US embassy cable - 03ISTANBUL1849

UNCLAS SECTION 01 OF 02 ISTANBUL 001849 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, PGOV, TU, Istanbul 
SUBJECT: MACROECONOMIC RESULTS BRING OPTIMISM IN ISTANBUL, 
BUT CONCERNS REMAIN 
 
 
 1.  Sensitive but Unclassified.  Not for internet 
distribution. 
 
 
2. (SBU) Summary: Recent soundings among leading Istanbul 
market analysts and participants highlight the extent to 
which Turkey's continued strong macroeconomic performance has 
left them more optimistic about the future.  With strong 
disinflation and export performance, acceptable growth 
results, and continued progress on IMF implementation, our 
contacts give some credit to the AK government for keeping 
the economy on the right track.  Their optimism is tempered, 
however, by recognition that Turkey's recovery is fragile and 
could easily reverse if the government missteps and returns 
to populist policies that shake market confidence, fails to 
implement structural reforms, or slips on its EU accession 
track.  Looming too is the challenge Turkish business will 
face in the new world that will result if the GOT is 
successful in sustaining low inflation and low interest rates 
over the long term.  Mehmet Kutman, head of Turkey's largest 
securities firm, noted that his key worries center on the 
private sector, which has grown comfortable and complacent 
from the existing order, and will face difficulties in a new 
world where the benefits it has grown accustomed to receiving 
from the government are absent.  End Summary. 
 
 
3. (SBU) Visiting Ankara Economic Counselor and P/E Chief 
canvassed a number of leading market analysts and 
participants during a series of meetings on December 11, 
including Mehmet Kutman, Chairman of Global Securities (and a 
nephew of former Prime Minister Mesut Yilmaz), Demir Sabanci, 
head of the Sabanci Group's retail division, Ayse Berker, 
head of Fitch Rating's Istanbul office, and Bender analysts 
Emin Ozturk and Murat Gulkan.  All saw significant 
improvement in the economy over the last year, with Kutman 
and his chief strategist, Tevfik Aksoy, highlighting renewed 
interest by foreign investors in Turkey and Sabanci noting a 
pickup in retail demand.  However, our conversations also 
revealed that business investment remains low and that the 
recovery has not yet produced much job creation or boosted 
consumer spending significantly. 
 
 
4. (SBU) Pluses and Minuses: Kutman and Aksoy were optimistic 
overall, noting good results on the macro side and the 
"feel-good" effect of a strong single-party government. 
Kutman (who has sought to build good relations with the AK 
government) noted that he believes in Prime Minister Erdogan 
and especially Finance Minister Unakitan, though the rest of 
the team is less strong.  He opined that they don't yet have 
full cognizance of their strength and what they can 
accomplish, but that they "listen to feedback," are likely to 
steer clear of corruption (given their lack of ties to 
established major business groups), and are open to foreign 
direct investment.  He noted that he has never seen more 
interest in Turkey than he sees now, especially from 
Mediterranean, Middle Eastern, and Far Eastern groups.  With 
the current positive momentum from good macroeconomic 
results, he believes that the market is better positioned to 
absorb occasional mistakes by the government, such as the 
inexperience the government showed in allowing groups that 
opposed the privatization of TEKEL to raise unrealistic 
expectations about the company's value, thereby leading 
Unakitan to void the tender when bids came in at a lower 
level.  Kutman challenged the idea that all government 
attempts to weaken independent regulatory boards are a bad 
idea, strongly criticizing the performance of the Banking 
board under former chairman Engin Akcakoca (Ankara septel 
reports on our Istanbul meeting with Akcakoca) for having 
pursued policies that raised the cost of the reorganization 
of the sector. 
 
