TURKISH TREASURY UNDER SECRETARY NOT WORRIED ABOUT

C O N F I D E N T I A L ANKARA 000477 SIPDIS SIPDIS TREASURY FOR INTERNATIONAL AFFAIRS - JROSE E.O. 12958: DECL: 03/02/2012 TAGS: EFIN TU SUBJECT: TURKISH TREASURY UNDER SECRETARY NOT WORRIED ABOUT IMF OR MARKETS REF: A. ANKARA 379 ¶B. ANKARA 408 Classified By: Economic Counselor Tom Goldberger for reasons 1.4(b) and (d). ¶1. (C) Summary: Turkish Treasury Under Secretary Ibrahim Canakci told us March 3 he was not worried about the current wave of market turbulence. He said it would not have substantial macroeconomic impact unless it persisted for a longer period. Nor did Canakci express concerns about the IMF Mission which he expected to focus primarily on fiscal issues and the social security reform. Canakci said the Government had put in place safeguard measures to control health spending and that energy sector state-owned enterprises' financial situation had been helped by better-than-projected energy prices and exchange rates. He doubted the Government would be able to commit to an explicit timetable to sell majority control of Halk Bank. End Summary. -------------- Shrugging Off Market Turbulence -------------- ¶2. (SBU) Treasury Under Secretary Ibrahim Canakci downplayed the impact of the current wave of Emerging Market turbulence, unless the wave of selling continues for a sustained period. Canakci said a possible slowdown in the U.S. only has an indirect effect on Turkey since most trade is with Europe. The key issue for Turkish markets, in his view, is global liquidity: Turkey is affected when the Federal Reserve or European Central Bank tighten monetary policy. ¶3. (C) Canakci attributes the tendency of Turkish ot overly concerned about the CA deficit). Second, although debt ratios had improved and the average maturity lengthened, Turkey's debt -- both public and private -- has a relatively short maturity profile. Finally, Canakci asserted that when EMs sell off, investors sometimes cover losses in other markets by selling Turkish assets. They do so, he said, because of the Turkish capital markets relative openness and liquidity. Only when we asked about it, did Canakci admit that political risks were a factor, albeit (he claimed) a relatively minor one. -------------- Negligible Revision to Macro Targets -------------- ¶4. (SBU) Canakci expected the IMF mission, which begins negotiations on the Sixth Review March 5, would leave the 2007 macro targets intact: 5% growth, 4% inflation, and 6.5% primary surplus. Canakci said preliminary data show 2006 GDP growth coming in at 5.5% (above the 5% target) and that recent data suggest a similar result in 2007 -- slightly better than earlier projections. Canakci said stronger-than-expected growth derived principally from exports. Indications of a strong export performance, combined with a good outlook for services income, and lower global energy prices than in 2006 all suggest an improved current account deficit for 2007: around $30 billion or 7% of GDP. The Central Bank's latest projections assign a 70% probability to 2007 inflation ending up inside the targeted band (i.e. under 6%). -------------- Focus on Fiscal -------------- ¶5. (C) Canakci expected the Fund mission to focus primarily on fiscal issues and next steps on the social security reform, following the Constitutional Court's invalidation of the new law. On fiscal issues, Canakci said it was too early to say whether the IMF would find a gap that it would require filling. He expects the IMF to raise concerns about a measure to make temporary government workers permanent as well as provisions to expand the scope of the regional incentives program that reduce the number of employees firms need to be eligible for tax and energy abatements. ¶6. (C) Canakci said the Government had implemented all the Fund-initiated safeguards to control health spending: measures on pharmaceuticals, treatment, co-payments, putting medicines in smaller packages, and increasing the number of countries used in the reference basket. Provision of medical care by the three previously-separate systems had been combined and the incentive structure for doctors had been changed. The IMF recently sent a technical mission to Turkey to work on health spending and the upcoming mission would discuss the technical mission's findings, though Canakci said there was "no magic solution" in their findings. ¶7. (C) Canakci confirmed press reports that the Government overspent the program's 2006 spending ceiling. Overspending amounted to 1.9 billion YTL or 0.2% of GDP. Despite the Government having exceeded the 6.5% primary surplus target Canakci understood the IMF will object to this violation of the Government's commitment to save any excess. ¶8. (C) Canakci discounted press reports of possible reductions in VAT rates for certain sectors and said that Treasury has warned the Ministry of Finance about the need to adhere to the Government's commitment to the IMF not to enact these cuts. -------------- -------------- Energy SEE's Benefited from Exchange Rate and Oil Prices -------------- -------------- ¶9. (C) With the Government having opted not to follow IMF-recommended price increases for electricity and gas, Canakci recognized that the IMF is likely to take a hard look at these companies' financials. He said that lower-than-projected oil prices had improved their situation. The program projected Brent crude prices of $63.4 per barrel, whereas Brent was currently trading at around $56-57. Canakci said every $1 change in the oil price yield a $200 million change in the financial balances of the SEE's. The stronger-than-projected exchange rate also is helping: every 1% change translates to a $150 million change in the SEE's financials. He said the Treasury continues to warn the Energy Ministry and the SEE's to be cautious and not to assume the favorable price picture will continue. Canakci lamented the fact that the Government had failed to put in place for gas and electricity the kind of automatic pricing mechanism that has worked successfully for gasoline since early 2005. -------------- The Social Security Challenge -------------- ¶10. (C) On social security, the Government has been working at the technical level to come up with options to salvage the reform, navigating between the requirements of the Constitutional Court andl rise to around 15% in The principal options shement amendments to te old pension framework for civil servants while having the new legislation apply to other employees or to try to preserve the reform law's coverage of civil servants while amending it to try to satisfy the Court. Canakci said that the IMF Mission will provide useful pressure to accelerate the process. He expects the IMF to push to retain a July 1 deadline for resubmission of the legislation. -------------- Halk Bank Privatization -------------- ¶11. (C) On Halk Bank, Canakci said the Government's commitment to the Bank and Fund had been to follow one of the recommended options provided by the outside financial advisor. Though the Government had intended to pursue a block sale, the current strategy of a minority-share IPO followed by a block sale was one of the recommended options. Canakci expected the Government to resist any IMF push for an explicit commitment on the timing of the block sale. -------------- Other Structural Reforms -------------- ¶12. (C) The second stage of the Personal Income Tax reform passed parliament March 2 and the only other remaining IMF structural requirments are minor follow-up items on fiscal and financial sector reforms. Canakci said Turkey would continue structural reforms under World Bank and EU programs. -------------- Comment -------------- ¶13. (C) Canakci is now a veteran of IMF reviews. To the extent election-year backsliding makes these negotiations more difficult than usual, Canakci may find IMF pressure useful to help keep the Government in line. Ditto for the market sell-off which may have helped jolt complacency at the poltical level. Visit Ankara's Classified Web Site at http://www.state.sgov.gov/p/eur/ankara/ WILSON