AMBASSADOR'S FAREWELL CALL ON CENTRAL BANK GOVERNOR

C O N F I D E N T I A L ANKARA 004422

SIPDIS


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


E.O. 12958: DECL: 07/14/2008
TAGS: EFIN PREL ECON TU
SUBJECT: AMBASSADOR'S FAREWELL CALL ON CENTRAL BANK GOVERNOR

(U) Classified by Ambassador W. Robert Pearson. Reason:
1.5(b,d)



1. (C) During a July 14 farewell call, Ambassador praised
Central Bank Governor Serdengecti for his economic policy
work and his cooperation with the U.S., and solicited
Serdengecti's views on the issues on which the new Ambassador
might want to focus. Serdengecti responded that the most
important thing the United States could do was to implement a
strong public relations program to counter its poor image in
Turkey and the region. He noted that, despite all the good
things the U.S. had done to help Muslims and to help Turkey
(he noted support for economic reform and EU accession),most
people still do not see the U.S. in a positive light.
Serdengecti said he was seeing mixed reports on whether
bilateral relations were improving. To some extent, a
nationalist tone in the Turkish press is to be expected;
however, he fears that some in Turkey are portraying the U.S.
and the IMF as "no good" to further their aims of keeping
Turkey isolated and "third world."



2. (SBU) Serdengecti sees both good and bad economic trends.
On the positive side, inflation -- which had not fallen
significantly since December -- has begun to decline again.
He predicted the lira's strength and falling agricultural
prices, combined with the base year effect (i.e. high
inflation in the second half of 2002),would enable Turkey to
keep CPI below 25 percent and probably close to 20 percent
this year, assuming no sharp decline in the lira. Although
domestic demand is growing moderately -- hence little risk of
economic overheating -- growth overall is "beyond
expecations." The fact that growth has yet to generate many
jobs means productivity is increasing, which is healthy.
Over time, growth will increase support for the reform
program. For the moment, the current account deficit is not
a cause for alarm, though the Bank is keeping a close eye to
see if imports of consumer goods (now at 11 percent of
imports) rise to levels indicating domestic demand is
becoming excessive.



3. (C) The main negative, per Serdengecti, is that the
government is not doing what it needs to do in terms of
reforms and meeting IMF conditions. This failure is keeping
interest rates high (above 50 percent),and sooner or later
will be reflected in the exchange rate. Serdengecti said
State Minister Babacan knows the situation better than
others, and tells the truth in internal meetings (though he
refrains from issuing public warnings); the bigger problem is
Finance Minister Unakitan, who "lacks understanding" of the
economic situation. Serdengecti said he is not sure if the
Prime Minister gets it. After he and the PM last met, the PM
changed his rhetoric and started sounding like a Central Bank
governor. However, the technocrats see him only
occasionally, and others who are close to him regularly give
him bad information and advice. As a result, the Governor
expects the GOT to continue to move slowly on reforms until
the markets react.



4. (SBU) Looking back on the past three years, Serdengecti
pointed to two major economic achievements: growth, which
has brought GNP back to pre-crisis levels; and an economy
that is more resilient in the face of shocks, the result of
the shift to a floating exchange rate and numerous structural
reforms. Inflation has come down some, but Serdengecti will
not feel comfortable until it falls below 20 percent.



5. (C) Serdengecti dismissed the notion -- bandied about
during PM Erdogan's recent trip to Malaysia -- that the
government would abandon the IMF approach. The main
characteristic of this government, he argued, is that it
loves "bright ideas" -- jumping on alternative solutions as
if no one had ever considered them before. One day the
solution is the Malaysian approach, and the next day it is
Islamic money coming from the Gulf. The government, he
continued, explores these alternatives until they learn --
usually from the press or the bureaucracy -- that they are
infeasible. It is, he said, a time-wasting and costly
approach.
PEARSON