TURKEY'S ECONOMY: MARKET AND IMF UPDATE

UNCLAS SECTION 01 OF 02 ANKARA 001100 SIPDIS SENSITIVE STATE FOR E, P, EB AND EUR/SE TREASURY FOR U/S TAYLOR AND OASIA - MILLS AND LEICHTER STATE PASS USTR - NOVELLI AND MOWERY E.O. 12958: N/A TAGS: ECON EFIN PREL TU SUBJECT: TURKEY'S ECONOMY: MARKET AND IMF UPDATE Sensitive but unclassified, and not for internet distribution. ¶1. (SBU) Summary: Turkish markets remain hopeful that the GOT will respond positively to the USG by the weekend, though Deputy PM Sener's late afternoon press statement of "no agreement yet" sparked some selling. IMF mission staff in Ankara are less hopeful of reaching agreement on the 2003 budget primary surplus, following a late February 18 meeting with State Minister Babacan. We include for the curious a spring calender of Turkey's debt redemptions. End Summary. Markets Stable But Uneasy, Some Profit-Taking -------------- ¶2. (SBU) On February 19, Turkish financial markets were basically stable, in high trading volumes, with some profit-taking after the market rallies of the past two days. The lira ended the day unchanged from yesterday's close at TL 1,626,000 to the dollar; T-bill rates inched downward to 56.5 percent (from 57 yesterday); the Istanbul Stock Exchange was down 1.5 percent. ¶3. (SBU) There was some selling (hedge fund clients of Deutsche Bank we understand) following Deputy PM Sener's late afternoon press statement, coming out of the Cabinet meeting, that there was no agreement yet on the U.S. troop deployment. But the predominant sentiment remains positive about the prospects of a deal. JP Morgan/Chase bond trader summed up the market expectation as a positive GOT response to the U.S. before the weekend. ¶4. (SBU) CEO of Akbank Zafer Kurtul sounded one cautionary note: he told us that the GOT needs to clear up its U.S. package negotiations before the next large T-bill auction on March 3. If not, there will be a major "market disruption" he predicted. (Note: Akbank is Turkey's largest private sector commercial bank, and the largest holder of T-bills.) Spring Debt Redemption Calendar: Beware March 5 -------------- --- ¶5. (SBU) Turkish Treasury deputy DG for public finance Volkan Taskin provided us the following domestic debt redemption calendar. For the remainder of February, there is only a TL 394 (about $238 million) domestic debt redemption to state banks on February 26; Taskin said the Treasury may hold a small auction on February 25, or may not, depending on market conditions. Date Payment to Payment to public sector Market (Cenbank/state banks/etc) -------------- -------------- -------------- 3/5 TL 3.8 quad TL 100 trillion 3/12 - TL 511 trillion 3/15 - TL 9 trillion 3/19 TL 4.5 quad TL 500 trillion 3/24 - TL 25.8 trillion 3/26 - TL 339 trillion March total: TL 9.8 quadrillion ($6 billion) in domestic debt service; $0.8 billion in external debt service. 4/9 TL 4.6 quad TL 600 trillion 4/24 TL 1.6 quad April total: TL 7.8 quadrillion ($4.4 billion) in domestic debt service; $0.5 billion in external debt service. Smaller redemption dates in April not given. 5/7 TL 4.2 quad TL 200 trillion 5/10 - TL 2.8 quadrillion (payment to CenBank) 5/14 TL 1.2 quad TL 1.2 quad 5/21 TL 3.6 quad TL 100 trillion May total: TL 13 quadrillion ($7.4 billion) in domestic debt service; $1 billion in external debt service. Smaller redemption dates in May not given. ¶6. (SBU) Taskin's comment to us echoed that of Akbank CEO above: the GOT must provide clarity to the markets before the March 5 redemption date. Taskin said good press announcements on both the U.S. package and the IMF program would be enough. In that positive scenario, he saw no need for a bridge loan. In the absence of this positive scenario (i.e., no U.S. package or IMF program annoucement) Taskin said Treasury would work with local banks to try to ensure high debt roll-over rates for as long as possible. In this case he predicted March 4 auction rates in the 65-70 percent range. (Comment: Given the average maturity of TL-denominated T-bills of about 8 months, this means a much higher debt service in late 2003 than projected. It would immediately reignite concerns of debt sustainability. End Comment.) IMF Less Hopeful -------------- ¶7. (SBU) IMF resrep reported Feburary 19 that the late February 18 meeting with State Minister Babacan had not gone well. Treasury U/S Oztrak had met with PM Gul on February 14, and then reported to the IMF team GOT agreement on several 2003 budget issues. On February 18 Babacan appeared to step back from this agreement. -- The draft LOI had included a GOT commitment not to undertake new amnesties or re-schedulings of back taxes or other public receivables (e.g., employer's social security premiums, state bank loans, electricity arrearages, all of which AK figures have publicly mentioned). PM Gul reportedly agreed with Oztrak to this commitment, but Babacan explicitly told the IMF team that he couldn't agree. -- Babacan said there would be no new fiscal saving measures, though the primary surplus shortfall is, per the IMF calculations, now 1. 7 percent of GNP or about TL 6 quadrillion (about $3.8 billion). Oztrak had indicated that Gul was committed to taking measures needed to close this shortfall. ¶8. (SBU) Comment: IMF/GOT negotiations on the 2003 budget are ongoing, and will likely continue up to the last minute before the GOT submits the budget to its parliament. Though GOT staff are pushing for a budget submission this week, the interim budget goes through end March. GOT staff appear to be pushing becuase of the fragility of market sentiment. But even if IMF staff and the GOT reach agreement on the 2003 budget, IMF staff told us they will not recommend a Fourth Review board date, given the long list of outstanding structural reform conditions. Full update septel. PEARSON