US embassy cable - 05ISTANBUL1164

UNCLAS SECTION 01 OF 02 ISTANBUL 001164 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, TU, Istanbul 
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