TURKEY ECONOMIC UPDATE

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SUBJECT: TURKEY ECONOMIC UPDATE


REF: ANKARA 3693



1. (SBU) Summary: The increasing likelihood of a delay
beyond end-June in the Fifth Review under Turkey's IMF
program so far has not dampened the relatively buoyant mood
in the markets, as the lira continues to trade strongly
against the dollar. The Central Bank intervened again this
week, to the tune of $550 million, while also issuing a
public statement warning that inflationary pressures persist.
That said, the Bank's latest survey shows a decline in
inflationary expectations coupled with improved expectations
for growth. Amid anecdotal evidence of a pick-up in demand,
the latest figures for industrial production indicate
continued, albeit modest, growth. The Treasury this week
successfully placed $760 million in Euro-denominated bonds,
while raising another $1.2 billion via the sale of
lira-denominated t-bills. The government launched tenders
for two key privatizations -- involving oil refiner Tupras
and spirits/cigarette producer Tekel -- but is hinting it
might not bless the results of the just-concluded tender for
the privatization of petrochemical company Petkim. End
Summary.



2. (SBU) The GOT continues to move slowly on meeting the
conditions for the Fifth Review under its IMF-supported
economic program. Parliamentary Budget Committee Chairman
Sait Acba told us June 9 that Parliament was still debating a
proposal to put key pending legislation, including on
strengthening social security institutions, on to the Turkish
equivalent of "fast-track." Treasury officials advised June
12 that they hope Parliament will vote on this procedural
question on June 19, with the vote on passing the legislation
itself coming sometime later. IMF ResRep told us there has
been little progress on the fiscal side. On the one hand,
the government keeps coming up with new, populist spending
ideas that would increase the fiscal gap, including a 50
percent cut in electricity prices for exporters, a reduction
in the special consumption tax on cars, and a possible
reduction in the VAT on certin foods. On the other hand, at
the political level, it has so far been unwilling to approve
serious measures to reduce the gap. Per ResRep, Minister
Babacan and Treasury U/S Canakci presented the bureaucracy's
proposed fiscal measures to Prime Minister Erdogan on June 8;
he apparently was unenthusiastic, particularly about raising
electricity prices. Instead, the government is coming up
with measures -- such as extending the partial spending
freeze and offering a "discount" to those signed up for the
tax amnesty proposal if they pay all their arrears up front
-- that would bring short-term fiscal benefits but would not
address the fundamental problem. With Babacan heading off to
Malaysia and Pakistan today (with the Prime Minister) for
five days (after which the Minister will go to London and
Jordan),IMF ResRep does not expect rapid closure on the LOI.





3. (SBU) Markets so far have not reacted significantly to
the increasing prospects of a delay, although t-bill yields
have leveled off at the 48-49 percent range. Treasury this
week successfully placed $760 million in Euro-denominated
bonds (yielding 9.7 percent),while raising another $1.2
billion via the sale of 13-month lira-denominated bills with
a 48.4 percent yield. The lira's continuing strength
prompted the Central Bank to intervene again on June 9,
buying some $550 million. The intervention pushed the lira
back from a high of TL 1.409 million/dollar to TL 1.445
million/dollar, but it quickly strengthened again and was
trading this morning at TL 1.423 million/dollar. Monetary
Policy Council member Professor Guven Sak told us June 11
that officials remain puzzled at the lira's strength, but
believe it is mostly the result of reverse currency
substitution by local residents. Other Central Bank
officials have told us that, while the main reason for the
CB's intervention was to temper excessive volatility, the
Bank also saw an opportunity to build its dollar reserves
while ensuring sufficient lira liquidity in the market.



4. (SBU) Also on June 9, the Central Bank issued a
statement warning of continuing inflationary pressures: "The
increase in May of public-sector prices and signals that
domestic demand is increasing are seen as risk elements that
could limit inflation's fall." Analysts read the statement
as indicating the Bank would not further reduce short-term
interest rates anytime soon, despite the lira's strength. The
next day, however, the Bank announced that its latest survey
indicated that expectations for year-end inflation had fallen
from 26 to 25.6 percent, against a CPI target of 20 percent.



5. (SBU) The survey also revealed that expectations for 2003
GNP growth had risen from 4.1 to 4.4 percent. This fits with
anecdotal information we have been hearing from business
contacts, who detect a small pick-up in domestic demand.
April industrial production figures, up 4.2 percent over
April 2002, lend further support to this view. The press
attributes much of the growth to booming exports -- up 30.6
percent through the first four months of the year -- but
economists point out that imports are rising even faster (up
32.3 percent),so in fact foreign trade is not spurring
growth. Exports are, however, boosting confidence, at least
in some sectors (the auto sector's exports rose nearly 50
percent through April).



6. (SBU) Unfortunately for Turkey, the sharp rise in foreign
trade has not been matched by an increase in foreign direct
investment, which is -- at best -- trickling in. Turkish
Treasury officials have been hoping that implementation of
long-delayed privatization plans might boost FDI (as well as
provide them with much-needed revenue),and the government
finally is beginning to move on this front. The
Privatization Administration announced that it had received a
best bid of $605 million for a controlling stake in
petrochemicals firm Petkim. Shortly thereafter, it launched
tenders for oil refining monopoloy Tupras and tobacco/spirts
giant Tekel. The latter, in particular, is expected to
attract substantial foreign interest.



7. (SBU) The Petkim tender has sparked controversy. First,
Prime Minister Erdogan, opposition CHP leader Deniz Baykal,
and a host of others have complained that the $605 million
leading bid was far below Petkim's "market" value, and have
questioned whether the State should carry out the sale. The
Prime Minister warned that the Higher Privatization Council,
which must give final approval to the sale, would look into
this question. The other controversial aspect was that the
winning bid was made by Standart Kimya, owned by the Uzan
family of Motorola (and Genc Party) fame. (Comment: Unless
there is evidence of monkey business in the bidding process,
concerns about the size of the highest bid are unwarranted,
given that the priority here is to get these companies into
the private sector. However, given the Uzan's track record,
there is reason to be concerned about the family taking
control of another major enterprise. End Comment.)


PEARSON