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Cablegate: Ambassador's Meetings with Finance and Economy

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

UNCLAS SECTION 01 OF 03 ANKARA 007785

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD, AND EUR/SE
TREASURY FOR OASIA - JLEICHTER AND MMILLS
NSC FOR MBRYZA AND TMCKIBBEN
STATE PASS USTR FOR LERRION


E.O. 12958: N/A
TAGS: EFIN EINV EIND PGOV KIPR TU
SUBJECT: AMBASSADOR'S MEETINGS WITH FINANCE AND ECONOMY
MINISTERS

1. (Sbu) Summary: In December 17 meetings with Economy
Minister Babacan and Finance Minister Unakitan, the
Ambassador stressed the need for continued fiscal discipline,
structural reform and resolution of foreign investment
disputes. Both Ministers reconfirmed the GOT's commitment to
continue economic reform. On privatization, Unakitan seemed
committed but overly focused on price whereas Babacan
admitted GOT mistakes. Unakitan insisted the GOT would not
relent on fiscal discipline despite the upcoming municipal
elections. On investment issues, both Ministers accepted the
need to resolve some U.S. company disputes and promised
renewed effort. Unakitan said the Prime Minister had given
instructions to solve the data exclusivity problem.
Babacan's comments on the U.S. Financial Agreement will be
reported septel. End Summary.


2. (Sbu) On December 17, the day before the IMF Board is
scheduled to consider Turkey's Sixth Review, the Ambassador
met separately, at his request, with State Minister for
Economy Ali Babacan and Finance Minister Kemal Unakitan.
Ambassador congratulated the Ministers on the GOT's success
in hitting 2003 macroeconomic targets, but also highlighted
two major economic challenges: not succumbing to the
inevitable populist pressures to spend (or commit to spend)
before local elections; and ambitiously implementing the full
range of structural reforms, including privatization.


Fiscal Discipline, Minimum Wage Increase:
----------------------------------------


3. (Sbu) The Ambassador said that one challenge the GOT faced
was to avoid the temptation to spend in the run-up to the
March municipal elections. One example of this danger was
government consideration of a large increase in the minimum
wage. Note: the press has reported--and GOT officials have
confirmed privately--that the GOT is considering a minimum
wage increase of as much as 55 percent. Private analysts
immediately pointed out that this could have damaging effects
on the fiscal situation, inflationary expectations, and wage
competitiveness. End Note.


4. (Sbu) Minister Unakitan confirmed that he was working with
the Labor and Economy Ministers and the State Planning
Organization (SPO) to come up with a menu of options and
their associated costs to present to the Prime Minister.
Unakitan claimed that the minimum wage increase would not
present problems from a fiscal perspective, since it could
increase private sector income tax revenues and receipts of
social security premia, and could even be a net fiscal plus
to the State. Instead, Unakitan said the concern was the
impact on inflation and on exporters' costs, and seemed to
imply that these concerns outweighed the advantages of a
large increase. In a separate meeting the day before, SPO
Undersecretary Ahmed Tiktik told econoffs that he had advised
against a large increase.


5. (Sbu) On the broader issue of maintaining fiscal
discipline despite the elections, Unakitan insisted the GOT
would not sacrifice its hard-earned credibility, saying "we
will not do populism." Unakitan said they would not win
elections through more spending but by maintaining budget
discipline, and said the Prime Minister shares this view.
Unakitan characterized fiscal discpline, along with
transparency and honesty, as key components of good
governance. He personally was willing to be the bad guy and
say no to spending, citing some USD 30 million in funds to
municipalities that he does not intend to let them spend.


Privatization:
-------------


6. (Sbu) On the structural side, Babacan said the government
had made progress, but he acknowledged there had been delays
as well. He stressed the government's commitment to reform,
but added that some changes -- such as privatizations --
depend on outside (market) forces as well. Ambassador
interjected that, because no one could predict market
developments, the GOT needed to focus less on the price the
markets offered for a particular privatization and instead
emphasize the efficiency gains from the sales. He added that
the bids on Tekel -- lower than the GOT had hoped --
reflected in part the discount investors demanded because of
Turkey's poor environment for foreign investment. The
Ambassador also worried about some of the groups bidding on
privatizations.


7. (Sbu) Babacan agreed that the GOT had made a mistake in
raising expectations, adding that he had advised other
Ministers (read Finance Minister Unakitan) not even to
whisper about price expectations ahead of the next
privatization. He added that Privatization Administration
President Metin Kilci had told him that, legally, he could
not accept a bid below the lower range of valuation estimates
private sector advisors had developed for Tekel. More
broadly, he acknowledged that the major obstacles to
privatization were price and lay-offs, to which Ambassador
replied that privatization would only lead to efficiency
gains if they produced lay-offs.


8. (Sbu) Babacan argued that the political will to privatize
had never been stronger, or at least not in recent memory.
He noted that the GOT had reduced the number of workers at
state-owned enterprises by 55,000 in 2003 (41,000 of the
45,000 specified in the IMF plan, plus an additional 14,000
from SEEs that exceeded their company-specific targets in the
plan).


