ECONOMY

Securities auction a major test of confidence in new government

ISTANBUL (Reuters) – Turkey’s treasury will auction 371-day debt today, the longest maturity for more than a year and a major test of how deep recent confidence in Turkey’s new one-party government runs. Turkish financial markets have steered clear of long-term Turkish lira debt since financial crises erupted in 2000 and 2001, finding maturities over a year too risky. While the treasury has tempted markets to lend over more than a year with floating rate notes and debt linked to hard currency, today’s offer will be the longest lira discount coupon auction since a 392-day offer in May 2001. The yield in the auction, as well as filling a gap in the treasury’s portfolio, will also provide an important pointer to market expectations for inflation and stability under the week-old Justice and Development Party (AK) government. Volkan Kurt, economist for ABN Amro in Istanbul, said the auction came at a time when the treasury does not face any major repayments, meaning the sale was more about testing the waters than tapping the markets for cash. «We are not expecting very large volume but it’s not really about volume. It is quite reasonable (for the treasury) to try for the long term in an auction with low expectations that will serve as an indicator,» he said. «There’s no need to borrow a lot, what matters is setting a rate for that maturity,» he said. The treasury’s longest borrowing in a lira discount paper this year was 364 days in February and April, when it achieved yields of 69.54 percent and 58 percent respectively. After that yields rose sharply in the middle of the year as political instability drove worries for Turkey’s ability to manage a huge domestic debt load, even with the help of a $16 billion IMF loan deal. But the arrival of a one-party AK government after November 3 elections has seen yields fall back more than 10 percentage points as investors welcome the possibility of a stable government that could take Turkey closer to EU membership. New Turkish Economy Minister Ali Babacan said on Saturday that the sharp fall in Turkish interest rates does not pose a threat for the economy. Some analysts have said the sudden drop in interest rates could threaten the stability of the lira. «We don’t see any problem… Indeed we think that they (yields) should fall further,» Babacan told reporters on the sideline of a G-20 meeting of central bankers and finance ministers from developed and developing countries in New Delhi when asked by the recovery in interest rates. «Now there is a government which knows what to do. Interest rates have come down since confidence was restored,» Babacan said, adding that he believed rates were still above the level they should be. Stubbornly high rates have compounded Turkey’s efforts to lower its massive domestic debt load, which stood at 144,200 trillion lira (around $91 billion) at the end of October. Annual consumer inflation (CPI) ran at 33.4 percent in October and the country aims to bring it down to 20 percent by the end of 2003. Real interest rates – the discrepancy between yields and inflation – are still high in Turkey. Average yields on the longest maturity on the secondary market, the August 27, 2003 papers, were around 52.8 percent yesterday. On Sunday, Babacan dismissed speculation the new government would give priority to accelerating economic growth at the cost of lower inflation and said no major changes were planned in the IMF pact’s basic strategy. Babacan said last week an end-2003 consumer price inflation target of 20 percent could be revised, and his party’s statements on lowering a key fiscal surplus have raised concerns the new government may push for rapid economic growth that could harm inflation targets, a central plank of the IMF accord. «If this (revision) happens, it then becomes a change in the basic strategy. There is nothing like this,» Babacan told Reuters. After a sharp contraction in 2001, Turkey’s gross national product (GNP) is expected to grow by more than 4 percent this year. The previous government had said GNP growth could reach 5 percent. Turkey’s economic recovery program aims to lower consumer price inflation (CPI) to 35 percent by the end of this year. Babacan said CPI is likely to stand at «between 31 and 33 percent» by the end of 2002. The minister said last week a slight rise in the IMF-backed CPI target of 20 percent by end-2003 was possible. «Twenty percent is just an indicative estimate. In my statement last week I just intended to point out this fact. The central bank will make its study and offer a rate to the government and we will look at this,» Babacan said. Lowering inflation key «The important thing is not a few points change in the target but to achieve the target,» he said. «Our attitude is clear. We want to lower inflation permanently. We are very determined to do this, there should not be any doubt.» Babacan met Anne Krueger, the IMF’s first deputy managing director, on Saturday in New Delhi and said they had discussed the timetable of a new round of talks between the Fund and Ankara. Turkey’s treasury announced yesterday IMF European Department Director Michael Deppler would visit Ankara on December 2 and 3 to discuss Turkey’s $16 billion economic program. The treasury also said talks to complete a fourth review of the program, delayed by November 3 elections, would restart on December 9. The completion of the review is tied to the release of a latest $1.6 billion loan payment. Deppler will be accompanied by Turkey desk head Juha Kahkonen, the treasury said. Senior members of the AK party have said they would seek some changes to strengthen the social dimension of the program after last year’s crisis threw more than a million people out of work and halved the value of the lira. «Earlier we unveiled our intention to maintain the basic elements of the program,» Babacan said. «As the government we will do whatever is needed to speed up the process. I don’t think there will be any problems.» Babacan said officials would prepare a temporary budget for the first quarter of 2003 in line with the most recent letter of intent to the IMF signed by the previous government. «Budget expenditures will not rise in real terms,» he said.