VZCZCXYZ0042
RR RUEHWEB

DE RUEHAK #6622/01 3421543
ZNY CCCCC ZZH
R 081543Z DEC 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0247
INFO RUEHIT/AMCONSUL ISTANBUL 1765
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L ANKARA 006622 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR J ROSE 
 
E.O. 12958: DECL: 12/08/2016 
TAGS: EFIN PGOV TR
SUBJECT: TURKEY EX-BANK GOVERNOR HOPES FOR AKP ALTERNATIVE 
 
REF: A. ANKARA 6494 
 
     ¶B. ANKARA 6403 
 
Classified By: DCM Nancy McEldowney.  Reasons 1.5 (b) and (d). 
 
¶1.  (C)  Summary. Highly-respected former Central Bank 
Governor Surreya Serdengecti is pessimistic about the 
short-term outlook for Turkey's economy, which he sees 
reflected in the stubborn failure of the inflation rate to 
fall below 10% and a return of dollarization.  He does not 
believe the AK Party government is committed to sound 
economic policies, particularly under election year pressure. 
 Current opposition parties do not offer a credible 
alternative, but Serdengecti, who is now working closely with 
TOBB President Rifat Hisarciklioglu, says a "third political 
force" committed to orthodox policies could emerge in the 
coming months.  How much of this is wishful thinking is not 
clear, but it is clear that the business community's 
continued support for the AKP government depends on its 
ability to sustain pro-business policies.  End Summary. 
 
------------------------ 
A Change in Expectations 
------------------------ 
 
¶2.  (C)  In a November 30 meeting at his new perch at 
Ankara's TOBB University, Serdengecti painted a negative 
outlook for the Turkish economy.  He said his assessment was 
based on his meetings with businesspeople throughout the 
country as well as on the obvious difficulty the Central Bank 
is having controlling inflation.  Private companies, he said, 
are forecasting 2007 inflation in a range of 7 to 10%, 
compared to an official target of 4%.  He said changed 
expectations about the future, rather than higher energy and 
import prices, are reason behind the reversal in the trend 
that saw inflation steadily fall to its current level from 
over 70% in 2001.  For the first time since the economic 
crisis, inflation has reached a "threshold" below which it 
stubbornly refuses to go.  Another sign of insecurity is, he 
said, the reversal of the long-standing process of 
dedollarization.  (The share of the money supply denominated 
in dollars and euros grew from 45% in May to 53% in November.) 
 
¶3.  (C)  The change in expectations is shaped by 
Serdengecti's belief that the AK Party government is not 
committed to the sound economic policies that have driven the 
recovery.  Evidence of this is manifold, but the Governor 
singled out the April-May controversy over the appointment of 
his successor as being the trigger that showed the AKP's true 
populist colors and altered the previously positive 
assessments of economic actors.  The "unrealistic" 2007 
budget (ref A), a large pay increase for public workers, and 
current speculation about pre-paying the IMF are other 
examples of how the government is seeking to escape from the 
shackles of austere policy.  The Governor is also worried 
about how the government will resolve what he sees as the 
very serious macroeconomic problem of intra-government debts 
(ref B). 
 
------------------------------------------ 
"Not A Single Person" Committed to Reforms 
------------------------------------------ 
 
¶4.  (C)  Of course, this is no surprise to Serdengecti, who 
has long been critical, in and out of office, of the AKP's 
commitment to sound public finances.  Serdengecti insisted 
that "not a single person" in this government understands the 
importance of the 6.5% of GDP primary surplus target. 
Instead, what he called the "foreign exchange" and "export" 
lobbies collaborate in and out of government for a weaker 
currency and sectoral subsidies and protection.  These 
populist forces are only held in check by the IMF program and 
EU accession process.  Pointedly not mentioning Economy 
Minister Babacan, he said Treasury Undersecretary Ibrahim 
Canakci was the only senior person holding the IMF program 
together.  Serdengecti said the IMF itself has become an 
increasingly absent force, while the AKP's commitment to EU 
accession is not genuine. 
 
¶5.  (C)  Per Serdengecti, not since the days of Kemal Dervis 
(and presumably himself) has a senior figure been genuinely 
committed to economic reform.  The main opposition Republican 
Peoples Party (CHP) is at least as bad as the AKP. 
Serdengecti, who is rumored to be working with Rifat 
Hisarciklioglu to advance the TOBB President's political 
ambitions, coyly suggested that a "third force" could emerge 
that would support liberal, orthodox economic policies.  He 
said this could happen in Turkey in a period as short as six 
months. 
-------------------------------------------- 
Slow Election Year Growth to Add to Pressure 
-------------------------------------------- 
 
¶6.  (C)  The political outlook will also be clouded by a 
slowdown in growth that Serdengecti expected to begin in the 
second half of 2006 and continue into 2007.  He said it was 
not clear what the political fallout would be if the growth 
rate fell below 5%, which seemed likely, but that this would 
add to the pressures on and within the AKP to break with 
IMF-supported policies.  Carefully saying he had no 
information about pressures from other quarters, Serdengecti 
noted that the "secular/conservative establishment" had also 
been "encouraged" by the ease with which the military took 
control in Thailand. 
 
¶7.  (C)  Comment:  At the moment there is probably no better 
informed observer of the Turkish economy outside government 
than Serdengecti.  His pessimistic vision may be colored by 
his treatment by the AKP and the lack of recognition he feels 
he has received for his impressive accomplishments in 
bringing down Turkey's inflation rate.  His comments about 
inflation also ignore the fact that in his final months in 
office he too recognized that it would be a challenge to meet 
the 2006 targets.   It also ignores the fact that inflation 
was stuck around the 8% level in the final months of 
Serdengecti's governorship. 
 
¶8. (C)  The hints of a new political entity emerging, with 
TOBB leader Rifat Hisarciklioglu likely to play a leading 
role, have been rumored for years but never seem to happen. 
Still, Serdengecti remains very plugged into the business 
community, including through his association with TOBB.  As 
to whether Hisarciklioglu is the business world's savior in 
waiting, other senior business contacts suggest that they 
continue to give the AKP the benefit of the doubt, but it is 
clear that business support for the AKP is that of 
convenience and that it will only last as long as the AKP 
continues the non-inflationary policies that have spurred the 
economic recovery. 
 
Visit Ankara's Classified Web Site at 
http://www.state.sgov.gov/p/eur/ankara/ 
 
WILSON