Cablegate: A/S Sullivan,S Meeting with Turkish Treasury

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E.O. 12958: N/A

1. (SBU) Summary: A/S Sullivan met with Turkish Treasury
Under Secretary Ibrahim Canakci on October 12. Canakci
acknowledged there were risks to Turkey from the global
financial crisis but described the Turkish economy,s
strengths. While the slowdown in global growth and roiled
capital markets could hurt Turkey, lower oil prices could
help. On a possible IMF program, Canakci said that Turkey
would only have a program if the Fund and Turkey reached a
common understanding on fiscal policy in the coming weeks.
End Summary.

2. (U) A/S Daniel Sullivan met with Turkish Under Secretary
of Treasury Ibrahim Canakci on October 12 on the margins of
the annual meetings of the IMF and World Bank. A/S Sullivan
noted his work on the economic dialogue and his multiple
meetings with Turkish officials over the past two years. He
recalled then Foreign Minister Gul's interest in developing
the "unrealized potential" in bilateral economic relations
and said that has been his goal.

The Global Crisis:

3. (SBU) U/S Canakci said he was at the G-20 gathering when
President Bush made an unexpected appearance. Canakci said
that the U.S. Treasury was doing a good job sharing
information, saying he had been on numerous G-20 finance
ministry conference calls. Canakci said "everyone sees the
urgency of the issue and there is a consciousness of the need
for joint action. He mused that "pessimism is contagious"
but it may have helped concentrate people's minds. He
commented favorably on the comments of the Chinese
vice-minister at the Bank/Fund meetings and Canakci said, "no
country is immune." He said the financial markets are just a
reflection of macro imbalances. A/S Sullivan stressed the
importance of countries not turning inward, to which Canakci

Impact on Turkey:

4. (SBU) A/S Sullivan congratulated Canakci on Turkey's
generally strong economic performance in recent years and
asked how the global crisis was affecting Turkey. Canakci
said now "we have to prove our success is durable," and this
is a "testing time for us, too." He said there would be an
impact on Turkey, as a highly open economy: trade constitutes
more than 40 percent of GDP. Non-residents hold almost 70
percent of the capitalization of the Istanbul Stock Exchange
and 14 percent of the government securities market. He said
the percentage is even higher for the most highly-traded
issues. He said that foreign ownership of the banking sector
is about 40 percent of total capital, specifying that this
calculation includes both direct ownership and indirect
ownership through shares traded on the stock exchange

5. (SBU) In Canakci's view, there are three aspects of the
crisis that are affecting Turkey, two of which are negative
and one of which is positive. First, the slowdown in global
growth, especially in Europe will have a major impact.
Second, tighter conditions in capital markets and capital
flows to Emerging Markets will be important for Turkey. The
positive development is the easing of oil prices. Canakci
said the current account deficit for 2008 is projected at
around $55 billion or about 6.8 percent of GDP, but energy
imports are also expected to be around $55 billion, such that
without energy imports, there would be no deficit. With all
these impacts, Canakci expects sub-trend growth, easing of
current account deficit pressure (6 percent of GDP current
account deficit for 2009), and an easing of inflationary
pressures. This environment should make inflation targets
more attainable. In 2008, the inflation target was 7.5
percent but inflation is now projected to come in around 10
percent. Next year's target is 7.5 percent.

6. (SBU) Canakci went on to say major uncertainties remain.
The outlook is highly dependent on capital inflows. He
expects the Turkish economy to adjust to the external shock
and sees his job as trying to smooth the adjustment. He
insisted the fundamentals of the economy are strong, citing
four strengths. First, public sector finances are sound.
Second, the banking sector is very strong, both because banks
are well-capitalized and liquid, with low non-performing

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loans, and also because the regulatory framework is strong.
He said banks have only 3.1 percent non-performing loans on a
gross basis and 0.6 percent on a net basis and banks have
only minimal open foreign exchange positions. Several
foreign banks with subsidiaries in Turkey (e.g. Fortis,
Dexia) have had trouble at the headquarters level but not in

7. (SBU) Another strength is in monetary policy and the
foreign exchange regime. Turkey's independent Central Bank
is following an inflation-targeting regime and the floating
exchange rate regime acts as automatic stabilizer. Canakci
pointed out how low household liabilities are: consumer loans
are only 9 percent of GDP and housing loans are only 3.6
percent of GDP. Finally, Turkey's economy benefits from its
diversified export base. The impact of a slowdown in Europe
could be offset by the increased share of exports going to
other markets. Whereas exports to the EU used to account for
57 percent of Turkey's exports, they now account for only 50
percent while exports to the Middle East and North Africa
have grown from 10 percent to 18 percent.

8. (SBU) Despite these strengths, Canakci said Turkey needed
to follow prudent policies to deal with any impact from the
global crisis. Real interest rates were likely to stay high
and growth will be weak. He said the Central Bank has been
cautious and vowed that the Government will maintain fiscal
discipline, via the 2008-2012 medium-term fiscal framework.
This framework commits the Government to reduce public
debt/GDP from 39 percent to 30 percent by 2012. The
Government will keep the overall deficit to 1.4 percent of
GDP and will adopt a fiscal rule, following a workshop with
the IMF in December.

Possible IMF program:

9. (SBU) A/S Sullivan inquired about prospects for an IMF
program. Canakci said the GOT has been discussing a
possible program at the technical level since the end of the
last IMF program in May. There will be a Fund mission next
week with a particular emphasis on the 2009 budget. If there
is a common understanding, particularly on fiscal policy,
this could form the basis for a program. One major issue is
the Government's desire to retain flexibility on public
sector investment spending.

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