TURKEY: TIGHTENED 2009 BUDGET WILL HELP PAVE WAY

C O N F I D E N T I A L ANKARA 002180

SIPDIS

TREASURY FOR FRANCISO PARODI, JOANNA VELTRI AND ALEXANDER
CORREA

E.O. 12958: DECL: 12/29/2018
TAGS: ECON EFIN TU
SUBJECT: TURKEY: TIGHTENED 2009 BUDGET WILL HELP PAVE WAY
FOR IMF AGREEMENT

Classified By: Economic Counselor Dale Eppler for reasons 1.4 b, d


1. (C) Summary: The Turkish parliament approved the 2009
budget on December 27, While the budget as passed still
contains some dubious macroeconomic assumptions, such as 4%
GDP growth (private economists'estimates range from -4% to
2%),the GOT reduced planned expenditures by YTL 3.6 billion
in the final week of debate in anticipation of reaching a new
Stand By Agreement with the IMF in January. Treasury
Minister Simsek told the Ambassador on December 24 that the
GOT had reached agreement with the Fund on YTL 6 billion of
spending cuts, and that the GOT planned to make most of those
cuts in the 2009 budget. State Planning Agency
Undersecretary Ahmet Tiktik told us that the GOT ultimately
decided not to change the macroeconomic targets during the
final week of debate, but would do so after the GOT and the
Fund agree on new targets and an agreement is finalized. It
will be easier to make further spending cuts after the GOT
announces new macro targets agreed with the Fund, and the GOT
may be able to delay submitting a revised budget until after
March municipal elections. End summary.


2. (SBU) The Parliament approved the 2009 budget on
schedule, but after the GOT introduced YTL 3.6 billion
(approximately USD 2.4 billion) in expenditure reductions
during the final week of debate. The budget projects a
primary fiscal balance approximately 1.4% of GDP, with a YTL
10.4 billion budget deficit, down from YTL 13.4 billion in
the original budget submission. Major cuts were made in
agricultural subsidies, procurement and the investment
accounts of the Directorate General for Highways, the Office
of Water Utility, and of the Ministries of Education,
Transportation, Health and Justice. To reduce health
expenditures, co-payments for health services will be
introduced for civil servants and green card (free health
care) holders. Civil servants will receive a 4% wage hike and
only 25% of civil service attrition vacancies will be filled.


3. (C) Treasury Minister Mehmet Simsek told Ambassdor Jeffery
on December 24 that the GOT and the IMF had agreed on YTL 6
billion in spending cuts from the 2009 budget. Simsek said
the GOT planned to make most of those cuts in the 2009
budget, although he noted that there was still some
discussion on the "quality of the cuts" (Note: IMF staff had
told us they were seeking "quality" spending cuts that
avoided simply slashing investment across the board and
instead reduced politically popular but less necessary
employment, roadbuilding, etc. End note). With these cuts,
Simsek believed that the GOT could close an agreement with
the IMF in January.


4. (C) Despite the spending cuts, the GOT left the
macroeconomic targets in the 2009 budget unchanged. These
include 4% GDP growth, YTL 15.5 billion in privatization
receipts, 7.5% inflation, and an average USD-lira exchange
rate of 1.4098. State Planning Agency Undersecretary Ahmed
Tiktik told us December 29 that the GOT decided not to try to
adjust these targets in the final days of debate, but instead
would make them as soon as the GOT and the Fund agree on a
revised set of assumptions and sign a new agreement.


5. (C) Comment: Politically, it will be easier for the GOT to
make further spending cuts after it announces new macro
targets agreed with the Fund, and it is possible the GOT will
be able to delay submitting a revised budget until after
March municipal elections. The 4% GDP growth figure for 2009
is highly optimistic, with private forecasts ranging from -4%
(in the case of no IMF agreement) to 2%, most with downside
risks. Slower growth means less revenue, and most additional
cuts probably will result from reducing the growth
assumption. Likewise, the privatization receipts assumption
may need to be reduced given the difficult investment
environment. The 7.5% inflation estimate, however, which
seemed too low a few months ago, now looks achievable given
the slowing economy. End comment.


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Jeffrey