VZCZCXRO7171
RR RUEHDA
DE RUEHC #4975/01 3022221
ZNR UUUUU ZZH
R 282211Z OCT 08
FM SECSTATE WASHDC
TO RUEHAK/AMEMBASSY ANKARA 6131
INFO RUEHDA/AMCONSUL ADANA 2506
RUEHIT/AMCONSUL ISTANBUL 2424
RUEHBS/USEU BRUSSELS
RUEATRS/TREASURY DEPT WASHINGTON DC 9925

UNCLAS SECTION 01 OF 02 STATE 114975 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: A/S SULLIVAN,S MEETING WITH TURKISH TREASURY 
UNDER SECRETARY 
 
 ¶1. (SBU) Summary: A/S Sullivan met with Turkish Treasury 
Under Secretary Ibrahim Canakci on October 12.  Canakci 
acknowledged there were risks to Turkey from the global 
financial crisis but described the Turkish economy,s 
strengths.  While the slowdown in global growth and roiled 
capital markets could hurt Turkey, lower oil prices could 
help.  On a possible IMF program, Canakci said that Turkey 
would only have a program if the Fund and Turkey reached a 
common understanding on fiscal policy in the coming weeks. 
End Summary. 
 
¶2. (U) A/S Daniel Sullivan met with Turkish Under Secretary 
of Treasury Ibrahim Canakci on October 12 on the margins of 
the annual meetings of the IMF and World Bank.  A/S Sullivan 
noted his work on the economic dialogue and his multiple 
meetings with Turkish officials over the past two years.  He 
recalled then Foreign Minister Gul's interest in developing 
the "unrealized potential" in bilateral economic relations 
and said that has been his goal. 
 
The Global Crisis: 
----------------- 
 
¶3. (SBU) U/S Canakci said he was at the G-20 gathering when 
President Bush made an unexpected appearance.  Canakci said 
that the U.S. Treasury was doing a good job sharing 
information, saying he had been on numerous G-20 finance 
ministry conference calls.  Canakci said "everyone sees the 
urgency of the issue and there is a consciousness of the need 
for joint action.  He mused that "pessimism is contagious" 
but it may have helped concentrate people's minds.  He 
commented favorably on the comments of the Chinese 
vice-minister at the Bank/Fund meetings and Canakci said, "no 
country is immune."  He said the financial markets are just a 
reflection of macro imbalances.   A/S Sullivan stressed the 
importance of countries not turning inward, to which Canakci 
agreed. 
 
Impact on Turkey: 
---------------- 
 
¶4. (SBU) A/S Sullivan congratulated Canakci on Turkey's 
generally strong economic performance in recent years and 
asked how the global crisis was affecting Turkey.  Canakci 
said now "we have to prove our success is durable," and this 
is a "testing time for us, too."  He said there would be an 
impact on Turkey, as a highly open economy: trade constitutes 
more than 40 percent of GDP.  Non-residents hold almost 70 
percent of the capitalization of the Istanbul Stock Exchange 
and 14 percent of the government securities market.  He said 
the percentage is even higher for the most highly-traded 
issues.  He said that foreign ownership of the banking sector 
is about 40 percent of total capital, specifying that this 
calculation includes both direct ownership and indirect 
ownership through shares traded on the stock exchange 
 
¶5. (SBU) In Canakci's view, there are three aspects of the 
crisis that are affecting Turkey, two of which are negative 
and one of which is positive.  First, the slowdown in global 
growth, especially in Europe will have a major impact. 
Second, tighter conditions in capital markets and capital 
flows to Emerging Markets will be important for Turkey.  The 
positive development is the easing of oil prices.  Canakci 
said the current account deficit for 2008 is projected at 
around $55 billion or about 6.8 percent of GDP, but energy 
imports are also expected to be around $55 billion, such that 
without energy imports, there would be no deficit.  With all 
these impacts, Canakci expects sub-trend growth, easing of 
current account deficit pressure (6 percent of GDP current 
account deficit for 2009), and an easing of inflationary 
pressures.  This environment should make inflation targets 
more attainable.  In 2008, the inflation target was 7.5 
percent but inflation is now projected to come in around 10 
percent. Next year's target is 7.5 percent. 
 
¶6. (SBU) Canakci went on to say major uncertainties remain. 
The outlook is highly dependent on capital inflows.  He 
expects the Turkish economy to adjust to the external shock 
and sees his job as trying to smooth the adjustment.  He 
insisted the fundamentals of the economy are strong, citing 
four strengths.  First, public sector finances are sound. 
Second, the banking sector is very strong, both because banks 
are well-capitalized and liquid, with low non-performing 
 
STATE 00114975  002 OF 002 
 
 
loans, and also because the regulatory framework is strong. 
He said banks have only 3.1 percent non-performing loans on a 
gross basis and 0.6 percent on a net basis and banks have 
only minimal open foreign exchange positions.  Several 
foreign banks with subsidiaries in Turkey (e.g. Fortis, 
Dexia) have had trouble at the headquarters level but not in 
Turkey. 
 
¶7. (SBU) Another strength is in monetary policy and the 
foreign exchange regime.  Turkey's independent Central Bank 
is following an inflation-targeting regime and the floating 
exchange rate regime acts as automatic stabilizer.   Canakci 
pointed out how low household liabilities are: consumer loans 
are only 9 percent of GDP and housing loans are only 3.6 
percent of GDP.  Finally, Turkey's economy benefits from its 
diversified export base.  The impact of a slowdown in Europe 
could be offset by the increased share of exports going to 
other markets.  Whereas exports to the EU used to account for 
57 percent of Turkey's exports, they now account for only 50 
percent while exports to the Middle East and North Africa 
have grown from 10 percent to 18 percent. 
 
¶8. (SBU) Despite these strengths, Canakci said Turkey needed 
to follow prudent policies to deal with any impact from the 
global crisis.  Real interest rates were likely to stay high 
and growth will be weak.  He said the Central Bank has been 
cautious and vowed that the Government will maintain fiscal 
discipline, via the 2008-2012 medium-term fiscal framework. 
This framework commits the Government to reduce public 
debt/GDP from 39 percent to 30 percent by 2012.  The 
Government will keep the overall deficit to 1.4 percent of 
GDP and will adopt a fiscal rule, following a workshop with 
the IMF in December. 
 
Possible IMF program: 
-------------------- 
 
¶9. (SBU) A/S Sullivan inquired about prospects for an IMF 
program.   Canakci said the GOT has been discussing a 
possible program at the technical level since the end of the 
last IMF program in May.  There will be a Fund mission next 
week with a particular emphasis on the 2009 budget.  If there 
is a common understanding, particularly on fiscal policy, 
this could form the basis for a program.  One major issue is 
the Government's desire to retain flexibility on public 
sector investment spending. 
RICE