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FM AMCONSUL ISTANBUL
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UNCLAS SECTION 01 OF 03 ISTANBUL 001846 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN TU
SUBJECT: ISTANBUL BANKERS PRAISE AKP ECONOMIC REFORMS 
 
REF: ANKARA 5849 
 
Sensitive But Unclassified, Please Protect Accordingly.  Not 
for Internet Distribution. 
 
¶1.  (SBU)  Summary.  We met three Istanbul-based bankers with 
visiting Turkey desk officer to discuss economic performance, 
trends and political risk.   All three thought that the AKP 
government had done a good job implementing IMF-backed 
reforms, but felt that the AKP economic team lacked depth and 
had been unable to formulate a long-term economic strategy of 
its own.  The current account deficit and the effect of 
political risk on the economy were primary concerns, but both 
were seen as manageable in the short to medium term.  End 
Summary. 
 
Enormous Progress Despite a Weak Team 
------------------------------------- 
 
¶2. (SBU) Baturalp Candemir of EFG Securities told us that 
despite personally disagreeing with the AKP on virtually 
every social issue, he felt that AKP had made enormous 
progress on both economic and political reforms an assessment 
echoed by Steve Bideshi of Citigroup and Idil Dagdalen of 
Bender Securities.  Candemir explained that he is much less 
pessimistic than he was only two years ago.  He is no longer 
concerned about the possibility of a debt crisis because the 
structural reforms of the past several years have shielded 
the economy, particularly the banking sector, from external 
shocks.   Bidishi agreed, noting that Citigroup's internal 
projections give a 65% chance that the economic situation 
will remain the same over an 18 month horizon.  This factors 
in the early November EU 'report card' as well as upcoming 
presidential and parliamentary elections and contrasts with 
2005 projections that gave a 70% chance for stability. 
 
¶3. (SBU) Candemir cited three broad areas of improvement 
during the AKP government:  fiscal policy, changes to the 
social security system and the situation with regard to the 
EU.  Candemir argued that the AKP government has not only 
established better fiscal policy but also created a public 
recognition of the need to "pay for" budgetary outlays that 
was lacking in the past.   Additionally changes to the social 
security system have limited the deficit in that system to 
approximately 4.5% of GDP, heading off a projected increase 
in the deficit.  He expects that figure to remain constant 
for the next two to three years and then to gradually 
decrease to 2-3% of GDP over the subsequent decade. Finally, 
he argued that worries over the Cyprus ports issue 
notwithstanding, relations with the EU were clearly better 
than five years ago. 
 
¶4. (SBU)In a complaint voiced by all three bankers, Candemir 
complained that the AKP government lacked a long-term 
economic vision and cannot strategize.  Candemir and Bideshi 
argued that recent reforms were simply the result of 
mechanically implementing IMF and World Bank recommendations, 
an overly simplistic assertion in our view and one that 
government officials would vehemently deny.  Dagdalen 
conceded that point, but argued that it was better to have no 
economic vision than a "bad" economic vision and that lack of 
a competing economic philosophy made it easier for the 
current government to implement reforms than it might for a 
government controlled by the "statist dinosaurs" of the 
opposition CHP.  Comment:  We would frame the issue 
differently -- the AKP may not have a well-thought out 
long-term economic strategy of its own, but it clearly has 
free-market, pro-reform instincts that stand in sharp 
contrast to the reflexive statist impulses that are the norm 
within other political parties and the upper reaches of the 
secular establishment.  (See reftel)  The government has gone 
beyond the IMF's minimum requirements and shown real 
political courage on privatization, foreign investment and in 
going after the owners of failed banks.  End Comment. 
 
¶5. (SBU) All three bankers agreed that the AKP economic team 
lacks depth and that Economy Minister Babacan was 
overstretched by his additional responsibilities with the EU. 
 Bidishi argued that Babacan, who is "outstanding," needs to 
more visibly support Central Bank Governor Durmus Yilmaz who 
has had a difficult first few months in office.  Bidishi felt 
that both Yilmaz and Finance Minister Unakitan were hard 
workers, but noted that 
 Unakitan does not "present well" particularly with 
international audiences.  Candemir argued that the economic 
administration had grown overconfident and was taking credit 
for several years of strong economic growth that were more a 
 
ISTANBUL 00001846  002 OF 003 
 
 
reflection of global conditions in emerging markets and IMF 
reforms than AKP economic policy per se.  Candemir also noted 
that the AKP policy team does not trust career bureaucrats - 
who tend to be vehemently secular.  In the same vein, 
Dagdalen noted the AKP government is unable or unwilling to 
call upon technocrats in the way the Ecevit government did 
with Kemal Dervis in 2000.  She argued they will not pull in 
outsiders even at the mid-levels and that this has 
exacerbated the lack of economic expertise at the top. 
 
