TURKEY NEEDS AN IMF DEAL AND EXTERNAL FINANCING

C O N F I D E N T I A L ANKARA 001982 SIPDIS EUR FOR A/S FRIED, EEB FOR A/S SULLIVAN, TREASURY FOR U/S MCCORMACK E.O. 12958: DECL: 11/14/2023 TAGS: EFIN ECON TU SUBJECT: TURKEY NEEDS AN IMF DEAL AND EXTERNAL FINANCING REF: A. ANKARA 1978 ¶B. ANKARA 1969 ¶C. ANKARA 1920 ¶D. ANKARA 1872 Classified By: Economic Counselor Dale Eppler for reasons 1.4 (b) and ( d) This is a joint cable prepared by Embassy Ankara and Consulate General Istanbul. ¶1. (C) Summary: Reftel A describes multiple pressures on the real sector in Turkey. Key among them is financing. Banking fundamentals in Turkey remain sound, but banks are becoming skittish and limiting or cutting off credit to all but their best customers. The GOT is getting pressure to make a deal with the IMF from the real and financial sectors who argue a deal is the best way to increase investor confidence and thus liquidity. While foreign exchange (FX) liquidity and corporate FX debt payments are the source of concern, the GOT,s negotiations with the IMF are deadlocked over fiscal spending issues (see Reftel C). Absent a deal with the IMF, the private sector wants some other financing mechanism, but neither of the GOT,s preferred options (swap lines with the Federal Reserve or GCC central banks) seem likely in the short term. End summary. ¶2. (U) Central Bank of the Republic of Turkey (CBRT) Vice Governor Erdem Basci said the Turkish banking sector does not have liquidity problems like those in other countries. Basci noted, however, that the corporate sector has a $81 billion open FX position. Financing this debt will be a key concern for Turkey over the next year. The World Bank estimates a $130 billion external financing need in 2009 for Turkey. ¶3. (C) In early October, Finance Minister Kemal Unakitan made public statements warning banks against calls for early repayment, but offered no tangible penalties for offenders. This vague warning started rampant rumors and discussion about potential problems in the banking industry. We have been told by multiple interlocutors, including bankers and business group leaders, that Turkish banks are indeed accelerating repayment schedules, as well as failing to roll over existing loans and extend credit lines. One Istanbul-based financial analyst noted the irony of the GOT warning against calling loans explaining that publicly-owned banks are the least liquid and therefore the most likely to call loans. Central Banker Calls for Action �0A; -------------- ¶4. (C) On November 6, CBRT Governor Durmus Yilmaz told us that Turkey needs the discipline of an IMF deal to keep spending and fiscal policy under control and create an atmosphere of confidence for international investors. He added that the 2009 budget "could do more" to help the CBRT manage and reach its inflation targets, but said the CBRT can work with the parameters set in the budget. Industry Woes -------------- ¶5. (SBU) Istanbul Chamber of Industry (ISO) Chairman Tanil Kucuk noted that Turkey,s problems are not the same as the problems in the U.S. and EU, since Turkey,s problems hinge from a lack of reform that has depleted the competitive power of the manufacturing sector. Over the course of the last year, Kucuk said Turkey has seen substantial imports, but they have failed to generate profits (or exports). Kucuk believes the global financial crisis will compound problems faced by Turkey's real sector, which will need to find alternate sources of funding. Kucuk said Turkey "absolutely needs an IMF agreement; the sooner the better, we are behind the curve on this." He sees the U.S. and the Gulf as potential sources of financing. In an earlier conversation, Cem Akyurek, Chief Economist for Deutsche Bank Turkey, told us that structuring an IMF program for Turkey would be quite a challenge because now the private sector needs support more than the GOT. In past programs, the IMF was able to channel funds to the GOT to support debt repayments, but now the problem lies more heavily with the private sector. Both Kucuk and Akyurek are confident an agreement for Turkey with the IMF can be reached. U.S. Visitors Get an Earful on Energy Financing -------------- -- ¶6. (SBU) In late October, a U.S. team from OPIC, EXIM, and the IFC visited Turkey to support and encourage diversification of energy and gas, explore creation or facilitation of new investment and financing options, and to convince the Turks that the U.S. can accelerate and meet some of these needs. They got an earful from Turkish interlocutors, who complained that the outlook is somewhat bleak for the near future in Turkey, with banks tightening their lending, calling loans, putting off growth plans, and expressing concerns about foreign exchange liquidity. The Bankers' Association said unless the Turkish government does something to maintain foreign exchange, local liquidity will be in trouble. ¶7. (SBU) On October 21, EFG Securities Chief Economist Baturalp Candemir told us the GOT needs to go for a precautionary standby and the sooner the better. The environment is changing every day and not in Turkey's favor. Candemir hopes the GOT can announce an IMF deal within a month, adding that Turkey does not have the luxury to wait now that it did two months ago. Post program monitoring is not enough. Candemir believes Erdogan would prefer a blessing of the medium-term fiscal program without hard fiscal targets. Candemir believes the three-year program needs to be changed: reforms should be front-loaded and the fiscal program should be altered to fit current realities. Turkish Government Has High Hopes for G-20 Results -------------- -------------- ¶8. (C) The GOT is under growing pressure to find foreign funds to help businessmen and banks in trouble. The government hopes to find the needed funds at a G-20 meeting to be held over the weekend in the U.S. PM Erdogan will represent Turkey at the meeting. Some analysts predict that Erdogan will exert efforts to make a deal with IMF and at the same time will ask the U.S. Federal Reserve to provide swap lines to Turkey. As reported in Reftel B, however, we have already told the GOT that the Fed is not inclined to open any new swap lines at this time. The GOT also has discussed looking to the GCC countries for FX swap lines, but they are experiencing their own financial difficulties. Fiscal Spending Remains the Issue -------------- ¶9. (C) Comment: Many analysts and business associations say that the GOT should have developed a new IMF program when the last Stand By expired in May 2008. Conditions for negotiating a deal then were much easier than now. But the Prime Minister views ending IMF tutelage as a political victory, and he is loathe to go back under IMF fiscal restrictions going into local elections. Although the GOT has not asked for a new IMF agreement formally, negotiations with the Fund continue. The IMF sees greater need for fiscal restraint as the economy slows to avoid GOT borrowing crowding out the private sector. The GOT sees increasing need for fiscal stimulus as the economy slows (and March 2009 elections near). It will be hard to bridge that conceptual gap, even given continued pressure from all sides to do so. ¶10. (C) The GOT is in an enormous bind. Clearly, it needs to take action to introduce liquidity into the system and reaching an agreement with the IMF will be a technical challenge. However, if the GOT subsidizes public bank lending there will be a significant moral hazard risk, particularly in the run-up to nationwide municipal elections. Providing a 100% guarantee for bank deposits could help calm concerns related to the soundness of the banking sector and could induce local depositors to make better use of the banking system. End comment. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey WILSON