Cablegate: Treasury U/S Adams Visits Istanbul Amid Market Turbulence
DE RUEHAK #3644/01 1720510
ZNR UUUUU ZZH
P 210510Z JUN 06
FM AMEMBASSY ANKARA
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RUEHLO/AMEMBASSY LONDON 3027
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TAGS: EFIN TU
SUBJECT: Treasury U/S Adams Visits Istanbul Amid Market Turbulence
REF: ANKARA 3370 and previous
Sensitive But Unclassified. Please handle accordingly.
1. (SBU) Summary: In a day in Istanbul June 13, Treasury Under
Secretary Timothy Adams met with the Turkish Treasury Under
Secretary, a Central Bank Vice-Governor and private sector analysts
and bankers. Despite the sell-off in Turkish markets, neither the
officials nor the bankers seemed alarmed, though the analysts
sounded a cautionary note. The Turkish Treasury Under Secretary
stressed Turkey's much-improved fundamentals and said Turkey had
nearly completed the prior actions for the reviews under its IMF
program. In a television interview, U/S Adams noted that Turkey had
a strong economic team in place. End Summary.
Turkish Officials Concentrate on Fundamentals
2. (SBU) In his meeting with U/S Adams, Turkish Treasury Under
Secretary Ibrahim Canakci expressed confidence about Turkey's
ability to withstand market turbulence. Canakci admitted Turkey had
been hit more than other countries, citing the slowdown in
disinflation evident in the April and May inflation data. Canakci
said he believed, however, that the uptick in inflation was
temporary and that the authorities had put appropriate policies in
3. (SBU) Canakci praised the Central Bank's higher-than-expected
rate hike. While Treasury departments normally don't like higher
interest rates, he was happy to see the Central Bank showing its
commitment to price stability. Treasury has suffered in the past
from high real interest rates induced by high inflation and
instability, and therefore welcomed the rate increase. Canakci even
claimed the politicians understand that the increase was necessary.
4. (SBU) Canakci said fiscal policy has also been further tightened,
with the IMF review adding a new performance criteria: an overall
ceiling on primary expenditures expressed in nominal lira terms - a
commitment by the Government to save any overperformance in
revenues. Treasury's financing position has been boosted by
receipts from privatizations and from asset sales by the State
Deposit Insurance Fund (SDIF), neither of which are being used to
5. (SBU) Canakci said the Government has nearly completed the prior
actions for the third and fourth reviews under the IMF program and
Canakci expected a board meeting to take place in early July. One
key structural reform, the law reducing Corporate Income Tax rates
from 30% to 20% was passed by parliament on June 14, the day after
U/S Adams met Canakci.
6. (SBU) On June 15, as expected, President Sezer referred the
social security reform legislation to the Constitutional Court.
Sezer had vetoed the legislation for political reasons, according to
Canakci, based on his "different perception" of the role of the
state. In the meeting, Canakci said that so long as the Court did
not issue an injunction against the parametric changes to the
pension system, the reform would achieve its aims.
7. (SBU) Canakci also mentioned upcoming World Bank board decisions
that would help demonstrate that the authorities are continuing to
move ahead on structural reforms. The first is the second tranche
of the PFPSAL3 loan and the second is a new follow-on facility to
continue and expand public sector reforms, known as the PPDPL. Both
loans cover social security reform, other fiscal reforms and banking
sector reforms such as state bank privatization.
8. (SBU) Canakci described the improvements in the structure of
state debt in recent years. FX-linked or -denominated debt had
totaled 58% of total debt at the end of 2002, but had been reduced
to 38% at the end of 2005. Canakci said the recent fall in the
exchange rate had brought this ratio back up to 40%. Floating rate
debt had been reduced from 63% of lira-denominated debt to 50% as of
June 2, 2006. Net debt to GDP was 55.8% at the end of 2005. For
the broader economy, foreign exchange reserves nearly cover all
short-term debt, and do cover short-term debt if banks' reserves are
9. (SBU) Growth was now expected to slow in 2006, although the
Government predicted it would come in at 5.5% whereas market
analysts average projection is 4.7%. The combination of slower
growth and a weaker lira is expected to moderate the Current Account
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Deficit to around 6.5% to 6.7% (between $26 and $27 billion) versus
the pre-sell-off forecast of 7%. Canakci said Foreign Direct
Investment would total somewhere between $13.5 billion and $20
billion, with the lower end of this range already locked-in from
10. (SBU) Canakci cited the banking sector's increased
capitalization, reaching a capital adequacy ratio of 24%. Even if
adjusted for the Basel 2 criteria, he said the ratio was 16 or 17%,
one of the highest in Europe. The non-performing loan ratio has
declined from 20% to 5%.
