Identifier
Created
Classification
Origin
03ISTANBUL49
2003-01-13 05:42:00
CONFIDENTIAL
Consulate Istanbul
Cable title:  

ISTANBUL'S TAKE ON AK ECONOMICS: ALL ISN'T LOST

Tags:  PGOV ECON EFIN ETRD TU 
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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 02 ISTANBUL 000049 

SIPDIS


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


E.O. 12958: DECL: 01/09/2013
TAGS: PGOV ECON EFIN ETRD TU
SUBJECT: ISTANBUL'S TAKE ON AK ECONOMICS: ALL ISN'T LOST
BUT AK ISN'T HELPING

REF: A. (A) ANKARA 160

B. (B) ANKARA 193


Classified By: Consul General David Arnett. Reasons: 1.5 (b) and (d).


C O N F I D E N T I A L SECTION 01 OF 02 ISTANBUL 000049

SIPDIS


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


E.O. 12958: DECL: 01/09/2013
TAGS: PGOV ECON EFIN ETRD TU
SUBJECT: ISTANBUL'S TAKE ON AK ECONOMICS: ALL ISN'T LOST
BUT AK ISN'T HELPING

REF: A. (A) ANKARA 160

B. (B) ANKARA 193


Classified By: Consul General David Arnett. Reasons: 1.5 (b) and (d).



1. (C) Summary: Istanbul contacts in the financial and real
sectors agree that in its first month and a half Turkey's Ak
government "hasn't gotten it" and has done a poor job on
economic policy, thereby dissipating much of the goodwill
generated by initial perceptions that a single-party
government would break the deadlock that has constrained
Turkish governments over the past decade. Explanations range
from a combination of inexperience, lack of coordination, and
inconsistency, to a perception that far from being a unified
party, Ak is riven into warring factions with the "populist
wing," at least to date, coming out on top. Many believe
that all is not lost, however. While pessimists believe that
AK will not get it under any circumstances, a not
insignificant group believes that with the "road map staring
it in the face," economic forces will ultimately compel AK to
stick with the program. The failure of Tuesday's treasury
auction (ref a) is seen by many as a salutory first warning
by the markets, while PM Gul's subsequent budget
pronouncements (ref b) have been taken as a sign that at
least parts of the government are getting the message.
Concern is also widespread about the economic impact on
Turkey of an Iraq operation, though most agree that recent
estimates are highly exaggerated (one contact quipped that
they led him to conclude the "U.S. is planning to attack
Turkey rather than Iraq"). End Summary.



2. (C) Evaporating Euphoria: In a round of calls on leading
bank, real sector, and market actors on Wednesday, January 8,
visiting Ankara Econ Counselor and Istanbul Pol/Econ Chief
heard a decidedly downbeat assessment of Ak's performance to
date. The meetings followed closely on Tuesday's
unsuccessful Treasury Auction and overlapped with PM Gul's
afternoon budget statement. Akbank CEO Zafer Kurtul noted

that positive market sentiment has rapidly dissipated in the
face of Ak's expansive spending plans and failure to identify
savings to pay for them. Even Ak allies from within MUSIAD
(the "Islamic" businessmen's association) conceded that
Erdogan's "populist" policies have raised issues for the
market, while longtime Ak skeptics at Bender Securities
argued that the only possible "method to the madness" of
recent government policies was expectation that at the end of
the day neither the U.S. nor the IMF would allow Turkey to
fail. Optimism lingers in some camps, however. ING Baring's
Managing Director John McCarthy, a seasoned Turkey watcher,
conceded that AK's "honeymoon is over," but argued that
despite its populist tendencies, Ak is "smart enough to see
the roadmap and won't tinker too much."



