Turkish Treasury Under Secretary Optimistic about

UNCLAS SECTION 01 OF 02 ANKARA 001409 SIPDIS TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER DEPARTMENT PASS EXIMBANK SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EFIN TU SUBJECT: Turkish Treasury Under Secretary Optimistic about IMF Program Ref: Ankara 1332 1.(SBU) Summary: Treasury Under Secretary Canakci believes the recent VAT rate cut and delays on Social Security legislation can be managed within the framework of the IMF program, saying the Prime Minister will ensure the Social Security legislation will passed soon. Canakci downplayed the importance of the choice of Central Bank Governor, asserting the reform process is "institutionalized." He requested U.S. support in the OECD Export Credit Agency discussions of Turkey's sovereign credit rating and for an increase in its IMF quota. End Summary. -------------- -------------- -------------- Optimism on IMF Program Despite VAT Cut, Social Security Delay -------------- -------------- -------------- ¶2. (SBU) Turkish Treasury Under Secretary Ibrahim Canakci told us Turkey's relationship with the IMF has "ups and downs" but expressed optimism that the program would continue. He agreed that the biggest problem for relations with the Fund relating to the recent VAT rate cut was more one of principle than the measure itself. Confirming that Treasury had opposed the recent Value-Added Tax rate cut, which was supported by the Ministers of Commerce, Foreign Trade and Finance, Canakci explained that the textile companies had pushed for a long list of measures, including extending regional tax incentives to all textile companies, reducing social security premia payments, and reduced energy prices. With textile VAT export rebates exceeding VAT collections, the Tax Administration has long argued cutting the VAT rate for textiles would be revenue-neutral or even add revenue. Though Canakci, like the IMF, is skeptical of this claim, he said the VAT rate cut was the least costly of the measures proposed by the textile firms. ¶3. (SBU) Canakci pointed out that cutting the VAT rate would not help exports per se, since VAT on exported products is rebated. The line ministries argue, however, that by helping formal sector textile companies compete domestically with the large number of local companies who don't pay their taxes or social security contributions, the rate cut will help formal sector companies, enabling them to compete internationally. ¶4. (SBU) Going forward, the challenge will be to resist other sectors' demands for comparable rate cuts. Canakci told us he hoped the GOT would be able to do so, citing the unique importance of the textile sector for employment and exports. In contrast, the tourism sector is arguably suffering from temporary factors such as Avian Flu. ¶5. (SBU) On the Social Security legislation, Canakci revealed that the parametric reform legislation-the key structural condition the IMF is waiting for-had finally moved from the parliamentary sub-commission to the full Budget and Planning Commission, which would begin deliberations on it March 15. Canakci said the GOT hoped to pass it in conjunction with the legislation merging the three social security institutions, which was already out of commission and in the general assembly. According to Canakci, the Prime Minister is personally following this issue, reminding ministers that he promised IMF Managing Director Rato he would have the legislation passed in February. -------------- -------------- Downplaying Central Bank Governor Issue -------------- -------------- ¶6. (SBU) With the newspapers full of the March 14 departure of Central Bank Governor Serdengecti and the naming of Vice- Governor Erdem Basci as Acting Governor, Canakci (who had been widely-discussed as a possible candidate) downplayed the importance of the change. He noted that the most important contributor to disinflation was the government's strong fiscal policy. Though he praised Serdengecti's "personal qualities" and strong communications policy, he said monetary policy and the bank's independence had become "institutionalized," such that it had become less important ANKARA 00001409 002 OF 002 who was named to lead the Bank. -------------- -------------- -------------- Turkey's Improved Situation Not Reflected in OECD ECA Sovereign Risk Rating -------------- -------------- -------------- ¶7. (SBU) Canakci requested U.S. support in the OECD Export Credit Agency forum that sets a common sovereign risk rating for borrowing countries. He said Turkey is rated a 5 on a scale of 1 to 7. has not been upgraded recently to reflect Turkey's improvement as a sovereign credit. Turkey was upgraded from a 6 to a 5 two years ago, but has not been upgraded recently to reflect Turkey's improvement as a sovereign credit. As a result, export credit agency charges are increasingly becoming uncompetitive, raising the relative cost of ECA-financed projects substantially. Commercial credits have begun offering longer maturities and grace periods, rendering them newly-competitive with ECA's. Canakci attributes the problem to the "backward-looking" approach of the models used. He said the OECD group had met in February and would meet again in April. Canakci said he may raise this issue in his upcoming meeting with U.S. Treasury DAS Sobel on the margins of the G-20 deputies meeting. -------------- -------------- -------------- Turkey Pushing for Ad Hoc Quota Increase and Worried about IMF Interest Charges -------------- -------------- -------------- ¶8. (SBU) Canakci said he also wants to raise two IMF issues with the U.S. Treasury. Turkey is pushing for an "Ad Hoc" quota increase in the IMF to better reflect it's (and other key emerging markets') weight in the world economy. ¶9. (SBU) Turkish Treasury is also worried about the risk that the IMF will raise the interest rates it charges to Turkey. With Brazil and Argentina having repaid early, and the Fund financing its operations from a much smaller lending portfolio, Turkey fears it will be charged a higher margin. Canakci says that with IMF terms already approaching what Turkey can tap in the Eurobond market, increased rates would make it harder for Treasury to justify IMF borrowings domestically. Comment: This last point omits the substantial positive signaling effect which Turkey derives from having an IMF program, not to mention that it is doubtful there is market appetite sufficient to replace IMF borrowing on the terms Turkey has recently received. End Comment. Wilson