US embassy cable - 03ANKARA4613

UNCLAS SECTION 01 OF 02 ANKARA 004613 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN, PGOV, PREL, TU, IZ 
SUBJECT: AMBASSADOR'S FAREWELL CALL ON STATE MINISTER 
BABACAN 
 
 
1.  (SBU) Summary:  In a July 22 farewell call on State 
Minister Ali Babacan, Ambassador noted market concerns about 
delays in the IMF program and possible 2004 financing 
difficulties, and stressed the need for the GOT to move 
vigorously to complete the economic reform program.  He also 
urged the GOT to promote the strongest possible business 
links with Iraq, noting that strong commercial ties could 
promote prosperity in both countries while also enhancing the 
security environment.  Babacan emphasized the government's 
commitment to the reform program.  He blamed delays in 
completing the Fifth IMF Review on the legislative process, 
but acknowledged that those delays -- combined with unhelpful 
talk about following the Malaysia model of working without 
the IMF -- had made markets nervous.  He predicted growing 
market confidence into the Fall, and discounted rumors that 
Turkey would need additional financing, saying Treasury's 
debt rollover rate would actually decline significantly in 
the second semester.  Babacan did not raise the issue of U.S. 
financial assistance.  End Summary. 
 
 
2.  (SBU)  Ambassador paid a farewell call July 22 on State 
Minister for the Treasury Ali Babacan, at the latter's 
request.  Ambassador welcomed Turkey's good progress with the 
IMF in recent days, but noted that interest rates remained 
stubbornly high.  He asked Babacan to comment on suggestions 
coming out of the Istanbul financial community that (a) the 
government is taking advantage of recent market buoyancy to 
slow the pace of reforms, and (b) there will be a need for 
additional financing come this Fall. 
 
 
3.  (SBU) Babacan responded that markets had been 
understandably nervous ahead of the Fourth Review, because 
the government was new, the number of prior actions was 
substantial, there were many disagreements between the GOT 
and Fund staff, and the specter of war in Iraq made it 
difficult to predict the economy's trajectory.   In the case 
of the Fifth Review, however, there were few problems.  The 
government believed in reforms, and certainly had not 
intentionally delayed completion of the review.  Instead, the 
delay was the result of longer-than-expected parliamentary 
deliberations.  The government did not want to intrude too 
aggressively into the parliamentary process, as it believed 
full deliberation and debate was healthy and would bring a 
sense of ownership to the Parliament.  He added that Turkey 
had learned that rushing legislation -- such as the 15 laws 
in 15 days under Minister Dervis -- produced "defective" 
legislation that needed subsequent amendment.  (Comment:  In 
fact, the delay has been the result of GOT difficulties in 
agreeing to new fiscal measures, along with the slow 
legislative process.) 
 
 
4.  (SBU) Babacan agreed, nonetheless, that the delay in 
completing the review, combined with unhelpful comments about 
Turkey following the Malaysian model (i.e. not working with 
the IMF) had rattled the markets, which had prevented 
interest rates from falling as fast as he had hoped.  Looking 
forward, however, he predicted market confidence would 
increase as the GOT moved ahead with the reform program. 
Ambassador asked if that meant the GOT would complete the 
Sixth and subsequent reviews more quickly; Babacan replied "I 
guess so." 
 
 
5.  (SBU) Babacan also discounted concerns about future 
financing. saying he saw no reasons for the markets to be 
nervous.  He pointed out that the GOT and IMF had done a 
series of financial projections during recent discussions, 
and saw no financing gap going forward.  In fact, the 
government expects to reduce its domestic debt rollover rate 
from 96 percent (for the first half of 2003) to 80 percent 
(in the second half).  He does not think the economy risks 
overheating, as domestic demand is moderate, 
 
 
6.  (SBU) On the fiscal side, Babacan said the government has 
agreed to measures to close the budget gap, projected at 0.7 
percent of GNP.  Eighty percent of the savings will come from 
the expenditure side, mostly via a reduction in public 
investment.  The remainder will come from the revenue side. 
Babacan acknowledged that expenditures in the first semester 
had been higher than expected, while the much-touted tax 
amnesty had brought in considerably less than the GOT had 
hoped.  Babacan indirectly chided Finance Minister Unakitan, 
saying his early, rosy estimates of significant additional 
revenue from the tax amnesty had led other ministers to rush 
to the Prime Minister with new spending projects.  From now 
on, Babacan said, the GOT will have to be very careful on the 
fiscal side. 
 
 
7.  (SBU) Shifting to Iraq, Ambassador argued that Turkey had 
a great opportunity to build on historic and existing trade 
and assistance links to build a strong commercial 
relationship with the new Iraq, particularly the more stable, 
prosperous north.  Already, the UN is shipping huge 
quantities of food and other supplies to Iraq, and U.S. 
forces there are buying millions of dollars worth of fuel and 
other items from Turkey.  Unfortunately, some in Turkey were 
instead alleging that the U.S. and Turkey had conflicting 
security interests in Iraq, causing doubt and hesitation 
among Turkish business executives.  Ambassador urged Babacan 
to work within the government in favor of an aggressive, 
business-oriented approach that would build prosperity on 
both sides of the border, which in turn would promote 
Turkey's security.  Babacan agreed, and suggested that 
government needed only to stay out of the way of Turkish 
businessmen, removing any obstacles to trade and investment. 
Ambassador rejoined that a neutral government approach 
probably would not be sufficient; Turkey needed to actively 
promote full economic and commercial ties with the new Iraq. 
 
 
8.  (SBU) Of note, Minister Babacan did not raise the issue 
of U.S. financial assistance to Turkey. 
 
 
 
 
PEARSON