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Cablegate: Scenesetter for Economy Minister Babacan's

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. (Sbu) Summary: Economy Minister Ali Babacan comes to
Washington after the IMF's Seventh Review and several months
of better-than-expected macroeconomic performance. Senior
USG interlocutors could usefully use the meetings to praise
GOT accomplishments while warning against complacency,
reiterate the need for tangible action on U.S. investment
disputes, and urge the GOT to make its airplane purchase
based on the merits of the proposals. End Summary.

Economic Reform:

2. (Sbu) With the IMF's Seventh Review board vote April 16
and a run of better-than-expected macroeconomic performance
in recent months, Babacan is likely to come to Washington
full of confidence and optimism. Full year 2003 GDP growth
came in at 5.8 percent, well above the 5 percent target or
the market consensus. Thanks to the strong lira and the
independent Central Bank's disciplined disinflation policy,
year-on-year inflation (11.8 percent as of March 31 on a CPI
basis) is already below the full-year 2004 target of 12
percent. Though final 2003 fiscal data show the GOT did not
quite meet the ambitious 6.5 percent primary surplus target,
it came very close, and has continued to maintain fiscal
austerity in 2004, though there was an unseemly scramble for
compensatory fiscal measures to close the gap opened by the
Prime Minister's January minimum wage and pension payment

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3. (Sbu) While the GOT deserves praise for broadly adhering
to fiscal austerity and working with the IMF to sustain
economic reform, Babacan and his GOT colleagues, judging by
their statements, give themselves too much credit for the
improved macro performance and give every impression of being
complacent about the Turkish economy's continuing
vulnerabilities. An exogenous shock could still send
Turkey's skittish financial markets into a tailspin, with
spiking interest rates and a falling lira reinforcing each
other and throwing the GOT's projections out of whack. A
small touch of that happened this week as the markets
demonstrated nervousness over the Cyprus referendum. Senior
USG officials could usefully reinforce the need for the GOT
to take advantage of current favorable conditions to push
through additional reforms to prolong the positive momentum
in financial markets and prepare the basis for several years
of sustained economic growth. USG officials could urge more
aggressive action on structural reforms such as privatization
and improving the investment climate.

4. (Sbu) Privatization in general, and state bank
privatization in particular, are two notable areas of
weakness. In the past year, only two of Turkey's many large
state companies (the alcohol side of Tekel, and the oil
refiner Tupras) have been successfully privatized (and the
Tupras deal isn't finalized yet). There have also been some
high-profile failures, such as the tobacco side of Tekel and
the petrochemical firm, Petkim. Other large companies'
planned privatizations move forward only at a snail's pace,
with delays such as for the Turk Telekom tender. Though
Finance Minister Unakitan has the lead on the privatization
program, Babacan has the lead on the IMF program and
investment issues, and therefore plays a role on this issue.
Babacan has been the IMF and World Bank's interlocutor on a
revived strategy to privatize Turkey's three large state
banks, whose executives' recent actions and comments suggest
they are out of sync with the World Bank's stategy of

5. (Sbu) With the IMF's current Standby facility due to come
to an end this year, the Fund's post-2004 role in Turkey is
an open question. Babacan's public line is that the GOT, in
consultation with the IMF, will decide this issue this
summer. The IMF's rules require at least a post-program
monitoring arrangement. USG officials could point out the
usefulness of the IMF's continued expertise and market
credibility, whatever form its future role takes. In
particular, senior GOT officials' public comments other than
on the time frame of the decision-making process, serve only
to rattle markets and are counterproductive.


6. (Sbu) Although Turkey has reformed its legal regime to
encourage FDI in recent years, FDI continues to be
discouraged by a number of factors, including excessive
bureaucracy, frequent changes in the legal regime, weaknesses
in the judicial system and serious gaps in intellectual
property protection (including lack of data exclusivity
protection for confidential pharmaceuticals test data). The
fact that existing foreign investors are engaged in a series
of high-profile disputes with the GOT and with Turkish
partners does not help. Issues range from Cargill,s zoning
problems to harassment of small businesses, as in the Bedoian
case. Babacan and his ministerial colleagues say all the
right things about encouraging foreign investment, and devote
considerable time and effort to meetings with foreign
investors such as the recent Investors Advisory Council in
Istanbul. However, despite sustained USG pressure--during
the Prime Minister's Washington meetings, at the EPC, and by
Post--we are not seeing tangible GOT action to resolve US
investors problems in Turkey. Post recommends that US
officials press Minister Babacan to take the lead in
resolving at least some U.S. company problems so that Turkey
can attract badly-needed FDI. U/S Larson may also want to
point out that IPR problems may cause Turkey to be elevated
to the Special 301 Priority Watch List.

Encouraging Business Partnerships:

7. (Sbu) At the State Department, Babacan may raise the
question of funding for a Chamber of Commerce proposal to
encourage Turkish-U.S. business partnerships. U/S Larson may
want to note that the U.S. Government cannot fund this
proposal, but review the Department,s efforts to encourage
private sector funding.

Boeing/Turkish Airlines:

8. (Sbu) In the coming weeks the GOT is expected to decide on
whether state-owned Turkish Airlines (THY) will purchase a
fleet of Boeing or Airbus aircraft. Boeing has submitted a
proposal to supply thirty-six addtional Boeing 737NG and five
Boeing 777 aircraft to THY. State, Commerce, the Embassy and
Eximbank have all actively supported the Boeing proposal,
including letters from Secretary Evans to Finance Minister
Unakitan and Transport Minister Yildirim. USG support of the
project, one of Boeing's largest this year, is crucial.
Though Unakitan and Yildirim, rather than Babacan, have the
lead on the procurement decision, USG officials could
usefully press the message to Babacan that the GOT should
make its decision based only on the merits of the proposals.

U.S. Financial Agreement:

9. (Sbu) Bilateral discussions on a possible amendment to the
$8.5 billion Financial Agreement continue to move very
slowly, with post having passed MFA U/S Ziyal the U.S.'s
latest proposal in late March. With no pressing need for the
money right now, and the domestic political sensitivity of
the political/military conditionality, the GOT seems to be in
no hurry on this issue. Post recommends USG officials not
press Babacan on this issue, to avoid appearing to be urging
the GOT to take our money.

Recommended Talking Points:

--Congratulations on the Seventh Review and your recent
macroeconomic success. Urge you to avoid complacency and use
the opportunity to move aggressively on reforms.

--Privatization in general, and state bank privatization, in
particular, seem to be moving slowly. A "positive surprise"
to the markets on this issue could generate growth and spur
Foreign Direct Investment.

--Whatever you decide about the post-2004 IMF role, their
expertise and credibility with markets could help Turkey's
reform program. In particular, there is a risk that senior
officials' public statements about the IMF could be
counterproductive, by rattling markets.

--While applauding your Government's high-profile
encouragement of Foreign Investment, we cannot help noting
that there has been no tangible action on the many U.S.
business problem cases. Fixing some of these cases is the
best way to change the perception in the U.S. business
community about Turkey.

--Understand that Boeing has submitted a proposal to THY to
supply up to thirty-six Boeing 737NG and up to five Boeing
7877 aircraft. These U.S.-manufactured aircraft are well
known for their superior technical and commercial value,
state-of-the-art technology and unparalleled reliability.
This is an important issue for us and I encourage the Turkish
government to make its procurement decision based upon the
merits of the competing proposals.

If asked:

--Given that the conditionality in the Financial Agreement is
in the law, the U.S. Administration is not in a position to
alter the substance of the conditions. We hope the latest
language we offered Undersecretary Ziyal is a formula that
the GOT will find acceptable.


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