AK PARTY BEGINS TO ENGAGE ON THE ECONOMY

UNCLAS SECTION 01 OF 03 ANKARA 008356 SIPDIS SENSITIVE STATE FOR EUR/SE, EB/IFD/OMA AND E TREASURY FOR OASIA - MILLS AND GUNARATNE STATE PASS USTR - NOVELLI AND BIRDSEY 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