US embassy cable - 02ANKARA8527

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 008527 
 
SIPDIS 
 
 
STATE FOR EUR/SE, EB/IFD/OMA AND E 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR FOR NOVELLI AND BIRDSEY 
 
 
E.O. 12958: DECL: 09/02/2010 
TAGS: ECON, EFIN, PGOV, TU 
SUBJECT: THE NEW GOVERNMENT'S ECONOMIC TEAM STARTS WORK, 
CLARIFIES PORTFOLIOS 
 
 
Classified by Economic Counselor Scot Marciel for reasons 1.5 
(b,d). 
 
 
1. (C) Summary:  Prime Minister Gul announced the portfolios 
of the  state ministers, dividing supervision of the economic 
agencies between Deputy PM Abdullatif Sener (privatization, 
banking and capital markets boards), State Minister Ali 
Babacan (Treasury, Central Bank and main state banks), and 
State Minister Kursat Tuzmen (foreign trade).  Babacan, with 
his office in the Treasury, is likely to inherit the Dervis 
role of coordinating with the IMF and World Bank, and being 
the economic program's public spokesman, though Sener and 
Finance Minister Unakitan are both close to AK Chairman 
Erdogan, and will have key roles in economic policy-making. 
Treasury U/S Oztrak told us he is impressed with Babacan, 
though he gives an initial mixed review on AK policy 
positions.  The new team is good on privatization and foreign 
direct investment, but "need education" on IMF relations, tax 
reform, disinflation target, and banking sector reform.  The 
last issue is critical, and Oztrak said he warned Erdogan in 
his initial briefing that the government must keep its hands 
off the BRSA.  At a DCM-hosted iftar for AK parliamentarians 
this week, the deputies voiced differences on the primary 
surplus target of 6.5 percent of GNP.  End Summary. 
 
 
Treasury Undersecretary Impressed with New Team; 
But More "Education" Work Ahead 
--------------------------------------------- --- 
 
 
2.  (SBU) On November 19, Treasury U/S Oztrak told us his 
first contacts with the newly elected AK parliamentarians and 
new ministers were positive.  At his and Central Bank 
Governor Serdengecti's initial briefing of senior AK 
officials,  including Erdogan, they listened carefully, took 
notes and asked good questions. Oztrak meets daily with State 
Minister Babacan who "talks the same language as me, learns 
quickly and is very sensitive to market reactions." 
 
 
3.  (SBU) Oztrak is also optimistic about progress on the 
macro targets.  This year's growth could reach 6 percent of 
GNP (the formal target was increased from 3 to 4 percent last 
month).  The growth story is a healthy mix of exports and 
pick-up of domestic demand.  But 6 percent growth may raise 
concerns of the economy over-heating, he continued, thus 
providing another reason for keeping a high primary surplus 
of 6.5 percent of GNP for 2003.  On meeting the year-end 
primary surplus, Oztrak said that last week's state 
enterprise price increases (tobacco and alcohol products, 
tea, and sugar) will "keep us close to the 6.5 percent 
target."  (Comment:  IMF resrep told us separately this is a 
"positive spin.")   If the GOT keeps the 6.5 percent primary 
surplus in 2003, and markets stay positive, then Oztrak sees 
a chance to reduce public sector debt to GNP ratio - from the 
current target of 77 percent at year-end 2003 to the low 70s. 
 
 
 
 
4.  (C) On policy issues, Oztrak gave a preliminary mixed 
review of the new team.  On the positive side, they sounded 
good on pushing the foreign direct investment and 
privatization agendas.   There are, however, some concerns: 
 
 
--  IMF relations.  Oztrak understands the political need for 
calling for a new reform program, but he thinks the GOT 
should say:  "the general framework of the existing program 
is working and we will preserve it."  Within that framework, 
there is room per Oztrak to put more emphasis on socially 
vulnerable groups, to improve public sector governance and 
the investment environment.  On scheduling an IMF mission, 
Oztrak wants to quickly finish the outstanding Fourth Review 
conditions before discussing the 2003 program.  He believes 
Babacan wants a mid-December IMF mission to combine both the 
Fourth Review and also a detailed program for 2003. 
(Comment: Babacan told us he wants to hold informal talks 
with the IMF on the 2003 program without the Treasury staff 
and before a formal Mission, reftel.  This may be 
unrealistic, since Babacan doesn't have all the information 
and numbers at his fingertips, like the Treasury staff.) 
 
