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Viewing cable 03ANKARA2094, TURKISH ECONOMY MARCH 31: PROGRESS ON IMF FOURTH

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Reference ID Created Released Classification Origin
03ANKARA2094 2003-03-31 11:10 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Ankara
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 ANKARA 002094 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EUR/SE AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON PREL TU
SUBJECT: TURKISH ECONOMY MARCH 31:  PROGRESS ON IMF FOURTH 
REVIEW 
 
Sensitive but unclassified, and not for internet 
distribution. 
 
 
1.  (SBU) Summary:  The parliament passed the 2003 budget, 
and AK dropped a controversial amendment to the Public 
Procurement Law after the IMF complained, according to 
Turkish press.  Ahead of the April 8 debt auction and April 9 
$3 billion debt payment, markets expect an LOI signing and 
IMF Fourth Review board date.  The GOT should be in a 
position to sign the LOI this week.  Further good news came 
in final 2002 GNP numbers showing 7.8 percent growth. At the 
same time, however, AK leaders to continue send populist 
signals contrary to the fiscal austerity message the markets 
need to hear.  End Summary. 
 
 
Markets Improve For End Of Quarter; Focus on IMF 
--------------------------------------------- --- 
 
 
2.  (U) In morning trading March 31, Turkish banks worked to 
boost the value of T-bills and the lira, to improve their end 
of first quarter results.  The benchmark T-bill fell to 64.7 
percent (down nearly one percentage point from Friday's 
close); the lira strengthened slightly to TL 1,704,000 to the 
dollar; the Istanbul Stock Exchange was down 1.3 percent in 
light trading. 
 
 
3.  (SBU) Ahead of the April 8 debt auction and April 9 $3 
billion debt payment, markets expect to hear good news on the 
IMF Fourth Review (see below), and hope not to hear bad news 
on Congressional approval of the U.S. package.  Markets 
believe the GOT will successfully roll-over the debt on April 
8 (discounted yields on the April 9 bill reflect this 
confidence).  Looking forward, however, sentiment remain very 
negative.  ING Barings General Manager in Turkey told us his 
bank estimates Turkey's default risk at 30 percent in 2004, 
based mainly on incompetence of the AK government in handling 
its ever increasing debt burden. 
 
 
Final GNP Data Shows Strong Recovery in 
2002; A Different Story Expected for 2003 
----------------------------------------- 
 
 
4.  (U) On March 31, the State Statistics Institute released 
2002 fourth quarter and full-year data:  GNP growth for 2002 
was 7.8 percent;  fourth quarter growth, compared with the 
fourth quarter 2001, was 11.5 percent.  In lira terms, GNP in 
2002 was TL 273.5 quadrillion.  In dollar terms, GNP was 
about $171 billion and per capita GNP was $2,584. 
 
 
5.  (SBU)  Comment:  Former President Suleiman Demirel's 
famous saying, "Yesterday was yesterday, today is today," 
seems appropriate.  Strong growth in 2002 had two main 
elements:  inventory rebuilding/bouncing back after a 9.5 
percent contraction in 2001; a pick-up of exports.  Looking 
ahead, the growth story should be based more on the return of 
domestic demand.  However, consumer and investor confidence 
surveys do not indicate strong demand.  Private sector banks 
and market analysts predict 2003 growth in the 1-3.5 percent 
range, all under the GOT's target of 5 percent.  End Comment. 
 
 
Progress on IMF Fourth Review: 
Budget Adopted Without Problem Amendments 
----------------------------------------- 
 
 
6.  (SBU) On March 29, the parliament passed the full-year 
2003 budget, and the AK Party dropped a proposed amendment to 
the budget law which would have exempted state energy 
companies from the provisions of the new Public Procurement 
Law.   World Bank economist Parks told us the Bank advised 
the GOT to follow the EU practice on energy sector 
procurements (the EU has a separate directive for government 
procurement for commercial transactions in certain sectors, 
including energy, telecom, transportation). 
 
 
7.  (SBU) According to the World Bank, the GOT is moving 
forward on the other three main prior actions for the IMF 
Fourth Review in addition to the budget: 
 
 
--  Privatization Administration chief Bozkurt told the Bank 
that the High Privatization Council had approved the TEKEL 
privatization plan. 
--  The direct tax reform bill is scheduled to be voted by 
parliament's Budget and Planning Commission this week. 
--  On eliminating redundancies in the state enterprises, the 
prime ministry issued a directive to all ministries canceling 
earlier prohibitions on forced retirement; and the Prime 
Minister is scheduled to announce this week the targets for 
lay-offs in SEEs over the remainder of year. 
 
 
8.  (SBU) Comment:  The GOT needs to sign the LOI and have 
the IMF announce a 4th Review board date this week, ahead of 
the large April 8 debt auction.  Deputy PM Sener told local 
TV news that the LOI would be signed this week.  At the same 
time, however, AK leaders continue to undercut this fiscal 
austerity message, key to market confidence, with populist 
signals to their constituents.  Thus, Sener in the same 
interview said farmers would not have to pay interest on 
outstanding loans from state bank Ziraat (appears to 
contradict an LOI undertaking).  MinState Babacan told the 
press that AK was studying the possibility of adding an 
Islamic-type non-interest loan facility to the state banks. 
Newly appointed Ziraat Bank GM Caglar later said this would 
take at least two years to implement, but for Turkey's 
secular-oriented financial markets, this was another reason 
to remain skeptical of GOT fiscal commitments. 
PEARSON