TURKEY'S ECONOMY MARCH 3/3 COB: MARKETS STABILIZE,

UNCLAS SECTION 01 OF 02 ANKARA 001365 SIPDIS SENSITIVE STATE FOR E, P, EUR AND EB TREASURY FOR U/S TAYLOR E.O. 12958: N/A TAGS: ECON PREL TU SUBJECT: TURKEY'S ECONOMY MARCH 3/3 COB: MARKETS STABILIZE, BUT DEBT FINANCING A CONCERN REF: ANKARA 1351 Sensitive but unclassified, and not for internet distribution. Markets Stabilize in Afternoon Trading -------------- ¶1. (SBU) Turkish financial markets at COB March 3 stabilized after a rough morning which saw relatively heavy capital outflows: -- The lira depreciated about 3 percent, closing at TL 1,651,000 to the dollar. The Central Bank markets department reported a net capital outflow today of $120 million, $85 million from one bank. -- The benchmark T-bills closed at 60 percent in annually compounded terms, up 5.5 percentage points on the day, in heavy trading volume of TL 830 trillion (about $550 million). -- The Istanbul Stock Exchange dropped 12.5 percent in relatively heavy trading of TL 458 trillion (about $300 million). ¶2. (SBU) Comment: As reported at mid-day (reftel),the sell-offs were contained by two factors: first, PM Gul's press statement on the budget, backed by the IMF Mission Chief's supporting statement; second, a hope among some investors that the U.S. package will soon become available, becuase the parliament will pass a second troop deployment resolution. As Lehman Bros analyst told us, "The bad news of no U.S. package is not priced in. It would lead to a second sell-off, with Eurobonds dropping another 4-5 percentage points, and T-bill yields ending up at 65 percent or higher." ¶3. (SBU) Comment Continued: Looking ahead, the March 19 domestic debt redemption of TL 5.2 quadrillion (about $3.5 billion) is a concern. The Treasury may well use up some of its cash reserves of TL 4.2 quadrillion to take care of the March 5 redemption, leaving less flexibility to take care of the larger March 19 redemption. The "safety valve" may be for Treasury to use moral suasion with the state banks (especially Ziraat) to step up and buy more GOT debt. End Comment. IMF Resrep: Financing Gap a Concern -------------- ¶4. (SBU) IMF resrep told us March 3 that Fund staff are reviewing the the financing assumptions behind the 2003 budget (basically, an average T-bill interest rate of 45 percent, 90 percent debt roll-over rate, 8 month average maturity),wich he noted do not take into consideration the effect of an Iraq operation. Fund staff cannot recommend their Board approve the Fourth Review, if the GOT faces a funding gap in 2003, he stressed. Mission Chief Kahkonen's March 3 press statement says the GOT draft budget achieves a 6.5 percent primary surplus, but it doesn't say this is sufficient for the GOT's funding needs, he concluded. February Inflation Data: Credibility of Macro Framework May Be Questioned -------------- ¶5. (U) At market close March 3, the State Statistics Institute released the February inflation data: February January Consumer Prices 2.3 pct 2.6 pct Wholesale Prices 3.1 pct 5.6 pct ¶6. (SBU) Comment: The February inflation results are in line with market expectations, and seasonal adjustments (for higher food prices in winter) should reduce them. The government-controlled price increases of January affected February CPI, but this is not a lasting effect. Neverthless, two straight months of high inflation may start to have a corrosive effect on market acceptance of the GOT's macro-economic framework. We're two months into the year and the aggregate WPI is nearly half of the year-end target. We will check the Central Bank's next inflation expectations survey (due out in mid-March) to see if expectations are affected. PEARSON