ECONOMIC IMPACT IF COURT CLOSES AKP

C O N F I D E N T I A L ANKARA 001314

SIPDIS

DEPARTMENT FOR A/S FRIED
DEPARTMENT FOR A/S SULLIVAN
DEPARTMENT FOR DAS BRYZA

E.O. 12958: DECL: 07/22/2018
TAGS: ECON EFIN TU
SUBJECT: ECONOMIC IMPACT IF COURT CLOSES AKP

REF: ANKARA 1221

Classified By: Ambassador Ross Wilson for reasons 1.4 (b) and (d)


1. (SBU) Summary: Investors agree that AKP,s closure is the
most likely outcome of the court,s deliberations and
therefore, the effect of the closure has already been largely
factored into market behavior. However, two key unknowns,
the fate of PM ERDOGAN and AKP,s current economic policies,
will likely add a new dimension to the market reaction if AKP
is closed. To the extent that ERDOGAN remains on the scene
and AKP,s economic policies are continued by a successor
government, economic volatility is unlikely. Global economic
conditions will also continue to play an important role --
perhaps more so than AKP,s closure -- in Turkey,s economic
health. End Summary.

Current Economic Outlook
--------------


2. (SBU) The Turkish economy is currently suffering the
effects of global economic stresses, particularly increasing
energy costs. Tolga Ediz from Lehman Brothers told us
tensions in the political arena, global credit conditions,
and high oil prices have had a negative impact on Turkey,s
economy. Ediz said the Turkish equity market has been
particularly hard hit. Following an almost sevenfold
increase in U.S. dollar terms between 2003 and 2007,
outperforming the FTSE Emerging markets index by 175%, the
Turkish equity market is now one of the worst performing
among its peers with a 43% year-to-date decline (compared
with declines of 8.1% for global emerging markets and 13.1%
in Europe). Ediz expects the slowdown in global growth will
likely affect Turkey,s exports, especially in 2009. The
Turkish economy is still reliant on foreign capital flows to
finance its growth and tightening global credit conditions
mean that foreign investors will become less generous in
their exposure to Turkey as well as other emerging markets,
according to Ediz.


3. (C) Turkish Treasury Undersecretary Ibrahim Canakci
closely linked the risks for the Turkish economy with the
global economy, citing the key risk factors of high energy
prices; slowing global growth; inflation pressure; and tight
external financing conditions. He cautioned that Turkey,s
external financing need for its high current account deficit
puts the country in a vulnerable position; however, he went
on to note Turkey,s continued economic strength and ability
to raise a substantial amount from international markets this
year. Canakci expects Turkey to receive $16 billion in
foreign direct investment in 2008, a drop from Turkey's
record 2007 FDI of $19.8 billion. He expects Turkey,s
growth rate to reach 4-5% in 2008, down from the 6-7% rate of
previous years.


4. (C) The current outlook for the Turkish Lira predicts a
gradual depreciation. Turkey,s private sector has become
more vulnerable to fluctuations in the exchange rate. The
Central Bank of Turkey estimates that the open position of
the non-financial private sector is approximately $60
billion, or about 10 percent of GDP. Emrah Eksi, Central
Bank Markets Department Deputy Director General told us that
despite uncertainty in global and political developments, the
Turkish Lira is still one of the most attractive currencies
in emerging markets. Investors expect USD/TRY to settle at
1.35 (USD .74) by the end of 2008, and at 1.45 (USD .69) by
the end of 2009.

Investors Consider the Economic Effects of AKP Closure
-------------- --------------


5. (SBU) Political tension, fueled by the closure case and
more recently by the ongoing Ergenekon investigation, remains
high. Murat Gurkan from Deutsche Securities and Tevfik Aksoy
from Morgan Stanley told us a court ban of the AKP and some
of its leaders, including PM Erdogan, is considered the most
likely scenario by investors. As such, investors have
largely priced the AKP,s closure into Turkish assets, and
Turkey has been paying increasingly higher rates because of
perceived higher risk. Baturalp Candemir from EFG Securities
said his worst case scenario is PM Erdogan,s being banned
from party politics, because this will increase and prolong
investor uncertainty.


6. (C) Aksoy said that if AKP is closed, we should expect a
period of political uncertainty, especially regarding the
Prime Minister's position. Consequently, Aksoy expects
volatility in Turkish asset prices in the immediate wake of
the Court decision. Aksoy, Gurkan, and Ediz all expect a
decision to close AKP will slow growth further than global
economic conditions merit, as domestic firms and consumers
become more conservative in their spending and investment
decisions. Ediz added that tightening global credit
conditions will continue to limit credit availability, and
rising real interest rates will cause consumers and companies
to cut back on their discretionary spending.

GOT Considers Economic Effects of AKP Closure
--------------


7. (C) Canakci told us if the Court closes the AKP, the
potential effects on the economy could range from marginal to
somewhat negative if economic policy is not clarified.
Canakci listed four basic pillars of positive macroeconomic
performance present since the rise of the AKP to power in
2002: fiscal and monetary discipline with policy stability;
favorable global environment; EU accession; and IMF dialogue.
The global environment is no longer favorable, and in case
of AKP,s closure, policy stability could be shaken along
with political stability. Canakci noted that AKP policies
have encouraged private sector development and played a key
role in Turkey's positive economic performance. If an early
general election is called, the Treasury Undersecretary mused
the next government would likely follow the basic outlines of
the current economic policies, although support for more
difficult structural reforms could continue to wane. Canakci
noted that Prime Minister Erdogan,s personal commitment to
reform has played an important role in the current policy
stability. A decision to ban ERDOGAN from politics could
damage this stability -- at least in the short-term -- and
shake up markets until his successor makes his economic
policies clear.

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WILSON