VZCZCXRO1700
RR RUEHDA
DE RUEHAK #0797/01 1561321
ZNR UUUUU ZZH
R 051321Z JUN 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 9838
INFO RUEHIT/AMCONSUL ISTANBUL 5835
RUEHDA/AMCONSUL ADANA 3908
RUEATRS/TREASURY DEPT WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 000797 
 
SIPDIS 
SENSITIVE 
 
TREASURY FOR JWEISS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN TU
SUBJECT: ISTANBUL ANALYSTS CONCERNED BY LACK OF IMF DEAL 
 
¶1. (SBU) Summary:  We participated in two May 2009 
conferences in Istanbul: "Forum Istanbul" (the "Turkish 
Davos"), and the KPMG's "Financial Risk Management". 
High-level speakers included Central Bank Governor Durmus 
Yilmaz; Former Central Banker, now UNDP President, Kemal 
Dervis; Former IMF Vice President Ann Kruger; and Economist 
Dani Rodrik from Harvard University.  Most participants and 
speakers agreed that Turkey may not need IMF financing for 
the short term but that it is likely to experience problems 
in the longer term unless it makes a deal with the IMF.  They 
share the view that without a deal Turkey is likely to have 
external and domestic financing gaps in the medium term, and 
may be hit by economic contraction and unemployment, higher 
inflation, and a domestic financing gap in mid 2010.  They 
noted the banking sector could be hard hit if the economic 
contraction continues.  End Summary. 
 
¶2. (SBU) Two prominent economists, Dervis and Rodrik, 
previously advocated for export-led growth strategies for 
Turkey but now acknowledge that countries hit most severely 
in this turmoil were those with strong export-led growth. 
Leading up to the collapse of Lehman Brothers in September 
2008, Turkey's major concerns were a growing current account 
deficit of nearly 6.5 percent of GDP in 2008, and an 
increasing financing gap, then estimated at USD 45 billion. 
Corporate sector debt stock of USD 120 billion and increasing 
oil prices were also areas of concern. 
 
¶3. (SBU) The picture changed dramatically with the onset of 
the global crisis.  Demand for imports fell 43.4 percent 
year-on-year as of April 2009, and corporate sector external 
debt had an average 80 percent roll-over rate in the same 
period.  Since October 2008, almost USD 18 billion flowed 
into Turkey through net errors and omissions, most likely a 
reflection of repatriation and spending of businessmen's 
money that had been held offshore.  The fiscal picture also 
deteriorated as a budget that two years ago had a 6.5 percent 
primary surplus became a 1.5 percent primary deficit. 
Conference attendees speculated that unemployment may 
continue to increase from its record high 16.1 percent as of 
March 2009.  Continued increases in global commodity prices 
may return Turkey's old friend inflation in the medium term, 
especially if the GOT fails to take necessary actions in 
policy and structural reforms in the short term. 
¶4. (SBU) Murat Ulgen, HSBC Chief Economist, and Central Bank 
Vice Governor Erdem Basci noted the risk of increasing public 
debt stock will put pressure on the local government rates 
and threaten fiscal stability.  Global Source's Murat Ucer 
said the marked rise in the domestic rollover ratio (at 
almost 120 percent compared to 85 percent in 2008), and the 
challenging domestic debt redemption schedule in August and 
October 2008 show the need for an IMF program.  HSBC's Ulgen 
said an IMF arrangement is probably inevitable unless GOT 
authorities are willing to endure a painful adjustment. 
 
¶5. (SBU) Conference participants also foresaw risks in the 
bond market.  Bonds remain subject to the twin risks of an 
end to the monetary easing cycle and fiscal deterioration, 
which could cause bond holders to demand higher premiums for 
assuming risk in Turkey.  Cuneyt Sel, former Treasury 
Undersecretary, called attention to a decrease in privately 
held money in foreign currencies in offshore accounts.  Sel, 
now a private consultant, told us that the loss of this 
"currency cushion" for business owners could lead to a sharp 
increase in the banks' NPLs (non-performing loans) which are 
currently low at 4.8 percent overall.  Sel and Ucer both 
opined that the AKP does not have the technical expertise to 
manage the current crisis. 
 
¶6. (SBU) Akil Ozcay, a former Central Bank Markets Director 
General, is now a senior advisor at the Turkish Economy Bank 
(TEB).  Ozcay said that the GOT must make an IMF deal and 
take stringent measures to compensate for liberal spending 
prior to the March 2009 elections.  Ozcay also expects NPLs 
to increase and said an interest rate differential could hit 
Turkey if the Central Bank continues to cut policy rates. 
Serdar Hamamcioglu, head of financial institutions in 
Citigroup, said securitization markets have stopped since 
September 2008 and bank balance sheets also stopped expanding 
due to decreases in deposits and loans.  He confirmed that 
banks are increasing their cash positions as a safeguard 
measure.  Hamamcioglu estimates that NPLs could increase to 7 
percent for small- and medium-sized enterprises. 
 
¶7. (SBU) Markets are now betting Turkey will make a deal with 
the IMF before the World Bank-IMF annual meetings (to be held 
in Istanbul on 6-7 October 2009).  Over the past few weeks, 
it has become clear that the GOT is very reluctant to sign an 
 
ANKARA 00000797  002 OF 002 
 
 
IMF program any time soon because it does not want to make 
tough fiscal adjustments.  Cevdet Akcay, Chief Economist from 
Yapi Kredi-Koc, said in the absence of a deal, the primary 
balance of the overall public sector seems headed toward a 
deficit of 2 percent of GDP in 2009.  Saruhan Ozel, Chief 
Economist from Denizbank, said Turkey needs to restore its 
credibility after two years of underperformance on the 
economic policy front and to secure the IMF funding to fill 
its financing gap.  He sees further contraction in economic 
activity and currency depreciation as inevitable without an 
IMF deal. 
 
¶8. (SBU) Comment: The bottom line of the conferences and 
private meetings is that without an IMF agreement the GOT has 
no intention to tighten fiscal policy.  Even though investors 
have been generous to Turkey, this is not a sustainable trend 
if fiscal fundamentals are not carefully managed.  If global 
sentiment turns negative, having a stand-by in place may help 
to minimize the negative effects on the economy.  If the GOT 
fails to sign a stand-by or neglects to make any fiscal 
adjustment ahead of the 2011 elections, Turkey is unlikely to 
outperform other emerging markets or attract significant 
investment.  End Comment. 
 
Visit Ankara's Classified Web Site at 
http://www.intelink.sgov.gov/wiki/Portal:Turk ey 
 
SILLIMAN