AK'S BUSINESS BASE GOES CALLING IN ANKARA

UNCLAS SECTION 01 OF 02 ISTANBUL 001164

SIPDIS

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E.O. 12958: N/A
TAGS: ECON EFIN TU
SUBJECT: AK'S BUSINESS BASE GOES CALLING IN ANKARA

This message is sensitive but unclassified-- not for internet
distribution. This message was coordinated with Embassy
Ankara.


1. (SBU) Summary: Representatives of the Independent
Businessmens' Association (MUSIAD) returned on June 30 from a
three-day lobbying junket to Ankara, where they pressed for
government action to assist small and medium-sized
enterprises, arguing that it is time to "rehabilitate the
real sector and enable ordinary citizens to share in Turkey's
economic success." The organization's suggestions reflect
the concerns of parts of the ruling AK party's base, in that
MUSIAD's small business members largely overlap with core
party supporters. The group has moderated its criticism of
Turkey's IMF program, and seems to be pressing for changes on
the margins rather than wholescale revision of the program.
Significantly, however, MUSIAD leadership told us that
government officials stressed that the need to maintain
budgetary discipline would preclude them from responding
favorably, until Turkey's budget deficit is resolved. End
Summary.


2. (U) Detailed Prescriptions: MUSIAD's annual economic
report, encompassing an assessment of the economy in 2004 and
the first half of 2005, and suggestions for its continued
improvement, was unveiled on June 22. From June 28-30,
representatives of the Istanbul-based, Islamist-oriented
MUSIAD journeyed to Ankara, where they held dozens of
meetings with government officials, including Prime Minister
Erdogan, Deputy Prime Minister Sener, and State Minister for
the Economy Babacan, as well as the Ministers of Finance,
Foreign Trade, Agriculture, Commerce and Industry and others.
The extensive program reflects MUSIAD's influence among
rank-and-file AK party members, given the fact it too draws
its own membership from the ranks of Turkey's small and
medium enterprises, especially in Anatolia.


3. (U) The report praises the AK government's success in
bringing political and economic stability since 2002, but
stresses that the 25 percent growth in the economy over the
last three years has not been fully felt at the grassroots
level. "Rehabilitation of the public and financial sectors
took too long," MUSIAD Chairman Omar Bolat argued in a press
conference unveiling the report, adding that the "government
needs to focus on the structural transformation of the real
sector." In a July 1 meeting with Istanbul P/E Chief, Bolat
and Vice Chairman Yusuf Cevahir argued that neither
unemployment nor lagging real income has yet recovered from
the crisis, and that now is the time for the government to
move to ensure that "ordinary citizens sense the success of
its economic policy." They argued that the government should
launch a support program for small and medium sized
enterprises (SMEs),especially since they expect 2005 to be a
difficult year for SMEs, as they believe most of the pent-up
demand in the economy was met in 2004. (Note: The report
indicates that MUSIAD members experienced a slowdown in
demand in the first five months of 2005, and that since last
year's demand was financed by bank loans and installment
payments, this year consumers will spend the bulk of their
income in paying off earlier purchases, rather than buying
new goods.)


4. (U) What to do: MUSIAD recommendations include changing
the way Turkey finances its debt by indexing treasury
borrowing instruments to the real growth rate, utilizing
lease certificates, and abandoning overnight repos. In
addition, the group suggests that the 6.5 percent primary
surplus target should be replaced by a target for public debt
stock at 60 percent of GNP, while all foreign exchange
denominated debt should be converted to YTL. The report also
presses for reduced fees for SME credits and reduced
corporate and income tax rates. Finally, MUSIAD urges tax
immunity for minimum wage earners and reduction in social
security taxes.


5. (SBU) Polite Hearing: Bolat and Cevahir said they had
received a polite hearing in government circles, not
surprisingly, since "our views come from them," but that
government officials had stressed that budget discipline
remained its priority and would preclude any major
initiatives of the sort they advocated. The key, these
interlocutors reportedly said, was to keep the budget deficit
on a declining trend so that interest rates would continue to
come down to a level where the real sector could access
credits to support its activities. Similarly, while the
government hopes to accomplish tax reform in the future to
lower rates, this too is contingent on decreasing the deficit.


6. (SBU) In our meeting, Bolat reiterated the report's
emphasis on the handicap social security taxes pose for
employers. He noted that the social security tax on
employers was 30 percent as recently as 1999, but that rates
had been raised to 42.5 percent in an attempt to close the
system's deficit. Notwithstanding this increase, the problem
remains, and has even intensified, as many employers evade
the tax. A rate between 20-30 percent is supportable, he
argued, and is necessary in the long run to encourage
employment.


7. (SBU) Comment: MUSIAD has long shied away from the
economic mainstream in its economic prescriptions. Its
proposals for Turkey's debt certainly fit with that
tradition, though less dramatically than in the past.
Overall, however, we found that the group's populism has
become more nuanced and less aggressive than it has been in
recent years, with understanding that lower interest rates
are a key incentive that will be of assistance to companies
in the real sector. End Comment.
ARNETT