor may substitute
for the IMF; the AK party is not monolithic and the GOT is
still selling a new program to certain factions
within it; communication with the market-oriented technocrats
is ineffective.

5. (Sbu) Financing a growing current account deficit
exacerbates market worries - Next to talk of
policy anchors, the wider than expected current account
deficit was the most discussed issue. GOT
estimates of the end-2004 deficit were $10.5 billion or
3.5-4% of GNP. Market projections were a
bit higher, gathering in a range of $12-13.5 billion or
4-4.5% of GNP. GOT officials pointed to the
measures they have taken to curb domestic demand, namely a
reduction in incentives for purchasing
cars, instructing the state banks to curtail their consumer
lending and not spending the revenue over
performance from the first part of the year. They insisted
they are ready to do more in coming
months, if needed, but were not overly concerned about the
growing deficit at the moment. Markets
explained their nervousness regarding the current account
given the sensitivity of Turkey,s capital
flows to interest rate developments in the United States and
the ease with which there could be a
halt or even reversal of these flows.

6. (Sbu) Markets, guarded optimism - Nearly all market
participants correctly predicted that the
GOT would eventually accept that it has no other alternative
to a disbursing SBA. They also predicted
that the EU decision will be favorable. In a meeting with
Bender Securities, Mills asked why such
expectations did not seem to be reflected in asset prices,
which remain high. Murat Gulkan, Bender
Managing Partner, replied that risks are not negligible and
the alternative scenario, while low probability,
would be very costly so investors are not yet ready to put
their money in. Some of the analysts
wondered if the government truly understood its economic
position. For them, the reluctance of the
government to accept a strong macroeconomic framework and IMF
program undermined already
limited GOT credibility.

Medium-term structural reform prospects discouraging
--------------------------------------------- -

7. (Sbu) Judging by post contacts, comments, prospects for
structural reform that will support sustained
growth are less encouraging than for the broader
macroeconomic framework. Progress toward
privatization of the state banks was a particular case in
point. In a meeting early in the visit, the
World Bank stated that a strategy for state bank
privatization, developed by McKinsey consulting, would
be announced in December and executed in 2005. Turkish
officials, including Canakci, BRSA chairman
Tevfik Bilgin and Ziraat Bank CEO, Can Akin Caglar seemed to
be operating with a longer time horizon
with only a very distant prospect of eliminating effective
state control.. Canakci and Caglar offered a
timeline with privatization beginning in 2006 or 2007 and
then only by piecemeal IPOs, rather than block
sales. Bilgin--until last year the CEO of Halk Bank--went as
far as to say that privatization of Halk and Ziraat
banks was impossible due to their asset structure. Vakif
Bank was the most likely of three remaining state
banks to privatized, he said, but even this was not likely.
Private sector representatives had similar views to
Bilgin,s, believing that privatization in the near to medium
term was unrealistic.

8. (Sbu) On the issue of non-banking sector privatization and
FDI, political will and legal system deficiencies
were cited as the principal barriers. Both U/S Tiktik and
Treasury Director General Memduh Akcay, pointed
specifically to the legal system with Akcay stating, "If I
was the IMF I would focus on this." The Privatization
authority also highlighted the problems they have been having
with the courts, specifically mentioning the
cases of TUPRAS and Turk Telecom.


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