3. (C) A Shot across the Bows: All pointed to the failure of
the January 7 treasury auction to raise sufficient cash for
the Treasury to meet its redemption requirements as an
important warning to the government, as even the local
"primary dealers" that have supported the market up to now
failed to step up to the plate. PM Gul's announcement of tax
increases and spending cuts late on January 8 (ref b) was
taken as evidence that the message had registered, but
Bender's initial reading was that even taken at face value
the measures will be insufficient to achieve a 6.5 percent
primary surplus goal that Gul reiterated. Bender Chief
Economist Emin Ozturk noted too that covering the shortfall
forced the Treasury to expend a significant portion of its
foreign exchange account at the Central Bank. A similar
shortfall in the next auction on January 21, he warned, will
deplete the account, leaving no "cushion for the future."



4. (C) Embattled Reformers?: The general consensus among
those we canvassed was that economic understanding in AK is
thin, limited mainly to Prime Minister Gul and State Minister
Babacan and their entourages. Deputy Prime Minister Sener
had few admirers among those we talked to, while there was
agreement that Erdogan too has "not played a constructive
role" on economic policy. Given perceived tensions between
Gul and Erdogan, and doubts about how much weight Babacan
carries within the government, there was concern about just
how effective the reformist bloc could be. Not all judge the
situation hopeless, however. McCarthy noted that a recent
TUSIAD meeting in Ankara concluded that the organization
could work with AK, but would need to "support it to the
extent we can" to make up for its lack of depth and
credentials.



5. (C) Dangerous Tendencies: Observers also expressed concern
that despite public pledges to make a new start, AK may
revert to familiar patterns of nepotism and corruption.
Bender pointed to anecdotal word that some party
functionaries are resigning to create construction companies,
presumably to benefit from public tenders, while indications
that Interior Minister Aksu's brothers may be appointed to
head BOTAS and Turkseker also raised concerns. Bender also
pointed to mutual suspicions between AK and ranking
bureaucrats and pressure from the AK caucus to put "loyal
people" in place as potential destabilizing factors.



6. (C) Growth?: Less consensus existed on the question of
where Turkey's economy is now. While the Bank of New York
said it has seen no movement, noting that its loan exposure
has fallen by 2/3 to just over 300 million USD, Yapi Kredi
Senior Economist Hasan Ersel said his bank has seen some
progress in the real economy, though he only expects 4
percent growth this year. (Ersel conceded that absent a
settlement between the Cukorova Group and BRSA, however, his
own institution's embattled predicament is not sustainable
past mid-year.) Some other companies are also thriving.
Lezzo Industries Chairman Erol Yarar (founding Chairman of
Musiad) noted that his group expects 9 percent growth in
sales this year and plans significant new investments, while
AKBank CEO Kurtul noted that the bank is doing well and is
working to increase market share in key product lines. Both
reminded us, however, that beyond the current range of macro
issues facing AK, there are a whole range of structural
impediments in the Turkish economy that hinder business and
discourage investment. These, they argued, will have to be
addressed before Turkey is able to achieve truly sustainable
and balanced growth.



7. (C) Iraq: Concern about Iraq's impact on Turkey's own
economy was more muted than recent alarmist press statements
led us to expect. Noting that damage estimates are clearly
exaggerated, Ersel quipped that they prompted him to wonder
whether the U.S. was shifting its sights and planning to
attack Turkey rather than Iraq. Yarar too downplayed the
issue, judging that "the thought is worse than the reality."
There was concern, however, particularly from market players
that the perception that the U.S. and IMF would not permit
Turkey to fail is creating a "moral hazard" and contributing
to slippage on economic reform and fiscal discipline.



8. (C) Comment: Gul's statement came late in our day of
meetings and was only addressed by Bender analysts, who
judged it positive but insufficient. That view has largely
been echoed over the last two days by other market analysts.
But whatever the doubts about the specific figures (and there
are many),there is at least relief that AK appears to have
gotten the market's message at some level. Whether the
reform contingent is capable of building on that start
remains to be seen. Many in the markets have their doubts.
End comment.




ARNETT