TURKISH ECONOMY MARCH 21: STEADY DETERIORATION

UNCLAS ANKARA 001810 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 21: STEADY DETERIORATION Sensitive but unclassified, and not for internet distribution. Markets Start to Re-focus on IMF Program, Await GOT Action -------------- ¶1. (SBU) On the morning of March 21, foreign investors were selling both Turkish stocks and Turkish Eurobonds. Lehman Bros Turkey analyst told us rumors of a Moody's downgrade of the Turkish sovereign debt is motivating some Eurobond selling. -- The lira depreciated one percent in the morning to TL 1, 720,000 to the dollar. -- The benchmark lira T-bill is currently trading at 68 percent compounded (up from 66.5 percent at yesterday's close). -- The Turkish 30-year maturity Eurobond is trading at about 1000 basis points wide of U.S. Treasuries (from 815 basis points on March 19). -- The Istanbul Stock Exchange 100 index closed down 6 percent in morning trading. ¶2. (SBU) Comment: With foreign investors increasingly selling out of Turkish stocks and Eurbonds (they are already out of the local T-bill market),it will be hard for the GOT to complain about "hot money" speculators (they'll wish they had some). Local investors now fully control the markets. According to bond and stock traders, the local investors were not happy to hear the morning TV news that the GOT is still negotiating with the U.S. on overflight rights (i.e., further reducing prospects of any U.S. aid). Locals are re-focusing their hopes for an optimistic scenario based now on two elements: a short war in Iraq (with smaller tourism and trade effects on Turkey); and quick GOT action to complete the Fourth IMF Review. Budget Update -------------- ¶3. (SBU) A key prior action under the IMF Fourth Review is passage of the full-year 2003 budget, which must in any case be adopted by April 1. According to Finance Ministry Deputy DG Ahmet Kesik, the current plan is for parliamentary floor debate to begin on Sunday, March 23 and finish five days later on Friday, March 28. President Sezer will then have until Monday, March 31 to ratify the budget law (though the Constitution gives the President up to 10 days to take action on legislation). ¶4. (SBU) Kesik told us there is one potential problem for the 2003 budget. Two new revenue raising measures - on motor vehicles and real estate - are contained in separate bills stuck in the parliament's Budget and Planning Commission. Parliament must pass those bills quickly as well, to avoid exacerbating existing serious concerns on budget financing. Kesik said the GOT plans to limit pass the bills out of the Budget and Planning Commission on March 28. Rising Inflationary Expectations -------------- ¶5. (U) The Central Bank publishes twice monthly a survey of expectations regarding forward-looking inflation. On March 21, the Central Bank published its second survey taken in March. It shows a steady increase in average expectations for year-end Consumer Price Index inflation. In February the expectations remained at 25 percent, while now they are 27 percent (the GOT target is 20 percent). PEARSON