VZCZCXRO8363
RR RUEHDA
DE RUEHAK #1864/01 2011442
ZNR UUUUU ZZH
R 201442Z JUL 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 3074
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 3048
RUEHDA/AMCONSUL ADANA 2158
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 001864 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE 
 
SENSITIVE 
 
SIPDIS 
 
E.O.12958: N/A 
TAGS: EFIN PGOV TU
SUBJECT: Opposition Parties' Market-Unfriendly Stance Helps Markets 
Rally on Likely AKP Victory 
 
REF: ANKARA 1015 
 
¶1. (SBU) Summary: Turkish markets have rallied buoyed by global 
bullishness and the increasing likelihood of an AKP victory that 
would increase the probability of continued market-friendly 
policies.  Investors' doubts about the principal opposition parties 
are attributable to these parties electoral manifestos which contain 
a significant amount of statist economic "old-think" that, if 
implemented, would be a serious negative for the investor community. 
 End Summary. 
 
-------------------------------------- 
Investors Prefer (Modest) AKP Majority: 
-------------------------------------- 
 
¶2. (SBU) The preferred election outcome for foreign investors and 
market analysts has continued to be a single-party AKP government 
but without AKP having a majority exceeding 367 votes.  An outcome 
with AKP getting over 367 seats heightens the probability of a clash 
with the secular establishment over the election of a president and 
constitutional changes.  With the polls suggesting an AKP majority 
with less than 367 seats is the most likely outcome, markets have 
continued to rally in recent days, with a strong assist from the 
bullish tone in international markets. 
 
¶3. (SBU) Foreign investors (and therefore the market) believe that a 
single-party government -- of any party -- is more likely to 
continue with orthodox and pro-reform economic policies.  Investors 
also worry that the principal opposition parties, CHP (Republic 
People's Party) and MHP (Nationalist Movement Party), are dominated 
by politicians who are far more skeptical of privatization, foreign 
investment, the IMF's role, the EU and orthodox economic policies 
than the AKP. 
 
--------------------------------------------- -- 
Opposition's Market-Unfriendly Policy Statements 
--------------------------------------------- -- 
 
¶4. (SBU) The opposition parties' economic platforms offer a window 
into an economic philosophy that has elements of pre-1980's Turkish 
statist thinking.  Although both CHP and MHP have people in their 
parties with economic policy experience, and are likely to be 
obliged to be prudent if they came to power, the fact that their 
platforms contain so many overtly "old-think" statements is 
off-putting for the investor community.  Both CHP and MHP adopt a 
more nationalist approach than AKP, emphasizing domestic production. 
 
¶5. (SBU) MHP: MHP's election manifesto says that it will base its 
economic program on a free market model.  However it will promote 
policies against foreign capital's dominance in the economy.  Their 
slogan will be "yes to foreign capital, no to foreign control."  MHP 
will be supportive of foreign investments that are 
production-oriented that will create jobs. The party targets 
increased production and employment through support for small- and 
medium-sized enterprises.  MHP says there will be no differentiation 
in taxation of foreign and local investors regarding capital gains 
and interest income.  (Currently, income tax from capital gains and 
interest income is 0% for foreign investors and 10% for local 
investors.) Interest income will be taxed more than capital gains. 
The manifesto states that, "Measures will be taken to prevent short 
term capital outflows in case of volatile markets," hinting at the 
possibility of capital controls.  MHP calls for the primary surplus 
target -- the centerpiece of the IMF programs' recent success -- 
should be reduced to allow social spending. MHP proposes to cut the 
Value-Added Tax (VAT) gradually in food, education and health.  MHP 
supports EU membership, but with many conditions. 
¶6. (SBU) CHP: CHP focuses on creation of employment, financial 
stability, supporting the real sector through stable and balanced 
growth as well as strong industrialization.  Fiscal discipline and 
the fight against inflation will be CHP's main priorities. 
Additionally, the party plans strengthening policies on industry and 
agriculture, fighting against unemployment and establishing a more 
balanced income distribution. CHP is planning to bring back 
sector-based incentives, which AKP has been avoiding in line with 
the IMF program. The party is also planning to focus on the 10 
million people living in poverty, and will develop strong social 
policies to tackle this problem.  CHP alleges that the current 
program has not served all of Turkey's needs and a medium-term 
development strategy should be adopted targeting a growth rate above 
6%, unemployment under 7% and inflation below 5%. Public 
infrastructure investments should be accelerated. EU convergence 
should be supported but Turkey should adopt a more dignified policy 
towards the EU, and towards the U.S. CHP claims foreign capital 
inflows lead to an increase in foreign debt.  CHP explicitly rules 
out privatization of State-owned Ziraat and Halk Bank.  Although the 
 
ANKARA 00001864  002 OF 002 
 
 
CHP platform does not explicitly oppose other privatizations, CHP 
leaders have attacked the AKP governments' numerous privatizations 
of state-owned companies. 
¶7. (SBU) Neither CHP nor MHP (or AKP) reveal any specific primary 
surplus targets.  None of them unveil their views on the future of 
the IMF relations, although MHP has made anti-IMF statements. All 
three share the view that broadening the tax base is vital to 
increase budget flexibility. On the other hand opposition parties' 
views on public sector banks, foreign capital inflows and foreign 
participation in banking sector are different from AKP's.  All three 
parties at least give lip service to the independence of the Central 
Bank, but a prominent MHP parliamentary candidate's public advocacy 
of a "managed float" exchange rate regime suggests they may not 
really mean it.  Both CHP and MHP criticize current policies 
claiming they would change the high interest rate policy that causes 
what they view as the excessive appreciation of Turkish Lira.  CHP's 
most prominent economic policy expert, former Treasury Under 
Secretary Faik Oztrak, said the current global market environment 
 
SIPDIS 
caused excessive capital inflow into Turkey that shielded AKP from 
its mistakes.  Oztrak claimed that Turkey's Foreign Exchange 
reserves -- currently $70 billion -- are not strong enough to face a 
serious global turbulence. 
--------------------------------------------- -- 
Favorable Polls and Global Bullishness Sustain Rally: 
--------------------------------------------- -- 
¶8. (SBU) Buoyed by the positive tone in global markets this week, 
capital investors priced in an AKP government, bringing the IMKB 100 
stock exchange index to almost 54,000, the benchmark government bond 
rate to 17.4% and USD/TRY exchange rate to a record 1.25.  If the 
elections produce a surprising outcome a market reaction is likely 
due to the opposition's market-unfriendly policies or, if AKP is too 
successful, the risk of a clash with the secular establishment over 
the presidency. AKP's new economic star, former Merrill Lynch 
economist Mehmet Simsek, warned recently that if opposition parties 
implement any part of their economic policies, this might lead to an 
economic crisis.  Simsek is undoubtedly exaggerating for electoral 
purposes, but the MHP and CHP statements on economic policy have 
reinforced investors' -- especially foreign investors' -- strong 
preference for AKP. 
WILSON