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Viewing cable 06ANKARA367, TURKEY'S MUCH-IMPROVED DEBT SITUATION

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Reference ID Created Released Classification Origin
06ANKARA367 2006-01-31 19:03 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Ankara
VZCZCXRO7900
RR RUEHDA
DE RUEHAK #0367/01 0311903
ZNR UUUUU ZZH
R 311903Z JAN 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 2826
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NSC WASHDC
RUEHIT/AMCONSUL ISTANBUL 9717
RUEHDA/AMCONSUL ADANA 0348
RUEHBS/USEU BRUSSELS
UNCLAS SECTION 01 OF 03 ANKARA 000367 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TU
SUBJECT: TURKEY'S MUCH-IMPROVED DEBT SITUATION 
 
 
This cable was coordinated with Congen Istanbul. 
 
1.(SBU) Summary: 2005 capped four years of steadily 
improving public sector debt ratios in Turkey.  Net debt to 
GDP is expected to be less than 60% of GDP at yearend 2005, 
compared to over 90% in 2001.  For the first time since the 
2001 crisis, the numerator of this ratio, net public sector 
debt, began to decline in the second half of 2005.  Good 
luck in the form of favorable global market conditions 
combined with strong policies to allow the Turkish 
government to stabilize its mostly short-term domestic debt 
situation, greatly reducing - but not eliminating -- its 
vulnerability to external market disruptions and reducing 
their severity if disruptions do occur.  End Summary. 
 
------------------------------------- 
Precarious post-crisis debt structure 
------------------------------------- 
 
2. (SBU) In the aftermath of the 2001 financial crisis, the 
Turkish state was saddled with a large debt burden that 
amounted to 90 percent of GDP.  More problematic than the 
size of the debt was its structure: most of the debt was 
short-term, traded domestic debt, leaving the GOT dependent 
on its ability to constantly roll over its debt in local 
financial markets.  Unlike many emerging markets, Turkey's 
domestic debt has represented a much bigger vulnerability 
than its foreign borrowings, which have been much longer- 
term and have accounted for less than a third of total debt 
(currently 26%).  From 2001 to 2004, with high rates of 
inflation keeping interest rates in double digits, Turkey 
had to borrow more and more merely to service existing debt. 
Consequently, the stock of public sector debt has grown in 
dollar or lira terms every year since the crisis despite 
strong growth, large primary surpluses, declining inflation, 
and a consequent decline of interest rates. 
 
--------------------------------------- 
Dramatic Improvement in Debt Indicators 
--------------------------------------- 
 
3. (SBU) 2005, a watershed year in a number of respects for 
the Turkish economy, was also a turning point in Turkey's 
debt situation. Net public sector debt as a ratio to GDP has 
declined over the past four years despite the growth in the 
dollar and lira value of the stock of public sector debt. 
From a ratio of over 90% of GDP in 2001, final 2005 data are 
expected to put net public debt to GDP at under 60%. 
 
4. (SBU) There are other signs of a stabilized debt profile. 
Total debt service leveled off at about YTL 188 billion 
($142 billion) in both 2004 and 2005.  Moreover, Turkish 
Treasury's generally conservative projections show that in 
2006 there will be a decline in debt service to YTL 168.4 
billion.  State Planning Organization Deputy Under Secretary 
Birol Aydemir says that in the second halfof 2005 the 
numerator of the net public debt o GDP ratio, i.e. net 
public debt, had begun to decline in nominal terms for the 
first time since the crisis.  Aydemir also emphasized the 
importance of the fact that 2006 projections show no net 
public sector borrowing requirement. 
 
5. (SBU) Treasury now finds itself in the strongest position 
vis--vis the markets since before the crisis.  Its planned 
rollover ratio (the ratio of newly-issued, traded domestic 
debt to redemptions) for 2006 is only 77%, far below 2005's 
89% or 2004's 98%. 
 
6. (SBU) Treasury's newfound strength enabled it to announce 
it would use 2006 to continue to lengthen the maturity of 
its new issuances.  (Some of the maturity-lengthening comes 
at the expense of greater interest rate risk: Treasury's 
longer-dated paper increasingly carries a floating -- rather 
than a fixed -- interest rate.)  Treasury had already taken 
steps to lengthen maturities: from January 2004 to December 
2005, the average maturity on traded domestic debt 
lengthened from 12.8 months to 19.6 months.  On January 25, 
Treasury issued $1.04 billion of 5-year lira-denominated 
fixed rate debt for example, a type of instrument it had 
only started to be able to place in small quantities in the 
domestic market in 2004. 
 
