AK PARTY BEGINS TO ENGAGE ON THE ECONOMY

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STATE FOR EUR/SE, EB/IFD/OMA AND E
TREASURY FOR OASIA - MILLS AND GUNARATNE
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E.O. 12958: N/A
TAGS: ECON EFIN PREL TU
SUBJECT: AK PARTY BEGINS TO ENGAGE ON THE ECONOMY


REF: A. ANKARA 7549

B. ANKARA 6259


Sensitive but Unclassified. Not for internet distribution.



1. (SBU) SUMMARY: In the past week, AK Party moved to
inject discipline into its public statements on the economy,
initiated contacts with the economic bureaucracy, and
reiterated its intention to work with the IMF. AK Economic
Coordinator Ali Babacan sought to reassure us that, despite
some unfortunate public statements, AK had no intention of
pursuing populist policies or weakening independent
regulatory boards. Vice Chairman Ali Coskun said the new
government would annul the financial amnesty law (scheduled
to take effect January 2003),move quickly to pass a budget
and a tax reform law, and accelerate privatization. Anxious
to avoid the perception that they are accepting IMF dictates,
the incoming government hopes to quietly negotiate an IMF
agreement and present it as the national program. There are
differences among the AK officials with whom we met on policy
details - announcing the ministerial appointments, which
could begin next week, will lead to greater clarity on the
economic policy direction of the new government. END SUMMARY.



2. (SBU) In a series of meetings November 11 - 13, we met
with several AK candidates for ECON-related ministerial jobs:
AK Vice Chairman Ali Coskun; head of AK's Econ coordinating
committee Ali Babacan; head of AK party operations Abdullatif
Sener. All three stressed AK's interest in engaging the
international financial community, both the markets and the
IFIs, and all spoke about an AK government program under
development. It was clear that ministerial appointment
decisions had not yet been made.


First Steps: Greater Discipline with Press;
Meeting with Bureaucrats
--------------



3. (SBU) Ali Babacan is the most "market friendly" AK
figure, per banking and market contacts. He told us several
post-election statements of AK figures had been
"unfortunate," referring to statements on the banking board,
tax cuts and agricultural subsidies. These statements
reflect people jockeying for ministerial jobs, he continued,
not AK policy. At November 8 and 9 AK meetings of the
governing board and senior advisors, Erdogan had reined in
such statements, saying that only Abdullah Gul was authorized
to talk about the economy. "You won't see much in the media
from now on," Babacan said, stressing the need for perception
management.



4. (U) On November 14, Gul gave a short statement to the
press, following AK's first meeting on the economy. AK
Chairman Tayyip Erdogan and 25 AK deputies attended the
meeting including Gul. They were briefed by Central Bank
Governor Serdengecti and Treasury U/S Oztrak. In a brief
statement, Gul told the press that one-party rule provides
Turkey a good chance, that the new government would continue
structural reforms, and that he expected the IMF Fourth
Review to take place in January. (Note: IMF resrep told us
that Babacan later clarified that Gul meant that the IMF
board meeting for the Fourth Review should take place in
January.) In response to a press question on whether AK
would replace senior bureaucrats, Gul said: "We will take an
objective view of the public sector. We will work with
bureaucrats who are hard-working, know their jobs well, and
share our enthusiasm.



5. (SBU) After the AK briefing, Central Bank Governor
Serdengecti told us he was impressed with the level of
preparation of the AK deputies. They listened carefully,
took notes, and asked "intelligent" questions. While
Serdengecti has the impression that some in the AK leadership
"don't get it," many others do. Serdengecti was particularly
supportive of AK's plan to come up with its own reform plan,
i.e., take full ownership of a plan.


