US embassy cable - 03ANKARA4422

C O N F I D E N T I A L ANKARA 004422 
 
SIPDIS 
 
 
STATE FOR E, EB AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
 
 
E.O. 12958: DECL: 07/14/2008 
TAGS: EFIN, PREL, ECON, TU 
SUBJECT: AMBASSADOR'S FAREWELL CALL ON CENTRAL BANK GOVERNOR 
 
(U) Classified by Ambassador W. Robert Pearson. Reason: 
1.5(b,d) 
 
 
1.  (C) During a July 14 farewell call, Ambassador praised 
Central Bank Governor Serdengecti for his economic policy 
work and his cooperation with the U.S., and solicited 
Serdengecti's views on the issues on which the new Ambassador 
 might want to focus.  Serdengecti responded that the most 
important thing the United States could do was to implement a 
strong public relations program to counter its poor image in 
Turkey and the region.  He noted that, despite all the good 
things the U.S. had done to help Muslims and to help Turkey 
(he noted support for economic reform and EU accession), most 
people still do not see the U.S. in a positive light. 
Serdengecti said he was seeing mixed reports on whether 
bilateral relations were improving.  To some extent, a 
nationalist tone in the Turkish press is to be expected; 
however, he fears that some in Turkey are portraying the U.S. 
and the IMF as "no good" to further their aims of keeping 
Turkey isolated and "third world." 
 
 
2.  (SBU) Serdengecti sees both good and bad economic trends. 
 On the positive side, inflation -- which had not fallen 
significantly since December -- has begun to decline again. 
He predicted the lira's strength and falling agricultural 
prices, combined with the base year effect (i.e. high 
inflation in the second half of 2002), would enable Turkey to 
keep CPI below 25 percent and probably close to 20 percent 
this year, assuming no sharp decline in the lira.  Although 
domestic demand is growing moderately -- hence little risk of 
economic overheating -- growth overall is "beyond 
expecations."  The fact that growth has yet to generate many 
jobs means productivity is increasing, which is healthy. 
Over time, growth will increase support for the reform 
program.  For the moment, the current account deficit is not 
a cause for alarm, though the Bank is keeping a close eye to 
see if imports of consumer goods (now at 11 percent of 
imports) rise to levels indicating domestic demand is 
becoming excessive. 
 
 
3.  (C) The main negative, per Serdengecti, is that the 
government is not doing what it needs to do in terms of 
reforms and meeting IMF conditions.  This failure is keeping 
interest rates high (above 50 percent), and sooner or later 
will be reflected in the exchange rate.  Serdengecti said 
State Minister Babacan knows the situation better than 
others, and tells the truth in internal meetings (though he 
refrains from issuing public warnings); the bigger problem is 
Finance Minister Unakitan, who "lacks understanding" of the 
economic situation.  Serdengecti said he is not sure if the 
Prime Minister gets it.  After he and the PM last met, the PM 
changed his rhetoric and started sounding like a Central Bank 
governor.  However, the technocrats see him only 
occasionally, and others who are close to him regularly give 
him bad information and advice.  As a result, the Governor 
expects the GOT to continue to move slowly on reforms until 
the markets react. 
 
 
4.  (SBU)  Looking back on the past three years, Serdengecti 
pointed to two major economic achievements:  growth, which 
has brought GNP back to pre-crisis levels; and an economy 
that is more resilient in the face of shocks, the result of 
the shift to a floating exchange rate and numerous structural 
reforms.  Inflation has come down some, but Serdengecti will 
not feel comfortable until it falls below 20 percent. 
 
 
5.  (C)   Serdengecti dismissed the notion -- bandied about 
during PM Erdogan's recent trip to Malaysia -- that the 
government would abandon the IMF approach.  The main 
characteristic of this government, he argued, is that it 
loves "bright ideas" -- jumping on alternative solutions as 
if no one had ever considered them before.  One day the 
solution is the Malaysian approach, and the next day it is 
Islamic money coming from the Gulf.  The government, he 
continued, explores these alternatives until they learn -- 
usually from the press or the bureaucracy -- that they are 
infeasible.  It is, he said, a time-wasting and costly 
approach. 
PEARSON