US embassy cable - 04ANKARA2195

UNCLAS SECTION 01 OF 03 ANKARA 002195 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, EB/CBA AND EB/IFD 
TREASURY FOR OASIA - MMILLS AND RADKINS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, BEXP, PREL, TU 
SUBJECT: SCENESETTER FOR ECONOMY MINISTER BABACAN'S 
WASHINGTON MEETINGS 
 
1. (Sbu) Summary: Economy Minister Ali Babacan comes to 
Washington after the IMF's Seventh Review and several months 
of better-than-expected macroeconomic performance.  Senior 
USG interlocutors could usefully use the meetings to praise 
GOT accomplishments while warning against complacency, 
reiterate the need for tangible action on U.S. investment 
disputes, and urge the GOT to make its airplane purchase 
based on the merits of the proposals.  End Summary. 
 
 
Economic Reform: 
--------------- 
 
 
2. (Sbu) With the IMF's Seventh Review board vote April 16 
and a run of better-than-expected macroeconomic performance 
in recent months, Babacan is likely to come to Washington 
full of confidence and optimism.  Full year 2003 GDP growth 
came in at 5.8 percent, well above the 5 percent target or 
the market consensus.  Thanks to the strong lira and the 
independent Central Bank's disciplined disinflation policy, 
year-on-year inflation (11.8 percent as of March 31 on a CPI 
basis) is already below the full-year 2004 target of 12 
percent.  Though final 2003 fiscal data show the GOT did not 
quite meet the ambitious 6.5 percent primary surplus target, 
it came very close, and has continued to maintain fiscal 
austerity in 2004, though there was an unseemly scramble for 
compensatory fiscal measures to close the gap opened by the 
Prime Minister's January minimum wage and pension payment 
increases. 
 
 
3. (Sbu) While the GOT deserves praise for broadly adhering 
to fiscal austerity and working with the IMF to sustain 
economic reform, Babacan and his GOT colleagues, judging by 
their statements, give themselves too much credit for the 
improved macro performance and give every impression of being 
complacent about the Turkish economy's continuing 
vulnerabilities.  An exogenous shock could still send 
Turkey's skittish financial markets into a tailspin, with 
spiking interest rates and a falling lira reinforcing each 
other and throwing the GOT's projections out of whack.  A 
small touch of that happened this week as the markets 
demonstrated nervousness over the Cyprus referendum.  Senior 
USG officials could usefully reinforce the need for the GOT 
to take advantage of current favorable conditions to push 
through additional reforms to prolong the positive momentum 
in financial markets and prepare the basis for several years 
of sustained economic growth. USG officials could urge more 
aggressive action on structural reforms such as privatization 
and improving the investment climate. 
 
 
4. (Sbu) Privatization in general, and state bank 
privatization in particular, are two notable areas of 
weakness. In the past year, only two of Turkey's many large 
state companies (the alcohol side of Tekel, and the oil 
refiner Tupras) have been successfully privatized (and the 
Tupras deal isn't finalized yet).  There have also been some 
high-profile failures, such as the tobacco side of Tekel and 
the petrochemical firm, Petkim.  Other large companies' 
planned privatizations move forward only at a snail's pace, 
with delays such as for the Turk Telekom tender.  Though 
Finance Minister Unakitan has the lead on the privatization 
program, Babacan has the lead on the IMF program and 
investment issues, and therefore plays a role on this issue. 
Babacan has been the IMF and World Bank's interlocutor on a 
revived strategy to privatize Turkey's three large state 
banks, whose executives' recent actions and comments suggest 
they are out of sync with the World Bank's stategy of 
shrinking-to-privatize. 
 
 
5. (Sbu) With the IMF's current Standby facility due to come 
to an end this year, the Fund's post-2004 role in Turkey is 
an open question.  Babacan's public line is that the GOT, in 
consultation with the IMF, will decide this issue this 
summer.  The IMF's rules require at least a post-program 
monitoring arrangement.  USG officials could point out the 
usefulness of the IMF's continued expertise and market 
credibility, whatever form its future role takes.  In 
particular, senior GOT officials' public comments other than 
on the time frame of the decision-making process, serve only 
to rattle markets and are counterproductive. 
 
