Identifier
Created
Classification
Origin
06ANKARA3896
2006-07-05 05:33:00
CONFIDENTIAL//NOFORN
Embassy Ankara
Cable title:  

MANAGING TURKISH MARKETS AND MEETING WITH TREASURY

Tags:  EFIN TU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003896 

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - JROSE AND MNUGENT

E.O. 12958: DECL: 07/03/2011
TAGS: EFIN TU
SUBJECT: MANAGING TURKISH MARKETS AND MEETING WITH TREASURY
UNDER SECRETARY

REF: A. ANKARA 3644


B. ANKARA 3717

Classified By: Economic Counselor Tom Goldberger for reasons 1.4 (b) an
d (d).

This cable was coordinated with Congen Istanbul.
C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003896

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - JROSE AND MNUGENT

E.O. 12958: DECL: 07/03/2011
TAGS: EFIN TU
SUBJECT: MANAGING TURKISH MARKETS AND MEETING WITH TREASURY
UNDER SECRETARY

REF: A. ANKARA 3644


B. ANKARA 3717

Classified By: Economic Counselor Tom Goldberger for reasons 1.4 (b) an
d (d).

This cable was coordinated with Congen Istanbul.

1.(C) Summary: Turkish Treasury Under Secretary Canakci said
that in GOT internal deliberations Turkish financial
officials are conscious of the domestic factors in the recent
market sell-off. Canakci pointed to the recent, relatively
successful Central Bank actions that had given the markets
the best week since the sell-off began. Bankers and
regulators have yet to see signs of problems in the banking
sector other than an expected reduction in profits. Turkish
ministers are likely to continue to make market-unfriendly
public statements, given domestic political considerations.
End summary.


--------------
Treasury Under Secretary Appreciates Feedback
--------------


2. (C) In a meeting with Turkish Treasury Under Secretary
Ibrahim Canakci on June 30, we passed on some of the concerns
foreign investors had been expressing: Turkish officials not
acknowledging the domestic factors in the sell-off and the
impression that the Central Bank and Government were not
well-coordinated in their actions and public statements.


3. (C) Canakci said he had been hearing similar comments from
&everyone we talked to8 in recent days. On the first
point, he said that in internal deliberations Turkish
officials are very conscious of the domestic factors in the
market sell-off. Canakci said he believes the most important
domestic factor was the pick-up in inflation that drove up
interest rates and hurt prices of equities and fixed income
government securities, causing non-resident portfolio
investors to pull out of Turkish securities. Canakci also
recognized the role of political factors, including the
shooting of a judge, tensions between the opposition and
government and problems with the EU, but said &these are not
directly related to us.8


4. (C) At the same time Canakci said the change in the
Central Bank Governorship had caused a kind of &pause in
monetary policy.8 Admitting the monetary policy was &a
little lagged8 he nevertheless believed that the policy
response ultimately had been strong. In addition to the

Bank,s moves on interest rates and in markets, the
Government had accelerated structural reforms and taken new
measures to strengthen its debt and cash management position
(see para 13).


5. (C) Canakci said statements were ineffective if not backed
by strong actions. In this kind of turbulent market, only
strong actions will change investors, mood. He lamented
actions had sometimes been taken in bits and pieces. He also
expressed frustration about Ministers, like Finance Minister
Unakitan, making comments about inflation. He also said the
Governor,s newness may have contributed to missteps on
communication.


6. (C) Canakci went into some detail about coordination
mechanisms with the Central Bank below the ministerial level.
He told us he attends the first part of the Monetary Policy
Committee meetings and presents Treasury,s view of current
conditions, as does the Central Bank,s staff. Then the staff
and he leave for the decision-making part. He also pointed
out that his staff and the Central Bank Markets Department
meet regularly to coordinate Treasury,s debt strategy with
the Bank.


7. (C) As before, Canakci downplayed the significance of the
current account deficit, which he sees as largely reflecting
external savings being used to finance investment in Turkey.
He said that the current account deficit to GDP ratio roughly
approximates the investment to GDP ratio over the past 3 or 4
years. He pointed to substantial capital goods imports and
large FDI flows to reinforce this point.

-------------- --
Stabilized Markets Await June Inflation Numbers
-------------- --


8. (SBU) Our call on Canakci came at the end of Turkish
markets best week since the turbulence began around May 9.
The Central Bank,s package of actions Sunday and Monday (a
rate hike, foreign exchange auctions and intervention, and
beginning lira deposit auctions) stopped and then reversed
the slide in the lira. Helped by Turks having to pay their
taxes (which always reduces lira liquidity) and a further
hike in the overnight lending rate Wednesday, the exchange
rate in particular, and markets in general remained stable
all week. On Friday, the better-than-expected Fed decision
and statement sparked a global rally that included Turkey,
driving the lira to 1.57, its best level in over a week. The
exchange rate continued to trade around this level on Monday,
as markets awaited the June inflation data. In the event, the
inflation data was not out of line with expectations, with
the CPI better than expected and the PPI worse.

