TREASURY UNDERSECRETARY ON IMF, U.S. MONEY

UNCLAS SECTION 01 OF 03 ANKARA 002915 SIPDIS SENSITIVE STATE FOR E, EUR/SE, AND EB/IFD TREASURY FOR OASIA - RADKINS AND MMILLS NSC FOR BRYZA AND MCKIBBEN E.O. 12958: N/A TAGS: EFIN ECON EINV PREL TU SUBJECT: TREASURY UNDERSECRETARY ON IMF, U.S. MONEY REF: A. STATE 108200 ¶B. ANKARA 2874 ¶1. (Sbu) Summary: Treasury U/S Canakci told Econoffs May 24 that the GOT would decide soon about both the U.S. Financial Agreement and the future IMF role. Econoffs delivered ref a financial points. Despite the recnt market downturn, Canakci was confident about Treasury's financing position for 2004, based on World Bank disbursements, strong fiscal performance, and the structure of public debt. Adding to his confidence was his expectation of above-target privatization receipts, but later the same day a court halted the Tupras privatization. Canakci admitted the Net Debt/GNP ratio could end the year above the 67 percent target. He claimed the GOT was not concerned about the current account deficit. He admitted there was little FDI, and cited problems with the judiciary system, among others. End Summary. The FA, the IMF and post-2005 Financing: -------------- ¶2. (Sbu) In a meeting May 24, with Treasury U/S Ibrahim Canakci and the newly-appointed Director General for External Relations, Memduh Akcay, Econcouns went over ref a Financial Agreement points, responding to the questions Minister Babacan had raised with Secretary Snow. Canakci seemed to understand the points about the interest rates and the guarantees. He did not push back. Note: In a meeting May 18, the Ambassador had covered ref a's points on the language in the amendment with MFA U/S Ziyal. End Note. ¶3. (Sbu) Econcouns noted the signs of Congressional concern about non-ratification of the FA, and asked Canakci when he thought the GOT would come to a decision. Canakci claimed that the GOT would decide on both the FA and on what kind of support to request from the IMF "in a short period of time." He said that both his minister and the Government were aware they could not postpone this decision for long. He said these decisions were closely related to the GOT's projected financing outlook for 2005 and beyond. In 2005, he said the major issue was the $7.5 billion due to the IMF. Canakci said Treasury is running simulations and will submit them to Minister Babacan and the GOT for consideration. ¶4. (Sbu) Note: Separately from the meeting with Canakci, press reports of the discussion of the FA at the Congressional hearing last week had set off a paroxysm of press coverage in Turkey, with Minister Babacan being asked at press conferences about it, and opposition leader Baykal referring to the "heavy conditions" of the U.S. loan. Regarding the financing outlook for 2005, in a meeting last week Treasury domestic debt manager Volkan Taskin told econoffs that if he had to issue an additional $5 billion to the domestic market in 2005, Treasury's rollover ratio would probably surpass 100 percent, i.e. Treasury would be borrowing more than it was repaying. Taskin also said the average maturity of new issuances for the first five months of 2004 was 14 months, and cautioned against overinterpreting the newly-steepened yield curve on domestic debt since the slope derives much more from diverse investor classes' appetites than from risk perceptions or inflationary expectations. End Note. ¶5. (Sbu) Canakci said there is a consensus view in the financial community that Turkey should seek the strongest possible arrangement from the IMF, a Precautionary or a Standby. He noted, however, that a follow-on IMF program could signal a lack of confidence that Turkey can stand on its own. Econcouns commented that it may be that markets are not sufficiently confident because of slow movement on structural reforms, and noted as an example the widely-held view that the draft law on independent regulatory boards could undermine these boards' independence. Canakci did not respond. Privatization: -------------- ¶6. (Sbu) Econcouns inquired as to the status of Treasury's understanding with the IFI's to withdraw capital from state-owned banks in order to retire debt and help shrink the banks for eventual privatization. Canakci revealed that all the preparatory measures had been taken, including obtaining permission from BRSA to reduce Ziraat Bank's capital, but that the GOT had held off because of the recent market volatility. Though the move would have reduced Treasury's outstanding debt, Canakci said the markets might think the GOT was taking panicky actions to respond to the volatility. ¶7. (Sbu) Canakci said privatization receipts in 2004 would come in well above the program target of $1 billion. The GOT has already received roughly $300 million from the sale of the alcohol side of Tekel, and expected to receive the full $1.3 billion from the Tupras privatization in the next week or so. Later in the the day on which the meeting took place, however, an administrative court stopped the Tupras sale on the grounds that there were flaws in the tender process. 