Cablegate: Macroeconomic Results Bring Optimism in Istanbul,

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





E.O. 12958: N/A

1. Sensitive but Unclassified. Not for internet

2. (SBU) Summary: Recent soundings among leading Istanbul
market analysts and participants highlight the extent to
which Turkey's continued strong macroeconomic performance has
left them more optimistic about the future. With strong
disinflation and export performance, acceptable growth
results, and continued progress on IMF implementation, our
contacts give some credit to the AK government for keeping
the economy on the right track. Their optimism is tempered,
however, by recognition that Turkey's recovery is fragile and
could easily reverse if the government missteps and returns
to populist policies that shake market confidence, fails to
implement structural reforms, or slips on its EU accession
track. Looming too is the challenge Turkish business will
face in the new world that will result if the GOT is
successful in sustaining low inflation and low interest rates
over the long term. Mehmet Kutman, head of Turkey's largest
securities firm, noted that his key worries center on the
private sector, which has grown comfortable and complacent
from the existing order, and will face difficulties in a new
world where the benefits it has grown accustomed to receiving
from the government are absent. End Summary.

3. (SBU) Visiting Ankara Economic Counselor and P/E Chief
canvassed a number of leading market analysts and
participants during a series of meetings on December 11,
including Mehmet Kutman, Chairman of Global Securities (and a
nephew of former Prime Minister Mesut Yilmaz), Demir Sabanci,
head of the Sabanci Group's retail division, Ayse Berker,
head of Fitch Rating's Istanbul office, and Bender analysts
Emin Ozturk and Murat Gulkan. All saw significant
improvement in the economy over the last year, with Kutman
and his chief strategist, Tevfik Aksoy, highlighting renewed
interest by foreign investors in Turkey and Sabanci noting a
pickup in retail demand. However, our conversations also
revealed that business investment remains low and that the
recovery has not yet produced much job creation or boosted
consumer spending significantly.

4. (SBU) Pluses and Minuses: Kutman and Aksoy were optimistic
overall, noting good results on the macro side and the
"feel-good" effect of a strong single-party government.
Kutman (who has sought to build good relations with the AK
government) noted that he believes in Prime Minister Erdogan
and especially Finance Minister Unakitan, though the rest of
the team is less strong. He opined that they don't yet have
full cognizance of their strength and what they can
accomplish, but that they "listen to feedback," are likely to
steer clear of corruption (given their lack of ties to
established major business groups), and are open to foreign
direct investment. He noted that he has never seen more
interest in Turkey than he sees now, especially from
Mediterranean, Middle Eastern, and Far Eastern groups. With
the current positive momentum from good macroeconomic
results, he believes that the market is better positioned to
absorb occasional mistakes by the government, such as the
inexperience the government showed in allowing groups that
opposed the privatization of TEKEL to raise unrealistic
expectations about the company's value, thereby leading
Unakitan to void the tender when bids came in at a lower
level. Kutman challenged the idea that all government
attempts to weaken independent regulatory boards are a bad
idea, strongly criticizing the performance of the Banking
board under former chairman Engin Akcakoca (Ankara septel
reports on our Istanbul meeting with Akcakoca) for having
pursued policies that raised the cost of the reorganization
of the sector.

5. (SBU) A Vulnerable Private Sector: In Kutman's view,
today's crucial need is for the optimism that has flowed from
good macroeconomic results and other positive developments
over the past year to move to the real economy. Otherwise,
he argued, it may prove ephemeral. He noted that real wages
have yet to recover from the crisis (and parenthetically that
he has not raised wages at Global for two years), so that
demand is top down rather than bottom up. (Sabanci confirmed
this point, noting that while sales are recovering at Sabanci
retail chains, the average consumer is still spending, per
visit to his stores, less than half what he or she spent
before the crisis.) Kutman's key worries center on the
private sector, which has grown too accustomed to growing
through government handouts, whether from discounts from
state enterprises (Tupras' privatizion will squeeze the
private sector, he suggested), government contracts, or
government sanctioned monopoly power. Turkish businesses, he
said, are still "not comfortable," and so only bring money
back to Turkey to play the securities market, rather than
make real investments. The new environment, and the added
challenge of foreign competition, he suggested, will force a
change in the way Turkish business operates. Beyond this,
his concerns focus on the bureaucracy and judiciary, which
often seek to block the government, as they have recently on
privatization and banking reform. The legal system, he
argued, is the key problem in Turkey: one that cannot be
fixed in one or even five years.

6. (SBU) Nuances: Analysts at Fitch Ratings and Bender
Securities were more cautious. Fitch's Ayse Berker, for
instance, told us that she continues to believe that promised
U.S. assistance is critical to maintaining stability in
Turkish markets. Without that money or potential World Bank
assistance, she forsees real debt repayment problems in 2005.
She noted that she remains concerned about the government's
reform commitment, given delays in passing key measures for
the sixth review (key banking and public administration
measures did finally clear parliament after our discussion),
and that ironically on some issues the earlier coalition had
taken more decisive action than AK, which she characterized
as a "coalition in a party." She questioned where growth
would originate in 2004, given the government's need to
maintain a large primary surplus, and worried about the
banking sector's ability to make money in a low-interest-rate
environment. Bender analysts Emin Ozturk and Murat Gulkan
echoed these concerns, adding that with the IMF's new softer
tone and the market's sunny optimism, it isn't clear "who
will push the government" to continue to take the necessary
tough decisions. They, along with Berker, noted that
Turkey's economic outlook for 2004 would also depend on
global economic trends (low global rates have pushed money to
Turkey in 2003), as well as progress toward EU accession,
including a Cyprus solution.

7. (SBU) Populism Redux: Ozturk and Gulkan pointed to rumors
of new populist measures that the government is considering,
including an amnesty for debtors to state banks, an increase
in the minimum wage and in pensions. They (like former BDDK
head Akcakoca at lunch) also challenged Kutman's suggestion
that AK is distant from all major holdings, noting progress
on a plan to allow Mehmet Kahramehmet to negotiate down his
three billion debt to the government for Pamukbank by nearly
forty percent in exchange for early repayment. (The deal has
not yet been finalized, but all are intrigued too by the fact
that Kahramehmet's Cukorova Group has emerged as a bidder for
Tupras at a time when its debts to the government exceed 4.5
billion dollars.) Sabanci noted that the AK party's populist
activism has extended to "Wal-mart" type restrictions to keep
major retailers from moving into areas where they would
disrupt small and medium-sized enterprises. At the same
time, however, AK is moving to protect food manufacturers
from competition from "store-brands." Currently, he opined,
"competitiveness and productivity" are not the watchwords in

8. (SBU) Comment: Though some credit Turkey's AK government
with having moved partway up a learning curve as a result of
market signals over the last year, all of our interlocutors,
even the relatively optimistic Kutman, agreed that this has
not changed the fundamental fact that the current government
suffers from a lack of understanding of economics. As a
result, there is no strategic economic vision within the
government, and the senior leadership is often sympathetic to
populist proposals that are economically damaging. End

© Scoop Media

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