--------------
Disconnect between Resident and Non-Resident Investors
--------------



9. (C) London- and New York-based investors have expressed
concerns about Turkey,s market problems and how they were
being managed. Merrill Lynch,s Turkish economist (protect)
told us he had been telling Minister Babacan that the Bank
should be intervening in the foreign exchange market
(although the IMF was advising the Bank not to intervene so
frequently). He brushed aside doubts that it was appropriate
to talk to Babacan about what the Governor should do, joking
that &they practically live together.8


10. (C) In a strikingly consistent pattern, however, local
observers seemed much less concerned than foreign investors.
Turkish big business leaders have been telling Congen
Istanbul that they are not particularly worried, and have not
repositioned their businesses or holdings. They say some
smaller businessmen have done so, but it,s not that
significant. The expatriate manager of Citigroup,s Turkish
subsidiary expressed frustration over how much more concerned
his people in New York seemed than anyone he was talking to
in Turkey, including the IMF Resrep. A visiting USDA bank
analyst found Fitch,s Istanbul rep (the only rating agency
analyst based in Turkey) rather balanced in her view. Fitch
even upgraded Garanti Bank during the week, although S&P
changed its outlook on Turkey from stable to positive.


11. (SBU) Bankers in Istanbul told Congen Istanbul that
retail investors had not moved out of lira during the
sell-off, much as the CFO of Ziraat Bank told us her bank had
experienced no movement out of lira deposits. The Istanbul
bankers did say some Turkish corporates who had borrowed in
foreign exchange sold lira when the exchange rate hit 1.7 but
that has now stopped. Perhaps reflecting the far less
anguished mood locally, Bear Stearns Turkey analyst switched
from a relatively pessimistic stance to a buy recommendation
after a week in Turkey.

--------------
No Signs Yet of Banking Sector Problems
--------------


12. (SBU) A series of meetings with bankers in Istanbul and
Ankara, as well as with the Bank Regulatory and Supervisory
Agency(BRSA) and the Central Bank Banking Department suggests
there are no signs yet that rising interest rates and a
falling lira are causing significant problems in the banking
sector. Though the BRSA Vice-Chairman admitted it was too
soon to say whether corporate open positions are severe
enough to cause problems in the banking sector (through
non-performing loans),the regulators are fairly confident
regarding other banking sector vulnerabilities. Knowing the
banks, end-May balance sheets, for example, the regulators
have been able to calculate the impact of the interest rate
and exchange rate moves and see no sign of significant
problems, although banks profits will certainly take a hit.
To be on the safe side, the Chairman of BRSA will begin
bank-by-bank meetings with CEO,s to go over each bank,s
situation. The Central Bank voiced similar confidence based
on its analysis and stress testing, and the Ziraat bank CFO
described in detail how the bank,s strengthened financials
have positioned it to weather the current problem.

--------------
Treasury Confident on Debt Situation
--------------


13. (SBU) Having beefed up its reserves, lowered its rollover
ratio, and reduced the share of its debt denominated in ) or
indexed to foreign exchange -- Turkish Treasury is not too
worried about the impact of the sell-off on its debt
position. Treasury has had to take a break from its efforts
to lengthen its maturities, given the absence of market
appetite for long-dated paper but this effort was long-term,
not an immediate need. Canakci told us Treasury had
accelerated efforts to collect non-debt creating inflows such
as the proceeds of State Deposit Insurance Fund asset sales
and privatization receipts. He said Treasury has also
redoubled its focus on cash management, only transferring
funds to line ministries when the ministries really need them
so as to maximize Treasury reserve levels.

--------------
Fiscal Impact Unclear
--------------


14. (SBU) Of all the impacts from the recent sell-off,
perhaps the most uncertain is on the Government,s fiscal
balances. The lower exchange rate and higher inflation will
cause increased costs for public sector spending on
everything from pharmaceuticals to higher interest costs.
Given lower-than-expected borrowing needs, however, the
interest rate cost may not be too severe. On other spending,
the recent IMF mission had been particularly focused on
controlling spending and had worked with the Government to
implement additional measures, such as passing on more of the
cost of pharmaceuticals to patients. On the revenue side, the
state had been collecting more revenue than projected, which
may help offset the expected slowdown in revenue growth if,
as expected economic growth slows dramatically in the second
half. As Erdogan, Unakitan and Babacan have repeatedly
stated, the Government is determined to demonstrate a
continued commitment to fiscal discipline. On July 3,
Reuters reported an unnamed Turkish official saying the GOT
would increase the primary surplus target in 2006 from 6.5%
to 6.7% -- an extraordinary undertaking given that the weaker
lira and higher interest rates make it harder to realize even
the 6.5% target.

--------------
Comment:
--------------


15. (C) The relative lack of worry about banks or the state
debt situation could change if market negativity leads to
further exchange rate depreciation and interest rate
increases. Hence the continued need for improved
coordination, strong actions and better communication on the
part of both Government and Central Bank. In terms of the
Government,s communication, Canakci,s frustration with
Unakitan speaks to a larger issue, that the economic
technocrats, including Babacan, will not be able to control.
On narrowly economic policy issues, the GOT, including PM
Erdogan, continually reiterates its commitment to the reform
program. However, it would help markets if Turkish ministers
toned down their rhetoric, including on problems with the EU.
But Turkish politicians will respond in a manner that plays
well to a domestic audience rather than to investors.

Visit Ankara's Classified Web Site at
http://www.state.sgov.gov/p/eur/ankara/

WILSON