 
Investment: 
---------- 
 
 
6. (Sbu) Although Turkey has reformed its legal regime to 
encourage FDI in recent years, FDI continues to be 
discouraged by a number of factors, including excessive 
bureaucracy, frequent changes in the legal regime, weaknesses 
in the judicial system and serious gaps in intellectual 
property protection (including lack of data exclusivity 
protection for confidential pharmaceuticals test data).  The 
fact that existing foreign investors are engaged in a series 
of high-profile disputes with the GOT and with Turkish 
partners does not help.  Issues range from Cargill,s zoning 
problems to harassment of small businesses, as in the Bedoian 
case. Babacan and his ministerial colleagues say all the 
right things about encouraging foreign investment, and devote 
considerable time and effort to meetings with foreign 
investors such as the recent Investors Advisory Council in 
Istanbul.  However, despite sustained USG pressure--during 
the Prime Minister's Washington meetings, at the EPC, and by 
Post--we are not seeing tangible GOT action to resolve US 
investors problems in Turkey.   Post recommends that US 
officials press Minister Babacan to take the lead in 
resolving at least some U.S. company problems so that Turkey 
can attract badly-needed FDI.  U/S Larson may also want to 
point out that IPR problems may cause Turkey to be elevated 
to the Special 301 Priority Watch List. 
 
 
Encouraging Business Partnerships: 
--------------------------------- 
 
 
7. (Sbu) At the State Department, Babacan may raise the 
question of funding for a Chamber of Commerce proposal to 
encourage Turkish-U.S. business partnerships.  U/S Larson may 
want to note that the U.S. Government cannot fund this 
proposal, but review the Department,s efforts to encourage 
private sector funding. 
 
 
Boeing/Turkish Airlines: 
----------------------- 
 
 
8. (Sbu) In the coming weeks the GOT is expected to decide on 
whether state-owned Turkish Airlines (THY) will purchase a 
fleet of Boeing or Airbus aircraft.  Boeing has submitted a 
proposal to supply thirty-six addtional Boeing 737NG and five 
Boeing 777 aircraft to THY.  State, Commerce, the Embassy and 
Eximbank have all actively supported the Boeing proposal, 
including letters from Secretary Evans to Finance Minister 
Unakitan and Transport Minister Yildirim. USG support of the 
project, one of Boeing's largest this year, is crucial. 
Though Unakitan and Yildirim, rather than Babacan, have the 
lead on the procurement decision, USG officials could 
usefully press the message to Babacan that the GOT should 
make its decision based only on the merits of the proposals. 
 
 
U.S. Financial Agreement: 
------------------------ 
 
 
9. (Sbu) Bilateral discussions on a possible amendment to the 
$8.5 billion Financial Agreement continue to move very 
slowly, with post having passed MFA U/S Ziyal the U.S.'s 
latest proposal in late March.  With no pressing need for the 
money right now, and the domestic political sensitivity of 
the political/military conditionality, the GOT seems to be in 
no hurry on this issue.  Post recommends USG officials not 
press Babacan on this issue, to avoid appearing to be urging 
the GOT to take our money. 
 
 
Recommended Talking Points: 
-------------------------- 
 
 
--Congratulations on the Seventh Review and your recent 
macroeconomic success.  Urge you to avoid complacency and use 
the opportunity to move aggressively on reforms. 
 
 
--Privatization in general, and state bank privatization, in 
particular, seem to be moving slowly. A "positive surprise" 
to the markets on this issue could generate growth and spur 
Foreign Direct Investment. 
 
 
--Whatever you decide about the post-2004 IMF role, their 
expertise and credibility with markets could help Turkey's 
reform program. In particular, there is a risk that senior 
officials' public statements about the IMF could be 
counterproductive, by rattling markets. 
 
 
--While applauding your Government's high-profile 
encouragement of Foreign Investment, we cannot help noting 
that there has been no tangible action on the many U.S. 
business problem cases.  Fixing some of these cases is the 
best way to change the perception in the U.S. business 
community about Turkey. 
 
 
--Understand that Boeing has submitted a proposal to THY to 
supply up to thirty-six Boeing 737NG and up to five Boeing 
7877 aircraft.  These U.S.-manufactured aircraft are well 
known for their superior technical and commercial value, 
state-of-the-art technology and unparalleled reliability. 
This is an important issue for us and I encourage the Turkish 
government to make its procurement decision based upon the 
merits of the competing proposals. 
 
 
If asked: 
 
 
--Given that the conditionality in the Financial Agreement is 
in the law, the U.S. Administration is not in a position to 
alter the substance of the conditions.  We hope the latest 
language we offered Undersecretary Ziyal is a formula that 
the GOT will find acceptable. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EDELMAN