This record is a partial extract of the original cable. The full text of the original cable is not available.

251537Z May 04

UNCLAS SECTION 01 OF 03 ANKARA 002915 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, AND EB/IFD 
TREASURY FOR OASIA - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV PREL TU
SUBJECT: TREASURY UNDERSECRETARY ON IMF, U.S. MONEY 
 
 
REF: A. STATE 108200 
     ¶B. ANKARA 2874 
 
 
¶1. (Sbu) Summary: Treasury U/S Canakci told Econoffs May 24 
that the GOT would decide soon about both the U.S. Financial 
Agreement and the future IMF role.  Econoffs delivered ref a 
financial points.  Despite the recnt market downturn, Canakci 
was confident about Treasury's financing position for 2004, 
based on World Bank disbursements, strong fiscal performance, 
and the structure of public debt.  Adding to his confidence 
was his expectation of above-target privatization receipts, 
but later the same day a court halted the Tupras 
privatization.  Canakci admitted the Net Debt/GNP ratio could 
end the year above the 67 percent target. He claimed the GOT 
was not concerned about the current account deficit. He 
admitted there was little FDI, and cited problems with the 
judiciary system, among others.  End Summary. 
 
 
The FA, the IMF and post-2005 Financing: 
--------------------------------------- 
 
 
¶2. (Sbu) In a meeting May 24, with Treasury U/S Ibrahim 
Canakci and the newly-appointed Director General for External 
Relations, Memduh Akcay, Econcouns went over ref a Financial 
Agreement points, responding to the questions Minister 
Babacan had raised with Secretary Snow.  Canakci seemed to 
understand the points about the interest rates and the 
guarantees.  He did not push back.  Note: In a meeting May 
18, the Ambassador had covered ref a's points on the language 
in the amendment with MFA U/S Ziyal.  End Note. 
 
 
¶3. (Sbu) Econcouns noted the signs of Congressional concern 
about non-ratification of the FA, and asked Canakci when he 
thought the GOT would come to a decision.  Canakci claimed 
that the GOT would decide on both the FA and on what kind of 
support to request from the IMF "in a short period of time." 
He said that both his minister and the Government were aware 
they could not postpone this decision for long.  He said 
these decisions were closely related to the GOT's projected 
financing outlook for 2005 and beyond.  In 2005, he said the 
major issue was the $7.5 billion due to the IMF.    Canakci 
said Treasury is running simulations and will submit them to 
Minister Babacan and the GOT for consideration. 
 
 
¶4. (Sbu) Note: Separately from the meeting with Canakci, 
press reports of the discussion of the FA at the 
Congressional hearing last week had set off a paroxysm of 
press coverage in Turkey, with Minister Babacan being asked 
at press conferences about it, and opposition leader Baykal 
referring to the "heavy conditions" of the U.S. loan. 
Regarding the financing outlook for 2005, in a meeting last 
week Treasury domestic debt manager Volkan Taskin told 
econoffs that if he had to issue an additional $5 billion to 
the domestic market in 2005, Treasury's rollover ratio would 
probably surpass 100 percent, i.e. Treasury would be 
borrowing more than it was repaying. Taskin also said the 
average maturity of new issuances for the first five months 
of 2004 was 14 months, and cautioned against overinterpreting 
the newly-steepened yield curve on domestic debt since the 
slope derives much more from diverse investor classes' 
appetites than from risk perceptions or inflationary 
expectations.  End Note. 
 
 
¶5. (Sbu) Canakci said there is a consensus view in the 
financial community that Turkey should seek the strongest 
possible arrangement from the IMF, a Precautionary or a 
Standby.  He noted, however, that a follow-on IMF program 
could signal a lack of confidence that Turkey can stand on 
its own.  Econcouns commented that it may be that markets are 
not sufficiently confident because of slow movement on 
structural reforms, and noted as an example the widely-held 
view that the draft law on independent regulatory boards 
could undermine these boards' independence.  Canakci did not 
respond. 
 