7. (SBU) Treasury has also been gradually reducing its 
vulnerability to exchange rate risk.   Following the crisis, 
when lira interest rates were prohibitively high, Treasury 
lowered its overall interest bill by borrowing both 
 
ANKARA 00000367  002 OF 003 
 
 
externally and domestically in lower interest rate foreign 
exchange-denominated or -indexed instruments.  The trade-off 
for the lower borrowing costs, of course, was increased 
exposure to a sharp fall in the exchange rate.  This risk 
remains: as Turkey's current account deficit has grown as a 
share of GDP, a sharp fall in the exchange rate is a 
distinct possibility, and one in which the lira value of 
Treasury's foreign exchange-denominated debt would spike. 
Treasury's improving debt situation, however, has allowed it 
to address this risk by lowering the share of foreign 
exchange-denominated or -indexed debt from two thirds of 
total debt in 2003 to 37.6% in December 2005. The 2006 
borrowing program calls for a further reduction in the share 
of foreign exchange debt. 
 
--------------------------- 
Good Luck and Good Policies 
--------------------------- 
 
8. (SBU) Good luck and good policies have worked together to 
achieve the much-improved debt situation.  First, the 
independent Central Bank succeeded in bringing down 
inflation through tight monetary policy.  CPI inflation, 
which was 68.5% in 2001 and 29.7% in 2002, had dropped to 
9.4% by 2004 and reached 7.7% in 2005.  Lower inflation 
brought down nominal interest rates, allowing Turkish 
Treasury to realize large savings on its interest payments. 
Total state interest payments peaked in 2003 at YTL 54.7 
billion, declining in 2004 to YTL 50.3 billion and YTL 45.5 
billion in 2005, despite the increasing stock of debt. 
 
9. (SBU) Investors gradually demanded less of a risk premium 
as they saw the discipline and success of both monetary and 
fiscal policies.  According to Treasury calculations, as of 
end-November 2005, real interest rates had fallen to 7.5% 
versus 9.5% in December 2004. 
 
10. (SBU) The IMF and European Union "anchors" have both 
played an important role in giving investors confidence to 
take on Turkish sovereign risk.  Particularly in the first 
post-crisis years, the IMF program was critical for investor 
confidence.  More recently, the GOT's reaching agreement on 
a new Stand-by Arrangement with the Fund in the spring of 
2005, and the December 17, 2004 and October 3, 2005 
decisions by the EU have played a major role in reassuring 
markets. 
 
11. (SBU) Turkey has also been very lucky about global 
market conditions.  The Federal Reserve and other major 
central banks have pursued mostly accommodative policies in 
recent years. This has left yield-hungry global investors 
keen to take advantage of emerging markets' high yields. 
Within this broader phenomenon, Turkey's high but falling 
yields and "EU convergence play" situation has proven 
irresistible to portfolio investors who have piled in to 
Turkish securities, including government debt. The surge of 
portfolio investment has caused the lira to strengthen, 
exacerbating the current account deficit problem but 
reducing the lira value of foreign exchange-denominated 
debt. 
 
12. (SBU) In 2005 and 2006, a series of high-profile 
privatization deals also helped Turkish Treasury's cash 
position.  The proceeds of these sales are being used to pay 
off debt or build Treasury's cash reserves, further reducing 
Treasury's borrowing need. Treasury's borrowing program data 
show total privatization receipts of YTL 3.6 billion in 2005 
and project YTL 7.0 billion in 2006, much of which consists 
of installment payments on deals agreed to in 2005. 
 
---------------------- 
Comment and Conclusion 
---------------------- 
 
13. (SBU) Though Turkey still has a large share of short- 
term debt, its debt ratios have greatly improved.  Despite 
continued vulnerabilities in the overall Turkish 
macroeconomic situation, (such as the large current account 
deficit) there has been a precipitous decline in the 
probability of a scenario in which the Turkish state has 
trouble rolling over its debt.   The lower risk has been 
reflected in recent upgrades by rating agencies, but even 
more so by the ever-declining risk premia on Turkish debt. 
Turkish Eurobonds, for example, are now trading at spreads 
normally associated with sovereign credits that are rated 
higher than Turkey's current BB- rating.  If the GOT 
 
ANKARA 00000367  003 OF 003 
 
 
perseveres on its structural reform agenda, both with the 
IMF and the EU, most analysts expect further upgrades in the 
course of 2006. 
 
 
Wilson