11. (SBU) When U/S Adams asked him what worried him, Canakci cited
the approaching elections and Turkey's continuing high unemployment
rate despite job growth. Canakci asserted that the politicians
understand that the solution is not to loosen fiscal policy but
unemployment remains a sensitive issue.
12. (SBU) When U/S Adams asked how he could be helpful, Canakci
asked for U.S. support in gaining access to European Bank for
Reconstruction and Development Bank lending, by means of a board
consensus. He also reiterated his request for U.S. support for
Turkey's candidacy to host the 2009 Bank/Fund annual meetings.
13. (SBU) Later in the day, U/S Adams also met briefly with
newly-appointed Central Bank Vice-Governor Mehmet Yorukoglu.
Yorukoglu, having been on the job less than a week, did not have
much to say about the Central Bank's view. Earlier, both Koc Bank
CEO Kemal Kaya and Murat Ucer of Globalsource praised the
appointment of Yorukoglu, since he is a respected academic from
Sabanci University. Yorukoglu has extensive U.S. experience, having
obtained his doctorate from the University of Rochester, followed by
teaching stints at the University of Chicago and Wharton. In the
meeting, Yorukoglu described Turkey's current problems as a supply
shock, meaning that the usual trade-off between growth and inflation
were not relevant.
14. (SBU) In a series of private sector meetings, U/S Adams
encountered no sense of alarm over the previous months' market
sell-off, despite his visit coinciding with a particularly sharp
fall in markets which led to a Central Bank intervention.
15. (SBU) CEO's of leading Turkish Banks (Is Bank, Koc-Yapi Kredi,
TEB, and HSBC) expressed moderately favorable views of Government
economic policies and the bank regulatory agency while criticizing
the Government's handling of the Central Bank Governor appointment.
Though the bankers admitted it was not yet clear how big a hit
Turkish corporations had taken on the depreciation of the lira, they
did not seem too concerned about it. They said it was not clear how
well corporates had protected themselves through "natual hedges"
(i.e. foreign exchange revenues to offset foreign exchange
borrowings) and non-transparent off-balance sheet hedging. HSBC CEO
Piraye Antika implied that corporates had to borrow in foreign
exchange to some degree: "If they had borrowed 100% in lira, they
would be bankrupt."
16. (SBU) On the recent outflows from Turkish markets, the bankers
painted a more nuanced picture: as foreign portfolio investors
pulled out of Turkish assets, local corporates and individuals took
advantage of the lower exchange rate to buy lira. At the same time,
there was a trend from bonds to deposits.
17.(SBU) Economic analysts Murat Ucer of Globalsource and Emin
Ozturk of TEB seemed worried about the medium-term outlook. With
global markets likely to be edgy, and the pillars of the Turkish
"story" looking weaker, they expect more problems ahead. Ucer
described the pillars as political stability, liquid global markets,
and Turkey's macro situation (lumping in IMF, EU, and disinflation).
Reduced global liquidity is coinciding with problems on the other
pillars. Neither analyst had reservations about the Central Bank
intervention in the foreign exchange market. Ozturk said the
intervention was warranted in a small open economy dependent on
capital inflows in an illiquid market, yet locked into inflation
TUSIAD Criticizes GOT
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18. (SBU) U/S Adams also met with TUSIAD Chairman Omer Sabanci, who
reiterated privately his public dismay over the Government's lack of
strategic vision on EU accession and its excessive focus on
19. (SBU) In an interview with the leading financial news TV station
CNBC, U/S Adams noted that Turkey had a strong economic team in
place, a comment that was picked up in several Turkish newspapers
the following day. Central Bank Vice-Governor Erdem Basci later
told us that he appreciated U/S Adams' public comments.