 
Privatization: 
-------------- 
 
 
¶6. (Sbu) Econcouns inquired as to the status of Treasury's 
understanding with the IFI's to withdraw capital from 
state-owned banks in order to retire debt and help shrink the 
banks for eventual privatization.  Canakci revealed that all 
the preparatory measures had been taken, including obtaining 
permission from BRSA to reduce Ziraat Bank's capital, but 
that the GOT had held off because of the recent market 
volatility.  Though the move would have reduced Treasury's 
outstanding debt, Canakci said the markets might think the 
GOT was taking panicky actions to respond to the volatility. 
¶7. (Sbu) Canakci said privatization receipts in 2004 would 
come in well above the program target of $1 billion.  The GOT 
has already received roughly $300 million from the sale of 
the alcohol side of Tekel, and expected to receive the full 
$1.3 billion from the Tupras privatization in the next week 
or so.  Later in the the day on which the meeting took place, 
however, an administrative court stopped the Tupras sale on 
the grounds that there were flaws in the tender process. 
 
 
2004 Financing Outlook: 
---------------------- 
 
 
¶8. (Sbu) Canakci argued that, for a variety of reasons, the 
recent fall in the exchange rate and the rise in interest 
rates would not have a large effect on the GOT's 2004 
financing outlook.  Obviously, the significance of the impact 
depends on how long the higher interest rates and weaker lira 
persist.  The fundamentals, however, have not deteriorated, 
and Canakci said he expected interest rates to decline.  When 
Econcouns pointed out that some analysts believe the 
pre-volatility low rates were "not normal" since they were 
driven by global liquidity, Canakci claimed they were normal 
and cited the very high real interest rates.  He expressed 
confidence that markets will reconsider the fundamentals and 
the current account deficit and return TL interest rates to 
levels lower than those currently prevailing. 
 
 
¶9. (Sbu) Canakci said that only 18 percent of projected debt 
service for the remainder of 2004 is denominated in foreign 
exchange, limiting the impact of a weaker lira.  Note: though 
the percentage of foreign exchange denominated debt is much 
higher than this, the lower interest rate on FX-linked debt 
and the longer maturities (i.e. fewer principal payments in 
the coming months) probably account for this low percentage 
of debt service. End Note.  Of the GOT's $5 billion target 
for external financing from private lenders, Canakci said the 
January and February Eurobond issues mean that only $2.2 
billion more will need to be borrowed.  He said they are 
closely monitoring market conditions and could issue at any 
time. 
 
 
¶10. (Sbu) World Bank financing has been forthcoming, with 
Canakci citing the recent $375 million disbursment under the 
Economic Recovery Loan (ERL) and the announcement last week 
that the Bank would disburse $500 million by June 30 under 
the PFPSAL 3 loan, with the remaining $500 million to be 
disbursed by year-end.   Canakci went on to cite the 
above-target performance so far in 2004 on the primary 
surplus: TL 1.8 Quadrillion ($1.2 billion) for the Central 
Government for January through April.  Canakci admitted that 
the under-spending that contributed to this good performance 
was unlikely to persist through the end of the year, but 
nevertheless argued that for all these reasons, the GOT is in 
a good position for its 2004 financing program. 
 
 
¶11. (Sbu) Regarding debt sustainability measures, on the 
other hand, Canakci said that the depreciation of the lira 
raised the possibility that the Net Public Debt/GDP target of 
67 percent might not be attained.  This was particularly 
likely if there were a real--rather than just 
nominal--depreciation of the exchange rate.  Beyond 2004, 
however, Canakci was confident that there would be a 
declining trend in Net Public Debt/GDP. 
 
 
Current Account and Foreign Investment: 
-------------------------------------- 
 
 
¶12. (Sbu) Canakci said neither the Central Bank, nor State 
Planning Organization (SPO), nor Treasury officials were 
overly concerned about the current account deficit, given the 
automatic adjustment mechanism of the floating exchange rate. 
 In the program, Canakci said the GOT had projected a deficit 
of 3 percent of GNP or $9.1 billion but that more recently, 
the Central Bank and SPO were projecting $10 billion, and had 
raised their assumption for oil prices.  He said that in 
addition to the likelihood of a strong tourist season, the 
GOT expects the trade deficit to moderate due to the 
depreciation of the exchange rate. 
 
 
¶13. (Sbu) Canakci agreed there was very little foreign 
investment.  He attributed this to the history of 
macroeconomic instability but also to "micro issues," 
especially the legal system, which lacks consistency and 
predictability.  He cited the recent court decision in favor 
of the former owners of Demir and Kent Banks as an example. 
With regard to the Cargill case, he said it had become more 
complicated lately, without elaborating. 
EDELMAN