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DE RUEHIT #0476/01 0891332
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FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC 4549
INFO RUEHAK/AMEMBASSY ANKARA 4920
RUEHDA/AMCONSUL ADANA 2210
RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS SECTION 01 OF 02 ISTANBUL 000476 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV TU
SUBJECT: BUSINESS CRITICISM OF GOVERNMENT INTENSIFIES 
 
REF: A. ANKARA 1629 
 
     ¶B. ANKARA 1528 
 
Sensitive but Unclassified.  Not for internet distribution. 
This message was coordinated with Embassy Ankara. 
 
¶1.  (U)  Summary: Business criticism of recent Turkish 
Government missteps on the economy has intensified in recent 
days, as business leaders have grown increasingly concerned 
about the potential impact of protracted uncertainty 
surrounding the leadership of the  Turkish Central Bank. 
Former Chairman Sureyya Serdengecti's five-year stewardship 
of the institution through the aftermath of the 2001 crisis 
is almost universally credited with having provided the 
monetary anchor that enabled Turkey to achieve single digit 
inflation.  Concern is widespread that his successor will not 
have the same credentials or independence from the 
government.  Ironically, the debate comes at a time when 
Serdengecti's critics, mainly textile exporters who have 
suffered from a perceived "overvaluation" of the Turkish 
lira, have also been extremely critical of the government, 
arguing that its promised assistance to the their industry is 
too little, too late.  End Summary. 
 
¶2. (SBU) Istanbul-based business organizations have been 
increasingly critical of the Central Bank appointment process 
in recent days as it (in the words of newspapers here) has 
degenerated from "comedy to farce."  Turkish Industrialists 
and Businessmens' Association President Omer Sabanci 
forthrightly told the daily "Sabah" here that the appointment 
process has been mishandled, and that the government needs to 
come up with a name that will "give confidence both to 
domestic and foreign markets."  Echoing something we have 
heard frequently in private from many contacts, Sabanci also 
questioned why a change needed to be made at the bank.  It 
had a "very successful governor and management and this was 
accepted by everybody," Sabanci told Sabah, and "we wonder 
why Sureyya Serdengecti was not appointed again."  Sabanci 
added a warning that the Central Bank cannot join the ranks 
of the numerous government institutions that are headed by 
Acting Chiefs, when President Sezer rejects a government 
appointment.  "The Central Bank cannot afford such interim 
management," he said.   Privately, a senior banker here told 
us that many perceive that the government believes that it 
has achieved an economic plateau that allows it to dabble in 
politics and to fiddle with institutions like the bank. 
"They are too unsophisticated to recognize that fine-tuning 
the economy requires daily effort," he said. 
 
¶3. (SBU) The criticism from the Istanbul establishment comes 
at a time when the GOT has been facing separate attacks from 
textile manufacturers-- who disliked Serdengecti and would be 
happy to see a loosening of the bank's monetary policy-- but 
who remain disappointed that the sole measure of support they 
have gained from the government to date is a VAT tax cut that 
marginally benefits domestic yarn producers, but provides no 
assistance to beleaguered exporters.  One Central 
Anatolian-based textile manufacturer who produces higher-end 
denim products for export told us recently that the 
criticisms have some merit.  While not among those who have 
spoken out publicly, since his high-end strategy has 
insulated him from the effects of the lira's high value, he 
noted that the VAT cut is of little help to anyone but 
consumers, since it applies equally to domestic and imported 
products.  Given that exporters already receive a rebate of 
whatever VAT they pay, whether it is 18 or 8 percent is of 
little consequence. 
 
¶4. (U) Disappointment with the measure led to a tense 
showdown between Prime Minister Erdogan and the head of the 
Istanbul Textile Makers Export Association (IKTIB), Suleyman 
Orakcioglu, at a meeting at the Istanbul Chamber of Industry 
last week.  Orakcioglu claimed that the GOT had been duped by 
a few yarn producers and that the VAT cut would have little 
impact on the sector.  He warned of dire consequences for the 
overall economy, given that the sector, though declining, 
accounts for 19 billion USD in exports and employees 
millions.  "Those who tell us to give up on this sector 
cannot replace it with anything else," he argued, and he 
pressed for an "equal environment with our competitors." 
Ironically, the textile industry has been among Serdengecti's 
strongest critics, pressing for speedier rate cuts and 
believing that his exchange rate policies allowed the lira's 
overvaluation. 
 
¶5. (U) In his remarks at the Chamber, Prime Minister Erdogan, 
criticized Orakcioglu for fear-mongering, arguing that it is 
 
ISTANBUL 00000476  002 OF 002 
 
 
not fair to argue that the Turkish economy is on the brink of 
a crisis.  He defended the government's policy on textiles, 
noting that the VAT cut was among the priorities the sector 
identified, together with input and labor costs and the size 
of the unregistered economy.  We are doing what we can with 
limited resources, he said, including a reduced corporate tax 
rate, a VAT reduction, and investment incentives for 49 
provinces.  "Nobody has thanked us," Erdogan concluded, "and 
if you are still suffering, it is your fault."  The 
government also secured support from two major yarn 
producers, Ahmet Zorlu of Zorlu Holdings and Abdulkadir 
Konukoglu of Sanko, who confirmed the Prime Minister's point 
regarding the importance of the VAT cut, and noted the 
government's commitment to address other issues over time. 
"We have obtained positive relations with the government, and 
should not spoil it," they said. 
 
¶6. (SBU) Comment: The government's mishandling of the Central 
Bank appointment, and concern that a similar problem will 
arise this week surrounding the Banking Supervision and 
Regulatory Agency (Chief Tevfik Bilgin's term expires on 
April 6) has unsettled both Istanbul business circles and 
markets, with the Turkish lira dropping to its lowest level 
of the year.  As Ankara has reported (reftels), market and 
business unease with the Central Bank situation has been 
compounded by concern with the "populist" VAT rate cuts the 
government has announced, which most believe augur an 
unsettled period in IMF-GOT relations.  TUSIAD's warning is a 
reminder that while big business here has tolerated the AKP 
government, that tolerance has been conditioned on the 
government's delivery of strong economic results.  If the 
government falls short on that front, those business circles, 
which have never shared AKP's ideology, could turn on the 
government and make problems for it.  The irony is that the 
putative beneficiaries of the largesse that has created some 
of these problems are themselves not satisfied, and continue 
to agitate against the government.  The resulting uncertainty 
is a reminder that weather can change very rapidly on the 
Bosphorus, and a protracted sunny period is not a foregone 
conclusion, whether in the Turkish economy or in the skies 
above Istanbul.  End Comment. 
JONES