 
--  Disinflation. The GOT program needs to continue focusing 
on disinflation, per Oztrak, though the new ministers are not 
mentioning it. (Note:  The pro-Islamist business association 
MUSIAD on November 20 announced that the 2003 GOT program 
should focus on "growth not inflation.")   Current Central 
Bank projections, based on core inflation trends, show a 2003 
year-end 26 percent CPI, whereas the program calls for 20 
percent. 
 
 
--  Tax Reform.  Oztrak said instead of annulling the 
"financial year zero law," the new GOT should delay its 
scheduled January 1, 2003 implementation, and make it part of 
a direct tax reform package to be introduced in 2003.  (Note: 
 The financial year zero law, adopted in July 1998, is 
intended to register the underground economy.  The law's 
implementation has been delayed and is now scheduled to enter 
into force on January 1, 2003, and gives Turkish residents a 
certain period to report to their local tax offices their 
unrecorded wealth without penalty.  Septel covers the debate 
on this law.) 
 
 
--  Banking Sector Reform.  "AK is confused about the BRSA," 
Oztrak said.  "I told Erdogan openly that continued 
restructuring of the sector is a key benchmark for the local 
and international financial communities.  We can't afford any 
perception of flexibility."  Oztrak said the concern is with 
Yapi Kredi, and he sees the problem as affecting Treasury's 
debt management capability:  "If there's a sick player in the 
system, holding our papers, this puts pressures on the player 
to sell the papers, which increases the risk premium for 
everyone holding the papers."  The banking sector's financial 
mediation role is key to growth in 2003, per Oztrak, thus the 
need to keep the GOT's hands off of the BRSA.  (Comment:  The 
new government has recently backed away from earlier 
criticism of BRSA.) 
 
 
5. (C) Oztrak is uncertain of his future in the government. 
"They have to have confidence in me, and I have to have 
confidence in them."  He told us PM Gul was the most 
reasonable person in the 1996/97 Refah-Yol government.  "We 
in the bureaucracy used to come to him to solve all sorts of 
problems."  On the other hand, DPM Sener (formerly Finance 
Minister) "just accepted whatever instructions Erbakan gave 
him." 
 
 
Reinforcing the Issues with AK Parliamentarians 
--------------------------------------------- -- 
 
 
6.  (C) Oztrak's mixed review of the new team's policy 
positions was reinforced during an iftar for AK 
parliamentarians hosted by the DCM.  We heard some 
differences on economic policy between younger MPs Reha 
Denemec and Ibrahim Ozal, and the "old guard" Minister of 
Industry Ali Coskun.   Ozal and Denemec thought the 2003 
budget needed to keep the 6.5 percent of GNP primary surplus, 
whereas Coskun focused on the need for "pump priming." 
Coskun proposed that the primary surplus could be lowered, 
because real interest rates were coming down (he said the 
target was 10 percent) and the budget would cut public 
investment and agency spending.  DCM suggested that the GOT 
budget needed to show fiscal discipline, and that the GOT 
shoudn't plan to spend savings that hadn't yet materialized. 
 
 
7.  (C) On the positive side, Industry Minister Coskun said 
the new GOT was committed to resolving foreign investment 
disputes.  The draft Foreign Direct Investment law now in 
parliament would be revised "to be more liberal."  The new 
GOT was putting together a list of 18 FDI disputes for 
immediate resolution.  "You'll come to thank us," Coskun 
said. 
 
 
State Ministers' Portfolios Announced 
------------------------------------- 
 
 
8.  (U) On afternoon of November 21, PM Abdullah Gul 
announced the portfolios of the seven State Ministers (three 
of whom are also Deputy Prime Ministers).  Following are the 
portfolios of the three with economic policy 
responsibilities. 
 
 
State Minister and Deputy Prime Minister 
Abdullatif Sener: 
 
 
-- Directly supervises the State Planning Organization and 
the Privatization Administration 
 
 
-- Reports to Cabinet on following independent agencies: 
Banking Regulation and Supervision Agency; Capital Markets 
Board; Turkish Development State Bank 
 
 
State Minister Ali Babacan: 
 
 
-- Directly supervises the Treasury Undersecretariat 
 
 
-- Reports to Cabinet on following independent agencies: 
Central Bank; Ziraat and Halk State Banks 
State Minister Kursat Tuzmen: 
 
 
-- Directly supervises the Foreign Trade Undersecretariat and 
the Customs Undersecretariat 
 
 
-- Reports to Cabinet on following independent agency: 
Turkish Ex-Im Bank 
PEARSON