Cablegate: Istanbul Analysts Concerned by Lack of Imf Deal

VZCZCXRO1700
RR RUEHDA
DE RUEHAK #0797/01 1561321
ZNR UUUUU ZZH
R 051321Z JUN 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 9838
INFO RUEHIT/AMCONSUL ISTANBUL 5835
RUEHDA/AMCONSUL ADANA 3908
RUEATRS/TREASURY DEPT WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 000797

SIPDIS
SENSITIVE

TREASURY FOR JWEISS

E.O. 12958: N/A
TAGS: ECON EFIN TU
SUBJECT: ISTANBUL ANALYSTS CONCERNED BY LACK OF IMF DEAL

1. (SBU) Summary: We participated in two May 2009
conferences in Istanbul: "Forum Istanbul" (the "Turkish
Davos"), and the KPMG's "Financial Risk Management".
High-level speakers included Central Bank Governor Durmus
Yilmaz; Former Central Banker, now UNDP President, Kemal
Dervis; Former IMF Vice President Ann Kruger; and Economist
Dani Rodrik from Harvard University. Most participants and
speakers agreed that Turkey may not need IMF financing for
the short term but that it is likely to experience problems
in the longer term unless it makes a deal with the IMF. They
share the view that without a deal Turkey is likely to have
external and domestic financing gaps in the medium term, and
may be hit by economic contraction and unemployment, higher
inflation, and a domestic financing gap in mid 2010. They
noted the banking sector could be hard hit if the economic
contraction continues. End Summary.

2. (SBU) Two prominent economists, Dervis and Rodrik,
previously advocated for export-led growth strategies for
Turkey but now acknowledge that countries hit most severely
in this turmoil were those with strong export-led growth.
Leading up to the collapse of Lehman Brothers in September
2008, Turkey's major concerns were a growing current account
deficit of nearly 6.5 percent of GDP in 2008, and an
increasing financing gap, then estimated at USD 45 billion.
Corporate sector debt stock of USD 120 billion and increasing
oil prices were also areas of concern.

3. (SBU) The picture changed dramatically with the onset of
the global crisis. Demand for imports fell 43.4 percent
year-on-year as of April 2009, and corporate sector external
debt had an average 80 percent roll-over rate in the same
period. Since October 2008, almost USD 18 billion flowed
into Turkey through net errors and omissions, most likely a
reflection of repatriation and spending of businessmen's
money that had been held offshore. The fiscal picture also
deteriorated as a budget that two years ago had a 6.5 percent
primary surplus became a 1.5 percent primary deficit.
Conference attendees speculated that unemployment may
continue to increase from its record high 16.1 percent as of
March 2009. Continued increases in global commodity prices
may return Turkey's old friend inflation in the medium term,
especially if the GOT fails to take necessary actions in
policy and structural reforms in the short term.
4. (SBU) Murat Ulgen, HSBC Chief Economist, and Central Bank
Vice Governor Erdem Basci noted the risk of increasing public
debt stock will put pressure on the local government rates
and threaten fiscal stability. Global Source's Murat Ucer
said the marked rise in the domestic rollover ratio (at
almost 120 percent compared to 85 percent in 2008), and the
challenging domestic debt redemption schedule in August and
October 2008 show the need for an IMF program. HSBC's Ulgen
said an IMF arrangement is probably inevitable unless GOT
authorities are willing to endure a painful adjustment.

5. (SBU) Conference participants also foresaw risks in the
bond market. Bonds remain subject to the twin risks of an
end to the monetary easing cycle and fiscal deterioration,
which could cause bond holders to demand higher premiums for
assuming risk in Turkey. Cuneyt Sel, former Treasury
Undersecretary, called attention to a decrease in privately
held money in foreign currencies in offshore accounts. Sel,
now a private consultant, told us that the loss of this
"currency cushion" for business owners could lead to a sharp
increase in the banks' NPLs (non-performing loans) which are
currently low at 4.8 percent overall. Sel and Ucer both
opined that the AKP does not have the technical expertise to
manage the current crisis.

6. (SBU) Akil Ozcay, a former Central Bank Markets Director
General, is now a senior advisor at the Turkish Economy Bank
(TEB). Ozcay said that the GOT must make an IMF deal and
take stringent measures to compensate for liberal spending
prior to the March 2009 elections. Ozcay also expects NPLs
to increase and said an interest rate differential could hit
Turkey if the Central Bank continues to cut policy rates.
Serdar Hamamcioglu, head of financial institutions in
Citigroup, said securitization markets have stopped since
September 2008 and bank balance sheets also stopped expanding
due to decreases in deposits and loans. He confirmed that
banks are increasing their cash positions as a safeguard
measure. Hamamcioglu estimates that NPLs could increase to 7
percent for small- and medium-sized enterprises.

7. (SBU) Markets are now betting Turkey will make a deal with
the IMF before the World Bank-IMF annual meetings (to be held
in Istanbul on 6-7 October 2009). Over the past few weeks,
it has become clear that the GOT is very reluctant to sign an

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IMF program any time soon because it does not want to make
tough fiscal adjustments. Cevdet Akcay, Chief Economist from
Yapi Kredi-Koc, said in the absence of a deal, the primary
balance of the overall public sector seems headed toward a
deficit of 2 percent of GDP in 2009. Saruhan Ozel, Chief
Economist from Denizbank, said Turkey needs to restore its
credibility after two years of underperformance on the
economic policy front and to secure the IMF funding to fill
its financing gap. He sees further contraction in economic
activity and currency depreciation as inevitable without an
IMF deal.

8. (SBU) Comment: The bottom line of the conferences and
private meetings is that without an IMF agreement the GOT has
no intention to tighten fiscal policy. Even though investors
have been generous to Turkey, this is not a sustainable trend
if fiscal fundamentals are not carefully managed. If global
sentiment turns negative, having a stand-by in place may help
to minimize the negative effects on the economy. If the GOT
fails to sign a stand-by or neglects to make any fiscal
adjustment ahead of the 2011 elections, Turkey is unlikely to
outperform other emerging markets or attract significant
investment. End Comment.

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