Identifier
Created
Classification
Origin
02ANKARA8527
2002-11-21 15:45:00
CONFIDENTIAL
Embassy Ankara
Cable title:  

THE NEW GOVERNMENT'S ECONOMIC TEAM STARTS WORK,

Tags:  ECON EFIN PGOV TU 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 008527 

SIPDIS


STATE FOR EUR/SE, EB/IFD/OMA AND E
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR FOR NOVELLI AND BIRDSEY


E.O. 12958: DECL: 09/02/2010
TAGS: ECON EFIN PGOV TU
SUBJECT: THE NEW GOVERNMENT'S ECONOMIC TEAM STARTS WORK,
CLARIFIES PORTFOLIOS


Classified by Economic Counselor Scot Marciel for reasons 1.5
(b,d).


C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 008527

SIPDIS


STATE FOR EUR/SE, EB/IFD/OMA AND E
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR FOR NOVELLI AND BIRDSEY


E.O. 12958: DECL: 09/02/2010
TAGS: ECON EFIN PGOV TU
SUBJECT: THE NEW GOVERNMENT'S ECONOMIC TEAM STARTS WORK,
CLARIFIES PORTFOLIOS


Classified by Economic Counselor Scot Marciel for reasons 1.5
(b,d).



1. (C) Summary: Prime Minister Gul announced the portfolios
of the state ministers, dividing supervision of the economic
agencies between Deputy PM Abdullatif Sener (privatization,
banking and capital markets boards),State Minister Ali
Babacan (Treasury, Central Bank and main state banks),and
State Minister Kursat Tuzmen (foreign trade). Babacan, with
his office in the Treasury, is likely to inherit the Dervis
role of coordinating with the IMF and World Bank, and being
the economic program's public spokesman, though Sener and
Finance Minister Unakitan are both close to AK Chairman
Erdogan, and will have key roles in economic policy-making.
Treasury U/S Oztrak told us he is impressed with Babacan,
though he gives an initial mixed review on AK policy
positions. The new team is good on privatization and foreign
direct investment, but "need education" on IMF relations, tax
reform, disinflation target, and banking sector reform. The
last issue is critical, and Oztrak said he warned Erdogan in
his initial briefing that the government must keep its hands
off the BRSA. At a DCM-hosted iftar for AK parliamentarians
this week, the deputies voiced differences on the primary
surplus target of 6.5 percent of GNP. End Summary.


Treasury Undersecretary Impressed with New Team;
But More "Education" Work Ahead
-------------- ---



2. (SBU) On November 19, Treasury U/S Oztrak told us his
first contacts with the newly elected AK parliamentarians and
new ministers were positive. At his and Central Bank
Governor Serdengecti's initial briefing of senior AK
officials, including Erdogan, they listened carefully, took
notes and asked good questions. Oztrak meets daily with State
Minister Babacan who "talks the same language as me, learns
quickly and is very sensitive to market reactions."



3. (SBU) Oztrak is also optimistic about progress on the
macro targets. This year's growth could reach 6 percent of

GNP (the formal target was increased from 3 to 4 percent last
month). The growth story is a healthy mix of exports and
pick-up of domestic demand. But 6 percent growth may raise
concerns of the economy over-heating, he continued, thus
providing another reason for keeping a high primary surplus
of 6.5 percent of GNP for 2003. On meeting the year-end
primary surplus, Oztrak said that last week's state
enterprise price increases (tobacco and alcohol products,
tea, and sugar) will "keep us close to the 6.5 percent
target." (Comment: IMF resrep told us separately this is a
"positive spin.") If the GOT keeps the 6.5 percent primary
surplus in 2003, and markets stay positive, then Oztrak sees
a chance to reduce public sector debt to GNP ratio - from the
current target of 77 percent at year-end 2003 to the low 70s.





4. (C) On policy issues, Oztrak gave a preliminary mixed
review of the new team. On the positive side, they sounded
good on pushing the foreign direct investment and
privatization agendas. There are, however, some concerns:


-- IMF relations. Oztrak understands the political need for
calling for a new reform program, but he thinks the GOT
should say: "the general framework of the existing program
is working and we will preserve it." Within that framework,
there is room per Oztrak to put more emphasis on socially
vulnerable groups, to improve public sector governance and
the investment environment. On scheduling an IMF mission,
Oztrak wants to quickly finish the outstanding Fourth Review
conditions before discussing the 2003 program. He believes
Babacan wants a mid-December IMF mission to combine both the
Fourth Review and also a detailed program for 2003.
(Comment: Babacan told us he wants to hold informal talks
with the IMF on the 2003 program without the Treasury staff
and before a formal Mission, reftel. This may be
unrealistic, since Babacan doesn't have all the information
and numbers at his fingertips, like the Treasury staff.)


