US embassy cable - 03ISTANBUL49

C O N F I D E N T I A L SECTION 01 OF 02 ISTANBUL 000049 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: DECL: 01/09/2013 
TAGS: PGOV, ECON, EFIN, ETRD, TU, Istanbul 
SUBJECT: ISTANBUL'S TAKE ON AK ECONOMICS: ALL ISN'T LOST 
BUT AK ISN'T HELPING 
 
REF: A. (A) ANKARA 160 
     B. (B) ANKARA 193 
 
 
Classified By: Consul General David Arnett.  Reasons: 1.5 (b) and (d). 
 
 
1. (C) Summary: Istanbul contacts in the financial and real 
sectors agree that in its first month and a half Turkey's Ak 
government "hasn't gotten it" and has done a poor job on 
economic policy, thereby dissipating much of the goodwill 
generated by initial perceptions that a single-party 
government would break the deadlock that has constrained 
Turkish governments over the past decade.  Explanations range 
from a combination of inexperience, lack of coordination, and 
inconsistency, to a perception that far from being a unified 
party, Ak is riven into warring factions with the "populist 
wing," at least to date, coming out on top.  Many believe 
that all is not lost, however.  While pessimists believe that 
AK will not get it under any circumstances, a not 
insignificant group believes that with the "road map staring 
it in the face," economic forces will ultimately compel AK to 
stick with the program.  The failure of Tuesday's treasury 
auction (ref a) is seen by many as a salutory first warning 
by the markets, while PM Gul's subsequent budget 
pronouncements (ref b) have been taken as a sign that at 
least parts of the government are getting the message. 
Concern is also widespread about the economic impact on 
Turkey of an Iraq operation, though most agree that recent 
estimates are highly exaggerated (one contact quipped that 
they led him to conclude the "U.S. is planning to attack 
Turkey rather than Iraq").  End Summary. 
 
 
2. (C) Evaporating Euphoria: In a round of calls on leading 
bank, real sector, and market actors on Wednesday, January 8, 
visiting Ankara Econ Counselor and Istanbul Pol/Econ Chief 
heard a decidedly downbeat assessment of Ak's performance to 
date.  The meetings followed closely on Tuesday's 
unsuccessful Treasury Auction and overlapped with PM Gul's 
afternoon budget statement.  Akbank CEO Zafer Kurtul noted 
that positive market sentiment has rapidly dissipated in the 
face of Ak's expansive spending plans and failure to identify 
savings to pay for them.  Even Ak allies from within MUSIAD 
(the "Islamic" businessmen's association) conceded that 
Erdogan's "populist" policies have raised issues for the 
market, while longtime Ak skeptics at Bender Securities 
argued that the only possible "method to the madness" of 
recent government policies was expectation that at the end of 
the day neither the U.S. nor the IMF would allow Turkey to 
fail.  Optimism lingers in some camps, however.  ING Baring's 
Managing Director John McCarthy, a seasoned Turkey watcher, 
conceded that AK's "honeymoon is over," but argued that 
despite its populist tendencies, Ak is "smart enough to see 
the roadmap and won't tinker too much." 
 
 
3. (C) A Shot across the Bows: All pointed to the failure of 
the January 7 treasury auction to raise sufficient cash for 
the Treasury to meet its redemption requirements as an 
important warning to the government, as even the local 
"primary dealers" that have supported the market up to now 
failed to step up to the plate.  PM Gul's announcement of tax 
increases and spending cuts late on January 8 (ref b) was 
taken as evidence that the message had registered, but 
Bender's initial reading was that even taken at face value 
the measures will be insufficient to achieve a 6.5 percent 
primary surplus goal that Gul reiterated.  Bender Chief 
Economist Emin Ozturk noted too that covering the shortfall 
forced the Treasury to expend a significant portion of its 
foreign exchange account at the Central Bank.  A similar 
shortfall in the next auction on January 21, he warned, will 
deplete the account, leaving no "cushion for the future." 
 
 
4. (C) Embattled Reformers?: The general consensus among 
those we canvassed was that economic understanding in AK is 
thin, limited mainly to Prime Minister Gul and State Minister 
Babacan and their entourages.  Deputy Prime Minister Sener 
had few admirers among those we talked to, while there was 
agreement that Erdogan too has "not played a constructive 
role" on economic policy.  Given perceived tensions between 
Gul and Erdogan, and doubts about how much weight Babacan 
carries within the government, there was concern about just 
how effective the reformist bloc could be.  Not all judge the 
situation hopeless, however.  McCarthy noted that a recent 
TUSIAD meeting in Ankara concluded that the organization 
could work with AK, but would need to "support it to the 
extent we can" to make up for its lack of depth and 
credentials. 
 
 
5. (C) Dangerous Tendencies: Observers also expressed concern 
that despite public pledges to make a new start, AK may 
revert to familiar patterns of nepotism and corruption. 
Bender pointed to anecdotal word that some party 
functionaries are resigning to create construction companies, 
presumably to benefit from public tenders, while indications 
that Interior Minister Aksu's brothers may be appointed to 
head BOTAS and Turkseker also raised concerns.  Bender also 
pointed to mutual suspicions between AK and ranking 
bureaucrats and pressure from the AK caucus to put "loyal 
people" in place as potential destabilizing factors. 
 
 
6. (C) Growth?: Less consensus existed on the question of 
where Turkey's economy is now.  While the Bank of New York 
said it has seen no movement, noting that its loan exposure 
has fallen by 2/3 to just over 300 million USD, Yapi Kredi 
Senior Economist Hasan Ersel said his bank has seen some 
progress in the real economy, though he only expects 4 
percent growth this year.  (Ersel conceded that absent a 
settlement between the Cukorova Group and BRSA, however, his 
own institution's embattled predicament is not sustainable 
past mid-year.)  Some other companies are also thriving. 
Lezzo Industries Chairman Erol Yarar (founding Chairman of 
Musiad) noted that his group expects 9 percent growth in 
sales this year and plans significant new investments, while 
AKBank CEO Kurtul noted that the bank is doing well and is 
working to increase market share in key product lines.  Both 
reminded us, however, that beyond the current range of macro 
issues facing AK, there are a whole range of structural 
impediments in the Turkish economy that hinder business and 
discourage investment.  These, they argued, will have to be 
addressed before Turkey is able to achieve truly sustainable 
and balanced growth. 
 
 
7. (C) Iraq: Concern about Iraq's impact on Turkey's own 
economy was more muted than recent alarmist press statements 
led us to expect.   Noting that damage estimates are clearly 
exaggerated, Ersel quipped that they prompted him to wonder 
whether the U.S. was shifting its sights and planning to 
attack Turkey rather than Iraq.  Yarar too downplayed the 
issue, judging that "the thought is worse than the reality." 
There was concern, however, particularly from market players 
that the perception that the U.S. and IMF would not permit 
Turkey to fail is creating a "moral hazard" and contributing 
to slippage on economic reform and fiscal discipline. 
 
 
8. (C) Comment: Gul's statement came late in our day of 
meetings and was only addressed by Bender analysts, who 
judged it positive but insufficient.  That view has largely 
been echoed over the last two days by other market analysts. 
But whatever the doubts about the specific figures (and there 
are many), there is at least relief that AK appears to have 
gotten the market's message at some level.  Whether the 
reform contingent is capable of building on that start 
remains to be seen.  Many in the markets have their doubts. 
End comment. 
 
 
 
 
ARNETT