TURKEY'S ECONOMY MARCH 4 AM: HIGH YIELDS IN T-BILL

UNCLAS SECTION 01 OF 03 ANKARA 001378 SIPDIS SENSITIVE STATE FOR E, P, EUR AND EB TREASURY FOR U/S TAYLOR AND OASIA - MILLS E.O. 12958: N/A TAGS: ECON EFIN PGOV TU SUBJECT: TURKEY'S ECONOMY MARCH 4 AM: HIGH YIELDS IN T-BILL AUCTION; DETAILS OF 2003 BUDGET MEASURES REF: ANKARA 193 Sensitive but unclassified, and not for internet distribution. ¶1. (SBU) Summary: The GOT raised TL 2 quadrillion in two Treasury debt auctions on March 4, but yields were high - 62.5 percent on the one-year bond. This result, together with the Treasury's TL 4.2 quadrillion cash reserve, is sufficient to meet the March 5 debt redemption of TL 3.9 quadrillion. According to the general manager of Akbank, the largest player in Turkey's domestic debt market, the ramifications of the March 1 parliamentary vote are still being felt in the markets. "Not getting the U.S. package is one thing, and there's still some hope there, but AK's mishandling of this vote is causing lack of confidence in the government which is not easily forgotten." This lack of market confidence in the GOT translates into higher interest rates on T-bills, which will add to debt sustainability questions. Also included in this report are the details of the 2003 new budget measures announced March 3 - including cuts to military spending, Northern Cyprus appropriation, delays to the World Bank-supported "Direct Income Support" for farmers, and two new taxes on real estate and vehicles. End Summary. Markets - Interest Rates Higher -------------- ¶2. (U) At mid-day March 4, Turkish markets were stable, though T-bills were trading at a much higher rate, anticipating the high yields in today's T-bill auctions (see below). -- The benchmark (most heavily traded) T-bills were trading at 62.50-63 percent in compounded terms. -- The lira appreciated slightly from March 3 close, trading at TL 1,642,000 to the dollar. -- The Istanbul Stock Exchange rebounded slighlty from yesterday's 13 percent sell-off, and was up 1.6 percent at noon. ¶3. (SBU) Akbank (Turkey's largest private sector bank and largest T-bill investor) General Manager Zafer Kurtul told us March 4 that PM Gul had called him, and other major Turkish bank general managers, around midnight March 2 asking about the likely market reaction to the parliamentary vote. Kurtul told us he said to Gul that the GOT needed to show the markets a fiscally responsible budget (comment: this advice may have helped prompt GOT agreement with the IMF later that evening). Kurtul opined to us that the ramifications of the March 1 vote are not over: "not getting the U.S. package is one thing, and there is still some hope on that, but AK's mishandling of this vote has caused major market lack of confidence and that will not be easily forgotten." March 4 Treasury Auction -------------- ¶4. (SBU) Turkish Treasury released the results of its March 4 auctions at 2:00 PM local time. The total amount raised (about TL 2 quadrillion) and the yields were within market expectations. However, the Turkish banks are now asking a significantly higher rate to roll-over the domestic debt, and this will add to debt sustainability concerns already in the markets. Compounded Yield Amt Sold 1-Year Bond 62.5 TL 1.65 quad 7-Month Bill 58.5 TL 0.36 quad Details of Fiscal Saving Measures -------------- ¶4. (U) Following are the fiscal saving measures released by PM Gul on March 3. They represent all fiscal measures agreed with the IMF on the 2003 budget. This list includes an earlier set of measures announced January 8, reftel, but has changed the fiscal impact of such measures in line with IMF experience (for instance, the impact of the tax amnesty is now TL 750 trillion, not TL 2.4 quadrillion as stated January 8). ¶5. (U) Among the highlights of the new measures are: public investment cuts of TL 2.6 quadrillion (note: the World Bank will share with us later the list of cut projects) and military spending cuts (TL 450 trillion); delay of the "Direct Income Support" (DIS) payments to farmers (TL 1.4 quadrillion); and two new taxes on real estate and vehicles (TL 1.750 quadrillion). Though not a fiscal saving measure, but still significant, the GOT agreement to include in the definition of primary spending all "foreign-financed investments" (these are foreign export credit agency-financed goods imported by line ministries, including medical and construction equipment and vehicles.) This category of primary spending was included in the budget for the first time, and the overall amount was also cut. Table of New Fiscal Measures for 2003 trillion TL % of GNP Expenditure Measures Personnel, includes: 545 0.2 Civil Servants (limit new hires to 35,000) Public Workers (postpone bonuses) Limit pharmaceutical benefits Investment 4,105 1.2 (stop new car purchases, cut foreign-financed purchases, rationalize list of investment projects) Other 1,184 0.3 cut military spending 450 transfer unspent mil appropriations from last year 270 cut health and education 50 other cuts 414 Transfers 3,967 1.1 Civil servant pension fund restructuring 764 0.2 Self-employed pension fund restructuring 350 0.1 Other Employee pension fund restructuring 190 0.1 Other Transfers 2,315 0.7 incl: cut transfer to Cyprus 50 postpone "DIS" to farmers 1,400 0.4 new reg on tax rebates for 294 0.1 exports Expenditure sub-total: 9,801 2.8 Revenue Measures, including: - Tax Amnesty 750 0.2 - New tax on real estate 650 0.2 - New tax on vehicles 1,100 0.3 - Revenue claw back of municipalities 275 0.1 - Cancel earmarking of revenues, return to central budget 1,440 0.4 - eliminate lags in corporate tax collection 780 0.2 Revenue sub-total 5,972 1.7 Total Savings TL 15,773 4.4 PEARSON