OUTGOING TREASURY U/S SAYS IT'S ALL ABOUT

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 002472

SIPDIS


STATE FOR E, EB AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
NSC FOR QUANRUD AND BRYZA


E.O. 12958: DECL: 04/15/2013
TAGS: EFIN PGOV TU
SUBJECT: OUTGOING TREASURY U/S SAYS IT'S ALL ABOUT
CONFIDENCE

(U) Classified by EconCouns Scot Marciel. Reason: 1.5(b,d).



1. (C) Summary: Outgoing Treasury U/S Faik Oztrak believes
Turkey has an opportunity to reduce its debt/GNP ratio and
reach its five percent growth target this year if the
government can restore market confidence, but he is not sure
the government can and will stop giving the mixed signals
that have so far undermined that confidence. Oztrak
acknowledged that interest rates need to drop significantly,
as current levels are unsustainable, but argued that a deep
recession resulting in social turmoil is a greater risk than
a debt default, at least this year. Oztrak said Foreign
Minister Gul is the only minister who "gets it" when it comes
to the economy. Ali Babacan understands economics to some
extent, but has no clout; the others have no understanding at
all. Oztrak also reported that IMF Managing Director Kohler
delivered a tough message to Babacan April 14, essentially
telling him that the IMF would not disburse loans to Turkey
if it failed to fully implement sound policies. End Summary.



2. (C) During an April 15 farewell lunch, outgoing Treasury
U/S Faik Oztrak (protect) offered his thoughts on the
government and the outlook for the economy. (Oztrak said he
would leave office by April 21 at the latest.) He expressed
frustration that the current government, inclined toward
populism, had squandered its credibility with the markets and
thus missed a great opportunity to reduce real interest rates
and Turkey's debt/GNP ratio. Similarly, it had lost
credibility with the IMF, including through recent moves such
as proposing spending any extra revenues gained through the
tax amnesty program to compensate farmers for debt payments.



3. (C) Oztrak reported that the IMF's unhappiness with the
GOT had manifested itself in Managing Director Kohler's tough
message to State Minister Babacan in Washington on April 14.
According to the read-out Oztrak received, Babacan began the
meeting by saying that AK's effective implementation of the
reform program should have inspired confidence. Kohler cut
him off, saying he had a busy schedule and did not have time
for political statements. Kohler then upbraided Babacan for
the government's failings to date and warned that, should the
government fail again, the Fund would not disburse the next
tranche.



4. (C) Despite the government's failings to date, Oztrak
believes the Turkish economy can end the year in better shape
than it started. The government has completed all its prior
actions for the Fourth Review, including passage of a strict
budget, and the economy is much more resilient than it was
two years ago. The key, he stressed, is confidence. If the
government can restore market confidence by fully
implementing the reform program, interest rates should fall
significantly. In that case, consumer spending and private
investment -- now held back by a lack of confidence -- also
should rise, enabling Turkey to reach its five percent growth
target despite (or perhaps because of) implementation of
tight fiscal policy. (Oztrak said he had argued to the
government that, if it fully implements the program, the
resulting fall in interest rates should make it possible for
it to spend, late this year, the 1.2 percent of GNP now
affected by an emergency partial government spending freeze.
This should be a huge incentive, he said, as it would
stimulate the economy ahead of next Spring's local elections.)



5. (C) If, on the other hand, the government's actions fail
to bring interest rates down significantly, Turkey will face
serious problems. Oztrak argued that, while the risk of a
debt default and financial crisis is always there, the
greater threat -- at least in 2003 -- is that continued weak
consumer/business confidence will keep domestic demand low
and usher in a potentially deep recession that could result
in social turmoil. (Note: Many analysts, noting that
inventory accumulation accounted for a large share of 2002's
7.8 percent GNP growth, argue that domestic demand remains
weak. Several say that this fact, combined with the expected
decline in tourism due to the Iraq war, suggests that growth
is is likely to be less -- perhaps substantially less -- than
five percent this year.)



6. (C) Oztrak said he was not sure this government could and
would take the steps needed to restore confidence. "They can
do the right thing when there is enough market pressure, but
you cannot take your eyes off them even for 24 hours." He
said Foreign Minister Gul was the only minister who "gets it"
when it comes to economics. Babacan "may understand," but
nobody listens to him because, in the AK hierarchy, he is
viewed as too young and junior. Also, he has lost all
credibility, not only with the markets, but with the IMF and
the USG. The remaining ministers do not understand economics
at all. Some, he laughed, have criticized him and Central
Bank Governor Serdengecti for failing to lower interest rates
(as if they had the power to do so). Oztrak admitted that
the ministers do not trust him, since he is not "one of
them." In that sense, Turkey may benefit from a new Treasury
U/S if that person has the trust of AK leaders and a good
understanding of what needs to be done. On the other hand,
if the government replaces some or all of the Treasury Deputy
U/S's with "its people," prospects for full implementation of
the reform program will decline.
PEARSON