CENTRAL BANK GOVERNOR TO AMBASSADOR: WE'VE MADE

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 005736

SIPDIS


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


E.O. 12958: DECL: 09/09/2013
TAGS: EFIN PGOV TU
SUBJECT: CENTRAL BANK GOVERNOR TO AMBASSADOR: WE'VE MADE
PROGRESS, BUT NOT ENOUGH


REF: ANKARA 5641


(U) Classified by Ambassador Eric Edelman. Reasons: 1.5(b,d).



1. (C) Summary: Central Bank Governor Serdengecti told
Ambassador September 9 that Turkey had made progress on a
number of economic issues, but he remains cautious because
"anything can happen." On the positive side, the economy is
enjoying both growth and disinflation, the government has
increasingly accepted the need to stick to the IMF program,
and people are starting to see the benefits of sound
policies. On the other hand, some circles continue to lobby
against the disinflation effort, the government's failure to
fully grasp and communicate the value of the reform program
is weighing on market confidence, and the Central Bank's
independence must be defended every day. Serdengecti warned
that the Imar Bank scandal had damaged the BRSA's
credibility, and may result in the departure of the BRSA
leadership. He reiterated his concern about anti-Americanism
and, more broadly, about elements within the State --
particularly in the bureacracy and judiciary -- who favor
isolationism and oppose foreign investment. End Summary.



2. (C) During Ambassador's September 9 courtesy call on
Central Bank Governor Sureyya Serdengecti, the Governor
caveated his generally positive description of economic
trends with numerous words of caution. He noted that the
economy was enjoying not only a downward trend in inflation,
but also solid growth, which few had expected. However, since
in Turkey "you are penalized for being successful," important
lobbies who have benefited from chronic inflation were
constantly criticizing the Bank and pressing for a more
relaxed approach to disinflation.



3. (C) Serdengecti said that six months ago, the government
had not understood the value of the economic reform program.
Its approach was to obtain U.S. financial support, then get
rid of the IMF so it could pursue populist policies. Since
the Iraq operation, the political leadership has increasingly
understood the need to stick to the program, though "we still
aren't 100 percent there." Government leaders have a hard
time understanding economic issues, and do not trust people
outside their circle. "We still have to lecture them all the
time." They have made progress, "but it's not enough.
Anything can happen."



4. (C) Ambassador said he had been encouraged by his recent
conversation with Minister Babacan (reftel),who appeared
upbeat about the Prime Minister's willingness to support
efforts to hold down spending. Serdengecti responded that
Babacan was lucky, in that his position overseeing the
Treasury meant that he had been lectured constantly (by
Serdengecti and Treasury technocrats). As a result, he was
the first to learn the need to stick to the reform program.

5. (C) Serdengecti said the upcoming 6th review was
critical. The Bank is becoming more confident about
inflation, so is tempted to cut interest rates again.
However, having seen delays leading up to the 5th review, he
remains skeptical of the government's commitment and wants to
see "more performance" before cutting rates. Unfortunately,
the government's habit is to wait until the last two weeks to
take the actions needed to meet Fund conditions.



6. (C) Noting that privatizations were a key aspect of the
upcoming review, Ambasssador suggested it would make sense
for the government to start the privatization process now,
rather than wait until the last minute, so as to reduce the
risk of being criticized for selling state assets for too low
a price. Serdengecti agreed, saying the only way to avoid
such criticism was to implement the privatizations in a
steady, fully transparent manner.



7. (C) The Governor said he was not too concerned about the
lira's strength, which he said was being driven by a
combination of reverse currency substitution, inflows of
Turkish-owned capital that had been stashed abroad, and
seasonal factors, notably tourism. Exporters constantly
complain, but that is because they are used to the Central
Bank focusing on the exchange rate rather than inflation. If
Turkey had a fixed exchange rate, the growing current account
deficit would be a concern. However, with a floating rate,
if people become convinced the lira is overvalued, they will
start to sell, and the exchange rate will correct itself.



8. (C) In response to Ambassador's question, Serdengecti
highlighted three continuing concerns:


-- powerful lobby groups fighting the Bank's disinflation
efforts. Some exporters, along with certain local industry
and trade groups, have benefited from chronic inflation,
because it has enabled them to shift the cost of their
mistakes to others (such as labor unions). The Bank is
getting a stronger hand in this war, but remains cautious
because these groups are lobbying the Prime Minister's office
to adopt a less aggressive anti-inflation strategy.


-- the continuing lack of confidence in the government,
despite the progress noted above;


-- the Bank's independence, which he said he has to protect
every day. "We've come a long way, but it's not enough."



9. (C) Ambassador asked about the impact of the Imar Bank
scandal on the Banking Regulation and Supervisory Agency
(BRSA). Serdengecti said he feared the damage was
significant, and BRSA's leadership might have to quit as a
result. He noted that the agency had been under constant
pressure, and is now paying a price for the Imar Bank mess.
Serdengecti stressed that government agencies have been aware
of the bank's problems for years, and predicted that the
public would learn "many things" when this case goes to
court. He cautioned that the government and the IMF needed
to handle this case carefully, because it would be a big
mistake if the government derived the wrong lessons and
blamed the BRSA, which is only partly at fault here.



10. (C) Ambassador noted that, while the government appeared
content to pursue corruption charges against former officials
and, now, the Uzans, the real test would be whether it was
willing to go after its own people should evidence of
corruption arise. Serdengecti said he had told the Prime
Minister and Minister Babacan that they should see this case
not as an opportunity to weaken the BRSA, but as a chance to
explain to the public the enormity of the corruption problem.
This approach, however, requires an understanding of the
critical importance of structural reforms, particularly
establishment of strong institutions, which the government
appears to lack.



11. (C) Serdengecti expressed concern at growing
anti-Americanism in Turkey, saying people had quickly
forgotten how Turkey had survived during the last 50 years.
He joked that, during the Cold War, Turks could always blame
problems on the USSR. Now that it was gone, only America was
left to blame. Of even greater concern, he said, is that
some "important circles" that oppose Turkey's reforms and
global integration are pressing for a return to isolationism.
Although Turkey had no choice but to enter alliances after
World War II, certain elements of the secular establishment
have always resisted integration. This resistance continues
today, deeply entrenched in the State, in the form of
opposition to reform and foreign investment. Even as Turkey
liberalizes legislation on foreign investment, important
forces in the bureaucracy and judiciary undermine the effort
through their actions. Successive governments, including the
current one, have failed to explain to the public the
benefits of global integration and reform, making it easy for
people such as Cem Uzan to campaign on an anti-IMF,
anti-globalization platform.
EDELMAN