Cablegate: Ambassador's Farewell Call On State Minister

This record is a partial extract of the original cable. The full text of the original cable is not available.

221512Z Jul 03

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

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