KOC EXECUTIVES ASSESS TURKEY'S ECONOMY

UNCLAS SECTION 01 OF 02 ISTANBUL 000269

SENSITIVE
SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV TU
SUBJECT: KOC EXECUTIVES ASSESS TURKEY'S ECONOMY

REF: ANKARA 926


1. (SBU) SUMMARY: Koc executives expressed concern over the
Turkish economy to Ambassador Jeffrey and CG Wiener in a July
9 meeting. While the situation has improved since earlier
this year and Turkey is relatively better-positioned than its
peers, consumer confidence remains low and must rebound for
the economy to grow again. Continued failure to sign an IMF
agreement is a concern as it leaves Turkey vulnerable to a
change in market conditions, according to Koc executives.
The Koc representatives doubted that the AKP can hold its
parliamentary majority in Turkey 2011's elections. Comment:
We believe recent economic data support the Koc executives'
economic assessments. End summary.


2. (SBU) Ambassador Jeffrey and Consul General Wiener
attended a lunch at the Istanbul headquarters of Koc Holding,
Turkey's largest industrial conglomerate, on July 9 with
Honorary Chairman Rahmi Koc, Chairman Mustafa Koc,
Vice-Chairman Temel Atay, CEO Bulent Bulgurlu, and Deputy
(and incoming) CEO Osman Durak. The Ambassador and CG were
accompanied by FCS branch chief Greg Taevs and Treasury TDYer
Jason Weiss.

Too early for optimism
--------------


3. (SBU) Koc CEO Bulent Bulgurlu noted that while the
Turkish economy is performing relatively better than earlier
this year, the recession has not yet reached its bottom and
it is too early for optimism. Mustafa Koc described Turkey's
primary challenge as restoring consumer confidence. People
in Turkey have money, he suggested, noting that a recent tax
cut on autos and consumer durables has spurred an uptick in
consumption in these sectors. He said he hopes Turks will
now start spending more. Bulgurlu noted that consumer
confidence has improved in the past two months, although he
agreed it remains low.

But well-positioned for recovery
--------------


4. (SBU) Bulgurlu does believe, however, that Turkey is
better-positioned for 2010 than the rest of Europe. The
primary difference is Turkey's banking sector, which he
described as very sound and strong. Bulgurlu believes the
banking sector will help Turkey to overcome potential further
global stress, and leaves Turkey in a relatively better
position than other economies whose banking sectors are not
as healthy. He added that Koc's exports are doing better
than six months ago and that Koc is working to diversify its
markets away from Europe and toward the Middle East and Asia,
where there is still positive growth. Bulgurlu and others
approved of the Turkish government's March tax cuts, which
they see as having helped the private sector and prevented
further unemployment, but which came later than they should
have.

Turkey needs an IMF program
--------------


5. (SBU) Mustafa Koc expressed concern over Turkey's
continuing lack of an IMF program. He said that last year's
budget, the first implemented without the IMF since the end
of Turkey's 2002-08 program, was a "disaster," and that a new
program would help Turkey a great deal with its current
difficult fiscal situation. He sees the government as
"caught between the deep sea and the devil," as on one hand
it needs an IMF program but, on the other, an IMF program
would prevent it from implementing populist policies ahead of
the 2011 parliamentary elections. As such, he sees the main
sticking points in negotiations as political, not technical.


6. (SBU) Bulgurlu noted that recent low oil prices and a
stable exchange rate have helped Turkey navigate the crisis.
As a result, the government believes that it can handle the
downturn, but this will depend on continued friendly oil
prices and exchange rates. A downturn in either would pose
further challenges for Turkey. As such, now is the time to
agree to an IMF program, he argues. Bulgurlu hopes that the
government realizes this and proceeds. Without an IMF
program, it will be very difficult for the Turkish private
sector to roll over the $20 billion in loans it has coming
due over the remainder of 2009. Ambassador Jeffrey noted

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that Turkey has benefited from EU and IMF relations in the
past (for instance, its customs union and bank restructuring)
and that certain measures under these institutions, even if
politically unpopular, are beneficial to Turkey.

Electoral implications of economic crisis
--------------


7. (SBU) Mustafa Koc assessed that the AKP will fare worse
in 2011 parliamentary elections than it did in 2009 local
elections, and may even lose its majority, in part because of
its mixed handling of the economic crisis. He said he would
not be surprised if a coalition government - either AKP-MHP
or CHP-MHP - resulted. While a coalition would not be the
best outcome, he believes that it is necessary for the sake
of democracy. Comment: Mustafa Koc is a vocal opponent of
the current ruling party and he tends to be more negative
than many observers regarding the AKP. His comments on the
AKP's political future should be taken in this context. End
Comment.

Comment
--------------


8. (SBU) Recent data on Turkey's May industrial production,
capacity utilization, and exports support Bulgurlu's comments
on the Turkish economy. The pace of economic contraction is
decelerating, but activity is still very low, unemployment
remains high, and banks have only marginally resumed lending
(and only to consumers, not to other firms),a sign of
continued weak confidence. Turkey's healthy banking sector
positions it for a stronger recovery than its European peers.
However, failure to reach agreement on an IMF program would
likely result in higher government borrowing and could crowd
out the private sector, complicating recovery. The
uncertainty caused by the lack of an IMF agreement despite
nine months of GOT suggestions of an imminent deal probably
also is a significant drag on business, banking, and consumer
confidence.
WIENER