-- Disinflation. The GOT program needs to continue focusing
on disinflation, per Oztrak, though the new ministers are not
mentioning it. (Note: The pro-Islamist business association
MUSIAD on November 20 announced that the 2003 GOT program
should focus on "growth not inflation.") Current Central
Bank projections, based on core inflation trends, show a 2003
year-end 26 percent CPI, whereas the program calls for 20
percent.


-- Tax Reform. Oztrak said instead of annulling the
"financial year zero law," the new GOT should delay its
scheduled January 1, 2003 implementation, and make it part of
a direct tax reform package to be introduced in 2003. (Note:
The financial year zero law, adopted in July 1998, is
intended to register the underground economy. The law's
implementation has been delayed and is now scheduled to enter
into force on January 1, 2003, and gives Turkish residents a
certain period to report to their local tax offices their
unrecorded wealth without penalty. Septel covers the debate
on this law.)


-- Banking Sector Reform. "AK is confused about the BRSA,"
Oztrak said. "I told Erdogan openly that continued
restructuring of the sector is a key benchmark for the local
and international financial communities. We can't afford any
perception of flexibility." Oztrak said the concern is with
Yapi Kredi, and he sees the problem as affecting Treasury's
debt management capability: "If there's a sick player in the
system, holding our papers, this puts pressures on the player
to sell the papers, which increases the risk premium for
everyone holding the papers." The banking sector's financial
mediation role is key to growth in 2003, per Oztrak, thus the
need to keep the GOT's hands off of the BRSA. (Comment: The
new government has recently backed away from earlier
criticism of BRSA.)



5. (C) Oztrak is uncertain of his future in the government.
"They have to have confidence in me, and I have to have
confidence in them." He told us PM Gul was the most
reasonable person in the 1996/97 Refah-Yol government. "We
in the bureaucracy used to come to him to solve all sorts of
problems." On the other hand, DPM Sener (formerly Finance
Minister) "just accepted whatever instructions Erbakan gave
him."


Reinforcing the Issues with AK Parliamentarians
-------------- --



6. (C) Oztrak's mixed review of the new team's policy
positions was reinforced during an iftar for AK
parliamentarians hosted by the DCM. We heard some
differences on economic policy between younger MPs Reha
Denemec and Ibrahim Ozal, and the "old guard" Minister of
Industry Ali Coskun. Ozal and Denemec thought the 2003
budget needed to keep the 6.5 percent of GNP primary surplus,
whereas Coskun focused on the need for "pump priming."
Coskun proposed that the primary surplus could be lowered,
because real interest rates were coming down (he said the
target was 10 percent) and the budget would cut public
investment and agency spending. DCM suggested that the GOT
budget needed to show fiscal discipline, and that the GOT
shoudn't plan to spend savings that hadn't yet materialized.



7. (C) On the positive side, Industry Minister Coskun said
the new GOT was committed to resolving foreign investment
disputes. The draft Foreign Direct Investment law now in
parliament would be revised "to be more liberal." The new
GOT was putting together a list of 18 FDI disputes for
immediate resolution. "You'll come to thank us," Coskun
said.


State Ministers' Portfolios Announced
--------------



8. (U) On afternoon of November 21, PM Abdullah Gul
announced the portfolios of the seven State Ministers (three
of whom are also Deputy Prime Ministers). Following are the
portfolios of the three with economic policy
responsibilities.


State Minister and Deputy Prime Minister
Abdullatif Sener:


-- Directly supervises the State Planning Organization and
the Privatization Administration


-- Reports to Cabinet on following independent agencies:
Banking Regulation and Supervision Agency; Capital Markets
Board; Turkish Development State Bank


State Minister Ali Babacan:


-- Directly supervises the Treasury Undersecretariat


-- Reports to Cabinet on following independent agencies:
Central Bank; Ziraat and Halk State Banks
State Minister Kursat Tuzmen:


-- Directly supervises the Foreign Trade Undersecretariat and
the Customs Undersecretariat


-- Reports to Cabinet on following independent agency:
Turkish Ex-Im Bank
PEARSON