2004 Financing Outlook: -------------- ¶8. (Sbu) Canakci argued that, for a variety of reasons, the recent fall in the exchange rate and the rise in interest rates would not have a large effect on the GOT's 2004 financing outlook. Obviously, the significance of the impact depends on how long the higher interest rates and weaker lira persist. The fundamentals, however, have not deteriorated, and Canakci said he expected interest rates to decline. When Econcouns pointed out that some analysts believe the pre-volatility low rates were "not normal" since they were driven by global liquidity, Canakci claimed they were normal and cited the very high real interest rates. He expressed confidence that markets will reconsider the fundamentals and the current account deficit and return TL interest rates to levels lower than those currently prevailing. ¶9. (Sbu) Canakci said that only 18 percent of projected debt service for the remainder of 2004 is denominated in foreign exchange, limiting the impact of a weaker lira. Note: though the percentage of foreign exchange denominated debt is much higher than this, the lower interest rate on FX-linked debt and the longer maturities (i.e. fewer principal payments in the coming months) probably account for this low percentage of debt service. End Note. Of the GOT's $5 billion target for external financing from private lenders, Canakci said the January and February Eurobond issues mean that only $2.2 billion more will need to be borrowed. He said they are closely monitoring market conditions and could issue at any time. ¶10. (Sbu) World Bank financing has been forthcoming, with Canakci citing the recent $375 million disbursment under the Economic Recovery Loan (ERL) and the announcement last week that the Bank would disburse $500 million by June 30 under the PFPSAL 3 loan, with the remaining $500 million to be disbursed by year-end. Canakci went on to cite the above-target performance so far in 2004 on the primary surplus: TL 1.8 Quadrillion ($1.2 billion) for the Central Government for January through April. Canakci admitted that the under-spending that contributed to this good performance was unlikely to persist through the end of the year, but nevertheless argued that for all these reasons, the GOT is in a good position for its 2004 financing program. ¶11. (Sbu) Regarding debt sustainability measures, on the other hand, Canakci said that the depreciation of the lira raised the possibility that the Net Public Debt/GDP target of 67 percent might not be attained. This was particularly likely if there were a real--rather than just nominal--depreciation of the exchange rate. Beyond 2004, however, Canakci was confident that there would be a declining trend in Net Public Debt/GDP. Current Account and Foreign Investment: -------------- ¶12. (Sbu) Canakci said neither the Central Bank, nor State Planning Organization (SPO),nor Treasury officials were overly concerned about the current account deficit, given the automatic adjustment mechanism of the floating exchange rate. In the program, Canakci said the GOT had projected a deficit of 3 percent of GNP or $9.1 billion but that more recently, the Central Bank and SPO were projecting $10 billion, and had raised their assumption for oil prices. He said that in addition to the likelihood of a strong tourist season, the GOT expects the trade deficit to moderate due to the depreciation of the exchange rate. ¶13. (Sbu) Canakci agreed there was very little foreign investment. He attributed this to the history of macroeconomic instability but also to "micro issues," especially the legal system, which lacks consistency and predictability. He cited the recent court decision in favor of the former owners of Demir and Kent Banks as an example. With regard to the Cargill case, he said it had become more complicated lately, without elaborating. EDELMAN