Next Steps - National Economic Reform Program
--------------



6. (SBU) Babacan told us Abdullah Gul was heading AK's
efforts to develop a detailed action plan for the new
government on the full range of issues. This action plan
would detail steps in the first month, first two months,
first three months, etc.. As part of this project, AK would
meet with other bureaucrats, in the Finance Ministry and
independent boards. In the meantime, Babacan cautioned, the
only definitive AK policy statement is contained in its
election platform, which Babacan had helped draft.

7. (SBU) In separate meetings, our AK interlocutors
stressed the need for the new government to present its own
"national economic program," in which AK would be fully
vested. They added that this would be done in consultation
with the IMF. Sener noted that "90 percent of AK voters"
don't like the IMF, but AK intentionally didn't feed this
sentiment, and was clear during the election campaign that
the new government needed to work with the IMF and other
international financial institutions. Babacan envisioned a
process whereby AK starts informal talks with the IMF
immediately, and not include the bureaucrats, who might leak
things to the press before they are agreed. The goal would
be to have IMF agreement on the broad outlines of a program,
then invite the IMF mission for official talks.


Policies Still Unclear
--------------



8. (SBU) We heard a variety of somewhat differing ideas in
separate meetings with Coskun, Babacan and Sener on the
substance of economic policies.


-- On fiscal policy, all noted that AK was careful during
elections not to promise government hand-outs, and that the
new GOT would focus on expenditure cuts. Erdogan proposed to
the AK parliamentary deputies that they forego their GOT
housing as a symbolic gesture, and the proposal had been
adopted by acclamation. Babacan said Erdogan had been
pressed hard on hazel nut support prices, and now regretted
saying anything about it (note: Erdogan had told the press
November 8 that hazelnut support prices for some Black Sea
provinces would continue). Babacan said the new GOT would
avoid populist measures. On the other hand, Coskun said one
of the priorities of the new GOT would be a package of
measures to stimulate the real sector, without specifying
these measures.


-- Both Coskun and Babacan confirmed an intention to offer a
limited tax amnesty, which they clarified would be intended
to reschedule debts for back taxes. Coskun estimates that
back taxes amount to TL 9.5 quadrillion, and the new law is
intended to collect some of it. (Comment: Finance Ministry
experts tell us that the main problem at present in meeting
this year's primary surplus target is a slowing of tax
collection efforts, based on a perception that an amnesty is
around the corner.)


-- Coskun also spoke of annulling or delaying enforcement of
a "financial year zero" law, enacted in 1998 and scheduled to
come into effect on January 1, 2003. This law requires
Turkish residents to declare the sources of their financial
holdings starting in 2003. Coskun said the law when enacted
had resulted in capital outflows; annulling it now would
bolster market morale.


-- On the BRSA and other independent agencies, they said AK
would make changes, but per Babacan "whatever we do will
ensure greater independence, more transparency, more timely
reporting." Coskun and others criticized the excessive
spending of the independent boards. (Comment: BRSA
officials tell us that Yapi Kredi Bank owner Mehmet Emin
Karamehment has broken off talks with BRSA about his
estimated $2 billion in unpaid loans to the bank.
Karamehment is instead lobbying AK members, and holding out
for a better deal. Yapi Kredi applied to the Capital Markets
Board for a 15 day delay in releasing its third quarter
financials, and the application was accepted November 15.
End Comment.)


-- Other priorities mentioned by AK interlocutors include
passing a tax reform law (note: submitting such a law to
parliament is a Fourth Review condition); accelerating
privatization (Coskun was critical of the government's
performance on privatization); and removing obstacles to
foreign investment.


Comment
--------------



9. (SBU) AK's greater discipline on press statements
demonstrates a sharp learning curve, and the normally
critical Central Bank Governor is impressed with the
seriousness of AK's leadership. The markets remain buoyed by
the prospects of a strong government implementing a reform
program in harmony with the IMF. But without an econ team in
place, and with the policies of the new government still
unclear, the market's two-week rally remains fragile. Our
discussions this week reveal differences among the AK
economic team; appointments expected next week should clarify
at least the personalities who will be involved.
PEARSON