VZCZCXRO0110
RR RUEHDA
DE RUEHAK #2183/01 1110435
ZNR UUUUU ZZH
R 210435Z APR 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 4985
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NSC WASHDC
RUEHIT/AMCONSUL ISTANBUL 0350
RUEHDA/AMCONSUL ADANA 0667
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 002183 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: Central Bank Governor Appointed and Social Security 
Legislation Passed 
 
Ref: Ankara 2049 and Previous 
 
1.(SBU) Summary:  On April 18, President Sezer approved the 
nomination of a new Central Bank Governor, ending months of 
speculation and uncertainty.  The new Governor is a well- 
regarded career central banker, though his reputed ties to 
the ruling Justice and Development Party (AKP) raise 
concerns about Central Bank independence.  On April 19, 
Parliament finally succeeded in passing the long-awaited, 
IFI-supported social security reform legislation, despite an 
opposition boycott of the proceedings.  These two 
achievements pave the way for another IMF review and perhaps 
a change in Turkey's credit rating.  The economic outlook 
for 2006 remains favorable, with risks principally in the 
domestic political arena. End Summary. 
 
--------------------------------------------- --------- 
Central Bank Governor Appointment Resolves Uncertainty 
--------------------------------------------- --------- 
 
¶2. (SBU) On April 18, President Sezer's office announced 
that he had approved the Government's nomination of Durmus 
Yilmaz to be Central Bank Governor.  The appointment 
resolves months of frenzied speculation in the press and 
fretting by market analysts about who the new Central Bank 
Governor would be.  The speculation was exacerbated by the 
Government's messy handling of the process and the rejection 
by President Sezer of the Government's nomination of the CEO 
of an Islamic Bank to be Governor. 
 
¶3. (SBU) In the end, the GOT and Sezer agreed on 26-year 
Central Bank veteran Durmus Yilmaz.  Yilmaz was a member of 
the Bank board and of its interest-rate setting Monetary 
Policy Committee.  Current and former Central Bank employees 
tell us he is well-liked and well-regarded within the Bank. 
He has good relations with former Governor Serdengecti but 
he is also reputed to have ties to FonMin Gul from their 
studies in the UK in the early 1980's. Sezer's approval of 
Yilmaz disproves speculation that a Sezer would reject any 
candidate with a headscarved wife, since Yilmaz' wife wears 
a headscarf.  Most market analysts were positive about the 
appointment, citing Yilmaz' long experience, although a 
Goldman Sachs analyst said the appointment raised questions 
about Central Bank independence. 
 
-------------------------------------------- 
Social Security Legislation (Finally) Passes 
-------------------------------------------- 
 
¶4. (SBU) On April 19 Parliament passed the long-awaited and 
highly controversial social security reform legislation. 
The legislation will institute universal health insurance, 
but will also gradually reduce the deficits of the state- 
funded pension system, by raising retirement ages and 
adjusting pension formulas.  This legislation has long been 
the single most important structural reform under the IMF 
program and delays in its passage have put the program on 
hold (reftel).  In the end, the AKP Government succeeded in 
overcoming opposition delaying tactics only by using an 
extraordinary, expedited procedure, causing the opposition 
People's Republican Party(CHP) to boycott the proceedings. 
The passage of the law despite CHP and violent street 
protests (which were dispersed by police gunfire in Ankara), 
shows that the AKP has the discipline and parliamentary 
majority to make hard reform decisions when it wants to. 
 
 
 
 
--------------------------------------- 
IMF Mission and Possible Rating Upgrade 
--------------------------------------- 
 
¶5. (SBU) In public comments April 20, both Economy Minister 
Babacan and IMF Resrep Hugh Bredenkamp said they expected an 
IMF mission to come to Turkey very soon, now that the social 
security legislation has been passed.  Though the mission 
will still need to deal with the GOT's decision to cut Value- 
added tax rates for the textile sector, the IMF and GOT are 
expected to find a way forward, allowing the third review to 
go to the IMF board and the accompanying loan tranche to be 
disbursed. 
 
¶6. (SBU) The market-friendly news also reopens the 
 
ANKARA 00002183  002 OF 002 
 
 
possibility that the rating agencies will upgrade Turkey's 
sovereign credit rating.  At the beginning of the year, 
Fitch had implied it would upgrade Turkey once the social 
security legislation was passed.  S&P was also thought to be 
considering an upgrade.  Moody's, on the other hand, has 
tended to adjust its ratings much less frequently, and 
Turkey analyst Kristin Lindow played down the likelihood of 
a change on April 20. 
 
------------------------- 
Positive Outlook for 2006 
------------------------- 
 
¶7.  (SBU) With markets reassured by the Central Bank 
appointment and the expected return of the IMF mission, the 
outlook for the remainder of 2006 is mostly positive.  Most 
analysts expect continued strong GDP growth in 2005, 
exceeding the 5% target.  While the Central Bank is expected 
to have its work cut out for it in achieving the ambitious 
5% inflation target, most analysts expect it will at least 
come close.  Foreign Direct Investment, which is badly- 
needed to provide long-term financing to Turkey's large 
current account deficit, not to mention to bring jobs and 
technology transfer, is expected to remain at the high level 
Turkey experienced in 2005.  With installment payments on 
2005 acquisitions still flowing in, and several new deals 
announced in 2006, total FDI is expected to be roughly 
comparable to last year's $9.6 billion.  The Turkish state 
is also much less vulnerable to problems rolling over its 
debt, with yearend 2005 Net Public Debt to GDP below 60%. 
Stubbornly high unemployment remains a problem, since 
Turkey's economy is not creating jobs as quickly as the 
growth in the potential labor pool. 
 
---------------- 
But Risks Remain 
---------------- 
 
¶8. (SBU) Though the current outlook for the economy is quite 
positive, Turkey is vulnerable to sudden shifts in market 
sentiment.  Though unlikely to lead to a full-blown crisis, 
a sharp shift could be disruptive, leading to a sharp 
recession, for example.  One risk remains Turkey's large and 
growing current account deficit, which surpassed 6% of GDP 
in 2005 and is likely to be slightly larger in 2006. 
Turkey's dependence on short-term portfolio investment to 
finance the current account deficit means a sudden shift in 
sentiment could be damaging, though in recent years 
investors have tended to wait out market corrections. 
 
¶9. (SBU) Perhaps the greatest area of risk to the economy 
and market confidence arises from the political arena. With 
elections due in 2007, Turkish politicians are already in 
election mode, with the attendant risks of populist 
pandering on economic policies.  Tensions between the AKP 
Government and the secularist establishment have increased 
recently, increasing the possibility of a politically- 
disruptive clash that would unnerve businessmen and 
financial market investors.  In addition, markets are very 
sensitive to instability in Turkey's volatile region or to 
tensions between Turkey and the EU. 
 
Wilson