9. (Sbu) Whereas Minister Babacan seemed to understand the
problem of being overly wed to internal valuations of
companies to be privatized, Unakitan seemed very much focused
on the price to be had, and on not selling state companies
too cheaply. He stressed his private sector background and
his belief in privatization, and said the Prime Minister also
supports privatization. Saying privatization is a
multi-faceted issue with labor, regulatory, competition and
pricing dimensions, he vowed not to deviate from the path of
privatization. He said the the Privatization Authority staff
was relatively inexperienced and would be more effective in
2004.


10. (Sbu) When disposing of state assets, however, Unakitan
said he tries to sell them at the highest possible price. He
cited the case of a fertilizer company in Istanbul that was
going to be sold for USD 36 million until Unakitan, after
consulting advisors, changed tack and eventually sold it for
USD 105 million. With Tekel's tobacco operations, Unakitan
said they could not sell it for the bid price because it was
too far below the valuation provided by the GOT's advisors at
Citigroup. Unakitan said that the Tupras privatization would
be finalized in January after an environmental assessment but
that Petkim was difficult to privatize because of the
economic situation.


Improving Market Confidence:
---------------------------


11. (Sbu) Babacan pointed to the August 1 Fund decision to
allow Turkey to "restructure" repayments, as well as a
successful post-roadshow international bond issuance, as
turning points in terms of market confidence. The government
will meet or exceed year-end inflation and growth targets
(which SPO U/S Tiktik also told us December 16), and
expectations for year-end 2004 inflation are within range of
the government's 12 percent target. Interest rates have
fallen faster than expected (and already are at 2004's
projected average, per IMF ResRep), enabling the government
to save TL 7-8 quadrillion ($5-5.5 billion) in interest
payments this year. The government's interest rate
projections for 2004 are "very conservative," as the
government believes it is critical to meet its targets to
establish credibility.


12. (Sbu) Babacan stressed that the government was trying to
be as consistent and predictable as possible, so as to boost
investor and consumer confidence. The success of this
effort, combined with the fact that the Prime Minister
clearly has supported the economic program in the last half
of 2003, has had a positive impact on confidence.


Investment Disputes:
-------------------


13. (Sbu) With both Ministers, Ambassador reported that the
two governments had discussed foreign direct investment
extensively at the recent Economic Partnership Commission
meeting, and the GOT delegation had made an effective
presentation on recent efforts to improve the investment
environment. However, attracting more U.S. investment
required not only macroeconomic stability and a streamlined
bureaucratic process, but also a good track record among
existing investors. Unfortunately, Turkey's track record
vis--vis U.S. investors is not good. With Babacan, he cited
as examples Cargill's zoning problems (and noted that
Cargill's plant here is its largest greenfield investment in
the world) and the lack of data exclusivity for
pharmaceutical companies. The Ambassador handed both
Ministers a non-paper laying out U.S. companies' problems
doing business in Turkey.


14. (Sbu) With both ministers, Ambassador suggested that the
Prime Minister's late January visit to Washington and
President Bush's late June visit to Turkey (for the NATO
Summit) were great opportunities for Turkey to highlight its
improved investment environment, and urged the government to
resolve at least some of the investment problems/disputes
before these events. Turkey, he argued, needs some
investment success stories.


15. (Sbu) Babacan said he fully agreed. The GOT's
Coordinating Committee to Enhance the Investment Environment,
which he chairs, had recently invited a number of foreign
investors -- including Cargill and Pfizer -- to present their
problems. Subsequently, the Prime Minister (with Babacan)
had met with the Foreign Investors Association (Yased), and
the Prime Minister had taken detailed notes throughout a two
hour Yased description of problems facing foreign investors.


16. (Sbu) Babacan said awareness of the problem was the first
step. Now, the GOT wants to resolve as many of these
problems as possible and make Turkey investor-friendly. If
it fails, Turkey will not attain its growth targets. He
argued that the biggest problem facing investment is Turkey's
judiciary. The courts take too long to make decisions, he
said, and those decisions are completely unpredictable --
"like flipping a coin." Judicial reform, he concluded, is
essential. (Comment: Interestingly, State Planning U/S
Ahmet Tiktik made the same argument to us December 16,
calling for an "overhaul" of the judicial system. End
Comment.)


17. (Sbu) Unakitan, who had to cut short the meeting, asked
the Ambassador to set up another meeting, at which they would
go over each U.S. company problem in greater detail. Unakitan
promised to try to help, even if the dispute was outside
Unakitan's portfolio.


18. (Sbu) With Babacan, the Ambassador pressed for progress
on data exclusivity for pharmaceutical companies. He pointed
out that the lack of IPR protection not only is a trade
problem, in terms of our Special 301 process, but also is a
disincentive to investment and could lead foreign
pharmaceutical companies to stop bringing new products to
Turkey. He warned that, without progress, the U.S. was
likely to place Turkey on its Special 301 Priority Watchlist
next year.


19. (Sbu) Babacan said he was aware of the problem, had
discussed it with the Prime Minister, and intended to talk
with the Health Ministry to find a resolution. He said the
Health Ministry feared the cost implications of implementing
data exclusivity, but he (Babacan) was confident the
pharmaceutical companies would work with the Ministry to
minimize those costs. Unakitan said the Prime Minister had
instructed him to work on the data exclusivity issue and
solve it despite the cost to Turkey.


EDELMAN

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