VZCZCXRO6462
RR RUEHDA
DE RUEHAK #0346/01 0301635
ZNR UUUUU ZZH
R 301635Z JAN 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 2799
INFO RUEHDA/AMCONSUL ADANA 0335
RUEHIT/AMCONSUL ISTANBUL 9699
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ANKARA 000346 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR CHRIS PLANTIER 
 
E.O. 12958:  N/A 
TAGS: EFIN TU
SUBJECT:  TURKEY CENTRAL BANKER WORRIED ABOUT BACKSLIDING 
 
REF:  ANKARA 40 
 
¶1.  (SBU)  Summary.  Turkish Central Bank Governor 
Serdengecti believes that while economic risks, such as 
from the current account deficit, are receding, the 
potential for political backsliding on reforms is the 
main threat to Turkey's economic recovery, along with 
potential instability in the region.  The Governor, whose 
term ends March 14, told Ambassador he has no idea if he 
will be reappointed and that any governor appointed by 
the AK Party Government should have the ability to assert 
his independence and stand up to the Party and Government 
as needed.  Advocating for market-oriented policies 
remains a challenge in Turkey, where neither the public 
nor the political system has been fully convinced of 
their value, even after four years of success.  End 
Summary. 
 
-------------------------------------------- 
Turkey has Changed, but Public Not Convinced 
-------------------------------------------- 
 
¶2.  (SBU)  In a first meeting with Ambassador January 25, 
Central Bank Governor Sureyya Serdengecti reflected on 
the difficulties of his job and the risks ahead for the 
Turkish economy.  Serdengecti, a godfather of Turkey's 
disinflation and economic recovery whose 5-year term ends 
March 14, said his biggest challenge was convincing 
ordinary Turks that "Turkey has really changed" and that 
the boom-bust and inflationary cycles of the thirty years 
that preceded the 2001 crisis were indeed history. 
Foreigners, he said, are easier to convince than Turks 
that the Turkish economy is a safe place for their 
investments. 
 
¶3.  (SBU)  This public attitude put politicians in a 
difficult position.  On the one hand, bringing inflation 
down from over 70% to 7.7% last year has bolstered the 
governing party's popularity.  On the other, the still- 
dissatisfied public expects greater employment growth. 
Job creation means that the politicians needed to 
continue to implement politically costly structural 
reforms that foster jobs and growth but that may cut into 
its political popularity.  In Serdengecti's opinion, the 
biggest risk, therefore, to Turkey's recovery is the kind 
of "reform fatigue" that has been seen in Latin America. 
 
¶4.  (SBU)  The Governor was quick to point out, however, 
that a slowdown in the reforms would not lead to another 
of the catastrophic crises that Turkey has known in the 
past.  The difference would be between relatively weak, 
but positive, growth and the high growth rates necessary 
for Turkey's living standards to approach EU averages. 
 
--------------------------------- 
Minimal Risk from Current Account 
--------------------------------- 
 
¶5.  (SBU)  Serdengecti minimized the risk coming from a 
large current account deficit relative to GDP.  The move 
to a floating exchange rate system meant that sharp 
adjustments in the balance of payments could lead to 
market turbulence but not an old style payments crisis. 
Also, the ongoing lengthening of the maturity of current 
account financing was reducing chances of an abrupt 
adjustment.  Furthermore, the actual deficit/GDP ratio is 
probably lower than the current figure because a) some of 
the large amount of positive net errors and omissions 
should be included in the current account, and b) GDP 
will undoubtedly be revised upward.  He attributed "noise 
in the press" about the current account and strong lira 
to politics: economic actors who bet against the success 
of the disinflation policies and kept their savings in 
foreign currency.  As the lira strengthened, these people 
were losers. 
 
¶6.  (SBU)  Other risks included increases in world energy 
prices, a crisis in relations with the EU, and regional 
political uncertainties.  (The Governor was particularly 
concerned about the impact of an international crisis 
involving Iran, but also was very aware by the dangers 
presented by a nuclear Iran.)  He thought the chances of 
a global emerging markets contraction were probably 
diminishing, and noted that the changing composition of 
current account financing left Turkey somewhat less 
exposed to external developments. 
 
¶7.  (SBU)  Prompted by Ambassador, Serdengecti noted that 
 
ANKARA 00000346  002 OF 002 
 
 
adverse political developments in Turkey were also a 
risk.  He said the next parliamentary elections would be 
the acid test of how successful Turkey's political system 
has been in adapting to sound economic policies.  In the 
past, elections had normally led to changes in government 
for reasons related to the inflationary economic 
environment.  If the incumbent government were to lose in 
a disinflationary environment, this would confirm a 
fundamental instability in Turkish politics.  He did not 
think that elections in themselves would necessarily lead 
to market turbulence.  If markets were able to foresee 
the outcome beforehand, as was the case in 1999 and 2002, 
they should remain calm. 
 
------------------------ 
No Idea on Reappointment 
------------------------ 
 
¶8.  (SBU)  As for his personal future, Serdengecti 
claimed to have no idea if the AKP would reappoint him 
(reftel).  He suspected that the AKP is divided over the 
issue.  While the party likes to appoint its own people 
to such positions, it is not always able to find 
qualified people within its ranks.  The best economists 
are in Istanbul and not associated with the AKP. 
Although there are qualified economists in the AKP, 
including some at the Central Bank appointed by the AKP, 
their shortcoming is that they are not likely to be 
inclined to stand-up to the government and politicians, 
which any independent central banker needs to be able to 
do to keep his or her credibilty. 
 
--------------------------------------------- ---- 
POLITICIANS NOT ON BOARD FOR STABILITY AND REFORM 
--------------------------------------------- ---- 
 
¶9.  (SBU)  The Ambassador noted United States support for 
Turkey's reforms and asked how he and the United States 
could best tailor messages that support continued reform. 
Serdengecti expressed his appreciation for the U.S. 
support, especially his good relations with the U.S. 
Treasury.  He observed that despite the success of good 
policies, Turkish politicians still do not fully 
understand the need for stability and reform.  They tend 
only to make the right decisions in extremis when obliged 
by markets.  In such an environment, messages seen as 
applying external pressure were more likely than not to 
be counter-productive. 
 
¶10.  (SBU)  The Governor also said he was preoccupied by 
recent strains in political relations between the United 
States and Turkey.  Such difficulties are not healthy for 
Turkey, and are difficult to understand given everything 
the United States has done for Turkey since 1946.  As a 
central banker who spends 50% of his time on public 
relations, he said he has an understanding of what it 
like to be unpopular and the difficulty of changing 
public attitudes.  The Turkish public has, he said, a 
short memory, which means it is necessary to take every 
opportunity to remind people of what the United States 
has done for Turkey.  Ambassador agreed that this was a 
concern and a very difficult problem.  He said it was 
also important to be seen as listening to and hearing the 
concerns of others, even if there was not necessarily 
agreement on how to deal with those concerns. 
WILSON