 
5. (SBU) A Vulnerable Private Sector: In Kutman's view, 
today's crucial need is for the optimism that has flowed from 
good macroeconomic results and other positive developments 
over the past year to move to the real economy.  Otherwise, 
he argued, it may prove ephemeral.  He noted that real wages 
have yet to recover from the crisis (and parenthetically that 
he has not raised wages at Global for two years), so that 
demand is top down rather than bottom up.  (Sabanci confirmed 
this point, noting that while sales are recovering at Sabanci 
retail chains, the average consumer is still spending, per 
visit to his stores, less than half what he or she spent 
before the crisis.)  Kutman's key worries center on the 
private sector, which has grown too accustomed to growing 
through government handouts, whether from discounts from 
state enterprises (Tupras' privatizion will squeeze the 
private sector, he suggested), government contracts, or 
government sanctioned monopoly power.  Turkish businesses, he 
said, are still "not comfortable," and so only bring money 
back to Turkey to play the securities market, rather than 
make real investments.  The new environment, and the added 
challenge of foreign competition, he suggested, will force a 
change in the way Turkish business operates.  Beyond this, 
his concerns focus on the bureaucracy and judiciary, which 
often seek to block the government, as they have recently on 
privatization and banking reform.  The legal system, he 
argued, is the key problem in Turkey: one that cannot be 
fixed in one or even five years. 
 
 
6. (SBU) Nuances: Analysts at Fitch Ratings and Bender 
Securities were more cautious.  Fitch's Ayse Berker, for 
instance, told us that she continues to believe that promised 
U.S. assistance is critical to maintaining stability in 
Turkish markets.  Without that money or potential World Bank 
assistance, she forsees real debt repayment problems in 2005. 
 She noted that she remains concerned about the government's 
reform commitment, given delays in passing key measures for 
the sixth review (key banking and public administration 
measures did finally clear parliament after our discussion), 
and that ironically on some issues the earlier coalition had 
taken more decisive action than AK, which she characterized 
as a "coalition in a party."  She questioned where growth 
would originate in 2004, given the government's need to 
maintain a large primary surplus, and worried about the 
banking sector's ability to make money in a low-interest-rate 
environment.  Bender analysts Emin Ozturk and Murat Gulkan 
echoed these concerns, adding that with the IMF's new softer 
tone and the market's sunny optimism, it isn't clear "who 
will push the government" to continue to take the necessary 
tough decisions.  They, along with Berker, noted that 
Turkey's economic outlook for 2004 would also depend on 
global economic trends (low global rates have pushed money to 
Turkey in 2003), as well as progress toward EU accession, 
including a Cyprus solution. 
 
 
7. (SBU) Populism Redux: Ozturk and Gulkan pointed to rumors 
of new populist measures that the government is considering, 
including an amnesty for debtors to state banks, an increase 
in the minimum wage and in pensions.  They (like former BDDK 
head Akcakoca at lunch) also challenged Kutman's suggestion 
that AK is distant from all major holdings, noting progress 
on a plan to allow Mehmet Kahramehmet to negotiate down his 
three billion debt to the government for Pamukbank by nearly 
forty percent in exchange for early repayment.  (The deal has 
not yet been finalized, but all are intrigued too by the fact 
that Kahramehmet's Cukorova Group has emerged as a bidder for 
Tupras at a time when its debts to the government exceed 4.5 
billion dollars.)  Sabanci noted that the AK party's populist 
activism has extended to "Wal-mart" type restrictions to keep 
major retailers from moving into areas where they would 
disrupt small and medium-sized enterprises.  At the same 
time, however, AK is moving to protect food manufacturers 
from competition from "store-brands."  Currently, he opined, 
"competitiveness and productivity" are not the watchwords in 
Ankara. 
 
 
8. (SBU) Comment:  Though some credit Turkey's AK government 
with having moved partway up a learning curve as a result of 
market signals over the last year, all of our interlocutors, 
even the relatively optimistic Kutman, agreed that this has 
not changed the fundamental fact that the current government 
suffers from a lack of understanding of economics.  As a 
result, there is no strategic economic vision within the 
government, and the senior leadership is often sympathetic to 
populist proposals that are economically damaging.  End 
Comment. 
ARNETT