Cablegate: Opposition Parties' Market-Unfriendly Stance Helps Markets

VZCZCXRO8363
RR RUEHDA
DE RUEHAK #1864/01 2011442
ZNR UUUUU ZZH
R 201442Z JUL 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 3074
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 3048
RUEHDA/AMCONSUL ADANA 2158
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 001864

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TREASURY FOR INTERNATIONAL AFFAIRS - JROSE

SENSITIVE

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E.O.12958: N/A
TAGS: EFIN PGOV TU
SUBJECT: Opposition Parties' Market-Unfriendly Stance Helps Markets
Rally on Likely AKP Victory

REF: ANKARA 1015

1. (SBU) Summary: Turkish markets have rallied buoyed by global
bullishness and the increasing likelihood of an AKP victory that
would increase the probability of continued market-friendly
policies. Investors' doubts about the principal opposition parties
are attributable to these parties electoral manifestos which contain
a significant amount of statist economic "old-think" that, if
implemented, would be a serious negative for the investor community.
End Summary.

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Investors Prefer (Modest) AKP Majority:
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2. (SBU) The preferred election outcome for foreign investors and
market analysts has continued to be a single-party AKP government
but without AKP having a majority exceeding 367 votes. An outcome
with AKP getting over 367 seats heightens the probability of a clash
with the secular establishment over the election of a president and
constitutional changes. With the polls suggesting an AKP majority
with less than 367 seats is the most likely outcome, markets have
continued to rally in recent days, with a strong assist from the
bullish tone in international markets.

3. (SBU) Foreign investors (and therefore the market) believe that a
single-party government -- of any party -- is more likely to
continue with orthodox and pro-reform economic policies. Investors
also worry that the principal opposition parties, CHP (Republic
People's Party) and MHP (Nationalist Movement Party), are dominated
by politicians who are far more skeptical of privatization, foreign
investment, the IMF's role, the EU and orthodox economic policies
than the AKP.

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Opposition's Market-Unfriendly Policy Statements
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4. (SBU) The opposition parties' economic platforms offer a window
into an economic philosophy that has elements of pre-1980's Turkish
statist thinking. Although both CHP and MHP have people in their
parties with economic policy experience, and are likely to be
obliged to be prudent if they came to power, the fact that their
platforms contain so many overtly "old-think" statements is
off-putting for the investor community. Both CHP and MHP adopt a
more nationalist approach than AKP, emphasizing domestic production.

5. (SBU) MHP: MHP's election manifesto says that it will base its
economic program on a free market model. However it will promote
policies against foreign capital's dominance in the economy. Their
slogan will be "yes to foreign capital, no to foreign control." MHP
will be supportive of foreign investments that are
production-oriented that will create jobs. The party targets
increased production and employment through support for small- and
medium-sized enterprises. MHP says there will be no differentiation
in taxation of foreign and local investors regarding capital gains
and interest income. (Currently, income tax from capital gains and
interest income is 0% for foreign investors and 10% for local
investors.) Interest income will be taxed more than capital gains.
The manifesto states that, "Measures will be taken to prevent short
term capital outflows in case of volatile markets," hinting at the
possibility of capital controls. MHP calls for the primary surplus
target -- the centerpiece of the IMF programs' recent success --
should be reduced to allow social spending. MHP proposes to cut the
Value-Added Tax (VAT) gradually in food, education and health. MHP
supports EU membership, but with many conditions.
6. (SBU) CHP: CHP focuses on creation of employment, financial
stability, supporting the real sector through stable and balanced
growth as well as strong industrialization. Fiscal discipline and
the fight against inflation will be CHP's main priorities.
Additionally, the party plans strengthening policies on industry and
agriculture, fighting against unemployment and establishing a more
balanced income distribution. CHP is planning to bring back
sector-based incentives, which AKP has been avoiding in line with
the IMF program. The party is also planning to focus on the 10
million people living in poverty, and will develop strong social
policies to tackle this problem. CHP alleges that the current
program has not served all of Turkey's needs and a medium-term
development strategy should be adopted targeting a growth rate above
6%, unemployment under 7% and inflation below 5%. Public
infrastructure investments should be accelerated. EU convergence
should be supported but Turkey should adopt a more dignified policy
towards the EU, and towards the U.S. CHP claims foreign capital
inflows lead to an increase in foreign debt. CHP explicitly rules
out privatization of State-owned Ziraat and Halk Bank. Although the

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CHP platform does not explicitly oppose other privatizations, CHP
leaders have attacked the AKP governments' numerous privatizations
of state-owned companies.
7. (SBU) Neither CHP nor MHP (or AKP) reveal any specific primary
surplus targets. None of them unveil their views on the future of
the IMF relations, although MHP has made anti-IMF statements. All
three share the view that broadening the tax base is vital to
increase budget flexibility. On the other hand opposition parties'
views on public sector banks, foreign capital inflows and foreign
participation in banking sector are different from AKP's. All three
parties at least give lip service to the independence of the Central
Bank, but a prominent MHP parliamentary candidate's public advocacy
of a "managed float" exchange rate regime suggests they may not
really mean it. Both CHP and MHP criticize current policies
claiming they would change the high interest rate policy that causes
what they view as the excessive appreciation of Turkish Lira. CHP's
most prominent economic policy expert, former Treasury Under
Secretary Faik Oztrak, said the current global market environment

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caused excessive capital inflow into Turkey that shielded AKP from
its mistakes. Oztrak claimed that Turkey's Foreign Exchange
reserves -- currently $70 billion -- are not strong enough to face a
serious global turbulence.
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Favorable Polls and Global Bullishness Sustain Rally:
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8. (SBU) Buoyed by the positive tone in global markets this week,
capital investors priced in an AKP government, bringing the IMKB 100
stock exchange index to almost 54,000, the benchmark government bond
rate to 17.4% and USD/TRY exchange rate to a record 1.25. If the
elections produce a surprising outcome a market reaction is likely
due to the opposition's market-unfriendly policies or, if AKP is too
successful, the risk of a clash with the secular establishment over
the presidency. AKP's new economic star, former Merrill Lynch
economist Mehmet Simsek, warned recently that if opposition parties
implement any part of their economic policies, this might lead to an
economic crisis. Simsek is undoubtedly exaggerating for electoral
purposes, but the MHP and CHP statements on economic policy have
reinforced investors' -- especially foreign investors' -- strong
preference for AKP.
WILSON

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