TURKISH ECONOMY MARCH 27: MARKETS QUIET;

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002010

SIPDIS


STATE FOR E, P, EUR/SE AND EB
TREASURY FOR U/S TAYLOR AND OASIA - MILLS
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 09/02/2006
TAGS: ECON PREL TU
SUBJECT: TURKISH ECONOMY MARCH 27: MARKETS QUIET;
FOREIGNERS OUT; TURKS SAY NO CONFIDENCE IN GOVERNMENT

Classified by Economic Counselor Scot Marciel for reasons 1.5
(b, d).



1. (SBU) Summary: While Turkish markets were relatively
quiet on March 27 am, a wide range of market and GOT contacts
tell us confidence in the government remains rock bottom.
This translates into ongoing serious concerns about the GOT's
ability to roll-over about $3 billion of debt in its local
T-bill market on April 8. Treasury's cash reserves at that
date are likely to be about TL 1.8 quadrillion ($1.1
billion). One new wrinkle to the April 8 roll-over problem
is the large percentage of debt coming due which is held not
by Turkish banks but by the Turkish public (as much as 40
percent.) Treasury is pressing the IMF to schedule a Board
date for the Fourth Review before the April 9, but the GOT is
not moving quickly to resolve pending issues. End Summary.


Markets Flat, Volumes Thin
--------------



2. (U) In morning trading March 27, yields on T-bills were
unchanged at 64 percent compounded. CEO of Disbank
(mid-sized Turkish bank) Bayazit told us banks were bringing
down yields ahead of the Monday March 31 end of first
quarter, when publicly traded banks report their balance
sheets to the shareholders. After March 31, Bayazit expects
yields to resume their upward trend ahead of the April 9 $3
billion debt redemption. The lira was also unchanged at TL
1,710,000 to the dollar, and the Istanbul Stock Exchange
closed up 0.7 percent.


BRSA Chairman: Capital Flight LImited, but
F/X Liquidity is a Problem
--------------



3. (SBU) Chairman of the Banking Regulatory and Supervision
Agency (BRSA) Engin Akcakoca told EconCouns March 27 that
market confidence in the Turkish government had never been
lower (his full remarks will be in septel). On the banking
sector, he said for the moment there are liquidity problems
on the F/X side, but the Central Bank is stepping in to lower
its short-term borrowing rates (which have dropped from 12 to
6 percent over past week),and to keep F/X lines open.
Nevertheless, "if withdrawals continue, we'll be in crisis
management mode."


-- Turkish bank customers are switching out of foreign
exchange and into Turkish lira, rather than transferring
capital out of the country. They are taking advantage of
higher interest rates in the TL markets. Per BRSA data,
Turkish banks report a total of $1.8 billion in withdrawals
of foreign currency deposits between March 14 and 25. In
return, TL deposits have increased about TL 1 quadrillion and
T-bill sales have increased about TL 1.5 quadrillion.
Akcakoca estimates $100-200 million of F/X cash was taken out
of banking system and put under mattresses in this period.


Concerns with April 9 $3 billion Debt Redemption
-------------- --------------



4. (SBU) General Manager of Kocbank (a mid-sized Turkish
bank half-owned by Italy's Unito Credito) Kemal Kaya told us
the banks remain concerned with the roll-over of the April 9
redemption. The wild card in the April 8 auctions, per Kaya,
is the high percentage of the T-bills to be redeemed on April
9 which are owned by the Turkish public, not by the banks.
He estimates the percentage in public hands to be about 40
percent. While Turkish banks will want to roll-over their
T-bills, per Kaya, they do not want to buy more bills. No
one can predict at present the public's appetite to roll-over
the debt at the April 8 auctions.



5. (U) Kaya said he heard from the bankers who met at
Treasury on March 26 that "Undersecretary Oztrak looks burned
out. The rumor is his days are numbered. The bankers told
Babacan that replacing Oztrak would be extremely negative
for market confidence." (Note: Tuncay Ozilhan, Chairman of
TUSIAD which is the prestige Turkish business group, gave a
press statement March 26 reinforcing the point that now is
not the time to replace the reform-minded top civil servants.
Ozilhan also urged the GOT to move forward quickly with the
IMF and also to extend the current Stand-by Arrangement until
2006.)


Treasury Concerned as Well, but
Still Negotiating LOI Terms
--------------



6. (C) Treasury Deputy U/S for public finance Hakan Ozyildiz
told us that, in Treasury's March 26 meeting with the
managers of the top four Turkish banks, the main message from
the banks was "finish the IMF Fourth Review immediately."
Ozyildiz said Treasury was pressing the IMF to sign the LOI
tomorrow, and to schedule a Fourth Review Board meeting
before the April 9 redemption.


-- IMF resrep told us there are still several issues to be
resolved before the LOI can given to IMF senior management:
for instance, the GOT has not yet canceled the pending
investigations into BRSA's intervention of Pamukbank. If the
issues were resolved overnight, IMF senior management could
begin reviewing the LOI tomorrow and the LOI could be signed
early next week.
-- On the April 8 auctions, Ozyildiz said the current plan
is to target a 85 percent roll-over of the April 9 redemption
(i.e. raise about TL 4 quadrillion or $2.35 billion). His
conservative projection of Treasury's cash balance ahead of
the April 9 redemption is TL 1.8- 1.9 quadrillion. If the
cash position is better than this projection (because tax
collection is stronger than projected) then the April 8
borrowing needs would be somewhat less.


-- Ozyildiz said Treasury would work closely with the 10
primary dealers in TL-denominated debt (9 Turkish banks and
HSBC) in offering appropriately short maturity debt on April

8. He has scheduled meetings in Istanbul and conference
calls next week with these dealers.
Upheaval At the Privatization Administration:
Populist Fiddling
--------------



7. (U) The Prime Ministry announced March 26 that President
Sezer had approved a change in ministerial portfolios,
shifting the Privatization Administration (PA) away from
Deputy PM Sener and into the portfolio of Finance Minister
Unakitan. Last week, all three vice presidents at PA were
replaced by AK Party cadre.



8. (SBU) On March 26, Deputy PM Sener gave a farewell speech
on privatization asserting that the 2003 program was on track
(septel has a privatization update). The markets, however,
focused on his remarks that, "the parliament is working on a
law to ensure nobody working in a state enterprise under the
PA portfolio will suffer from unemployment." (Note: Sener
unveiled this draft law in January; if passed, it would
allow state enterprise workers to convert to the GOT civil
service rather than face a lay-off. The World Bank believes
few state enterprise workers would opt for lower paying civil
service jobs, and would seek job severance packages instead.
However, this law's populist signal to the markets is quite
negative.)



9. (C) Comment: According to rumors in the market, Sener
lost privatization because AK-associated businesses that had
earlier won some smaller privatization tenders had complained
to PM Erdogan that the PA was too aggressive in requiring
them to pay up. Privatizations in Turkey are usually paid
for by installment (which means there are often payment
delays). If true, this is another example of the AK
government focusing on the narrow interests of constituents
and missing the bigger picture of a malfunctioning
government.



10. (C) World Bank economist Parks gave us another example
of populist fiddling on March 27. Industry Minister Ali
Coskun this week instructed the agricultural sales
cooperatives (part of his ministry) not to implement a
decision to close down several loss-making cotton spinning
mills owned by the cooperatives. The World Bank requires
this decision under one of its adjustment loan programs
(Agricultural Sector Reform Loan). Such decisions hold up
the cash flow to the Treasury at a time when cash reserves
are desperately needed.
PEARSON