Inflation, Interest Rates, Investment and the Current Account 
Deficit 
--------------------------------------------- --------- 
 
¶6. (SBU) We asked how long it would take for interest rates 
to go down and how this had affected consumer credit. 
Bidishi thought that interest rates were unlikely to go down 
before mid-2007 and then only if inflation was under control. 
 The rate of credit expansion has reduced.  In particular car 
sales have decreased due to higher interest rates, however 
export sales benefited from the weaker lira leaving a net 
neutral effect on the auto industry.  Bidishi noted that even 
during the spring volatility Turks did not sell lira to buy 
dollars.  There was a cashing out effect as Turks sold 
dollars to benefit from favorable rates, but unlike in 
previous years there was no massive shift from lira to 
dollars as the lira fell.   We asked whether the lira had 
rebounded to the point where it was overvalued.  All three 
thought that the lira would eventually stabilize at 1.55 to 
the dollar (slightly weaker than current rates.) 
 
¶7. (SBU) We asked how the government could best deal with the 
current account deficit.   Candemir argued that if the lira 
stabilized at 1.55 and growth held at 6% the current account 
deficit would fall to manageable levels within four to five 
years.  Dagdalen argued that the current account deficit - 
presently approximately $30 billion or 8% of GDP - is "too 
big to ignore."  Turkey's manufacturing sector uses a large 
amount of imported inputs, so increasing exports alone will 
not significantly reduce the current account deficit. 
Foreign direct investment has helped to finance the deficit, 
but she argued this is not sustainable. 
 
¶8. (SBU) Foreign investment in Turkey can be divided into 
three broad categories:  foreign direct investment, 
experienced (with Turkey) financial investors and financial 
investors without significant experience in Turkish markets. 
Candemir noted that foreign direct invstment was largely 
unaffected by the exchange rae volatility earlier in the 
year.  He was surpried when deals went through without 
suspensions o even demands for price concessions citing 
Petro Ofisi and Vakifbank.  We noted that FDI remains 
elatively low given the size of Turkey's economy de to 
investor concerns regarding inflation and crruption. 
Candemir argued that FDI was understatd in official figures 
because companies registered transfers as intracompany 
lending rather than FDI as an inflation shield and tax hedge. 
 Bidishitold us that Citigroup views Turkey as a good plac 
to invest.  Explaining that it was important toview 
investments in context, Bidishi argued that Turkey had a more 
open financial sector and thus more opportunity tha 
n China, Russia, India or Brazil. 
 
¶9. (SBU) Experienced financial investors expect liquidity to 
evaporate when problems occur that affect Turkish markets. 
Candemir and Dagdalen expect experienced financial investors 
to return fairly quickly.  Inexperienced financial investors 
were attracted to the market when the EU opened accession 
negotiations.   Many of these investors were caught off-guard 
by the spring liquidity crunch, and were badly hurt (with 
some investors losing 30 %.)  Although some of these 
investors have remained in the market, Dagdalen expects most 
of them to cash out after recouping some portion of their 
losses. Candemir expects it will be hard to re-attract these 
investors, particularly at the aggressive levels of 2005 and 
the first four months of 2006. 
 
Conclusion and Comment 
---------------------- 
 
¶10. (SBU) Despite political and social misgivings, even our 
normally skeptical financial markets observers give credit to 
the current government for economic reform.  We tend to 
agree, noting that the AKP government's commitment to 
free-market, pro-business policies and hold on the 
Parliamentary majority have enabled the implementation of 
IMF-backed reforms.  These reforms, combined with generally 
 
ISTANBUL 00001846  003 OF 003 
 
 
positive trends in the emerging markets, have fueled three 
years of strong growth. 
OUDKIRK