VZCZCXYZ0001
PP RUEHWEB

DE RUEHIT #0167/01 1350544
ZNR UUUUU ZZH
P 150544Z MAY 09
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8944
INFO RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUEKJCS/DIA WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK PRIORITY

UNCLAS ISTANBUL 000167 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - ABAUKOL, FPARODI, 
JWEISS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN TU
SUBJECT: TURKISH BUSINESS LEADERS EXPRESS OPTIMISM IN 
ISTANBUL DURING TREASURY VISIT 
 
¶1.    (SBU)    Summary:    On May 8 U.S. Department of 
Treasury officials, after a day of meetings in Ankara with 
high level government officials (septel), came to Istanbul to 
speak with bankers, economists and real sector 
representatives about Turkey,s economy.  The consensus among 
the interlocutors was that Turkey will come out of the 
financial crisis in good shape, though not until 2010.  The 
construction and financial sectors, anchored by a sound 
banking system, will lead the economy out of the wilderness. 
However, all agreed that the GOT must continue to liberalize 
and that the European Union (EU) and the International 
Monetary Fund (IMF) should anchor this process.  Greater 
reform of the legal system, as well as greater transparency 
and emphasis on human capital (education) are all crucial to 
Turkey,s future.  Turkey is economically stronger than the 
other countries in the region, but according to Ersin Ozince 
of Isbank, Turkey should be viewed as a part of the larger 
regional picture, albeit a very important part.  (End 
summary). 
 
¶2.     (SBU)   The Treasury group was headed by Deputy 
Assistant Secretary Andy Baukol, who was accompanied by a 
department director and a senior economist.   Istanbul 
interlocutors included Ersin Ozince (CEO of Isbank and 
Chairman of the Turkish Banks Association); Ekrem Keskin 
(Secretary General of the Association); Ferit Sahenk 
(Chairman of Dogus Holding); Cevdet Akcay (lead economist at 
Yapi Kredi) and banker Ilker Domac of Citibank. 
 
CHAIRMAN OZINCE EXPRESSES CONFIDENCE 
¶3.     (SBU)   Istanbul is doing fine, Ersin Ozince declared, 
although Turkey,s culture and vision need to broaden.  "We 
are not worried about the government.  The business and 
financial community will force the government toward 
liberalization."  An IMF deal would be nice, but Ozince is 
not overly concerned.  There will be a "rational" IMF deal, 
but the IMF must also be flexible and view Turkey as part of 
the region.  Such a deal, he believes, is more important 
politically than financially.  In many ways he thinks that 
Turkey is head of its peers.  "Why is Romania rated higher 
than Turkey?", he asks.   "Fortis Bank (in Europe) went bust, 
but Fortis Turkey didn,t."  He also noted that Iraqi and 
Chinese bankers are coming to Istanbul for seminars.  Turkish 
banks are doing fine, though he noted non-performing loans 
(NPL,s) are up.  Ozince mentioned that the Port of Mudanya 
on the Sea of Marmara has benefitted from serious upgrades 
and heavy infrastructure investment.  The entire system will 
be electronically controlled.  This port will do fine, though 
perhaps not all ports will do as well.  An initial planned 
investment of USD 100 million will now take place in slower 
stages, but one third has already been invested.  "There is 
no doubt the economic revival will occur," he declared.  "The 
country and region have to grow."  Ozince is bullish on the 
Anatolian Tigers ("Gaziantep is innovative and 
entrepreneurial"), and he sees great potential for them in 
Northern Iraq and possibly Syria, particularly in textiles 
and machinery.  Turkish firms made inroads into the CIS and 
North Africa, and now are trying to penetrate central Africa. 
 Ozince concedes that after the crisis began there was loan 
contraction in Turkey and a higher rate of NPL,s, but the 
latter rose only from 3.5% to a present level of 4.6%. 
During the 2001 crisis, the NPL rate was more than 25%.  High 
capital adequacy ratios in the banking sector allow more 
leverage.  NPL,s remain low in conservative parts of the 
country such as Van. 
 
¶4.    (SBU)   Ozince believes that construction, tourism and 
agriculture will help to improve employment.  Tourism will be 
okay this year.  Manufacturing is not the solution to 
unemployment, since it is generally not as labor intensive as 
other sectors.  Construction potential in Istanbul is huge, 
with 60% of Istanbul,s building stock sub-standard and in 
need of renovation.   Ozince claims that Turkey has the best 
construction expertise in the region, and noted that most 
airports in the region have been built by Turkish companies. 
In housing, mortgages represent only 5% of GDP, and the 
financial infrastructure for home lending and refinancing is 
still limited, since banking in Turkey is still fairly basic. 
 This will provide a great growth opportunity -- housing is 
growing and will continue to grow. 
 
SOCIAL AND LEGAL INFRASTRUCTURE MUST IMPROVE 
 
¶5.   (SBU)   Ozince maintained that "Turkey must insure 
basic, conventional business and create a functional 
 
marketplace."  The region needs good financial 
infrastructure, although there is a great deal of offshore 
capital.  A better functioning legal system is essential to 
Turkey,s economic future, and Ozince along with some of the 
other interlocutors repeatedly stressed the need for an 
independent tax system and judicial reform.  At present there 
is a large gray area in business, legal and accounting work, 
in part because there are few competent special courts in 
Turkey, and Ozince believes that the EU will continue to be a 
virtuous influence in this arena. 
 
¶6.   (SBU)   Secretary General Keskin said the banking system 
is ready to extend credits to the private sector, but is 
still risk sensitive.  Export unit growth is improving, but 
not price.  Keskin views the public sector as a problem. 
Aggregate demand in Turkey must increase, but there is a 
growing fiscal deficit.  The state should restructure 
expenditures, stop borrowing so much and generate more 
revenue.  "Ideally Turkey should have a higher current 
account deficit (CAD), but one which is more financeable." 
Better revenue collection is necessary.  Keskin describes 
Turkey,s capital markets as shallow, with fixed income 
borrowing  dominated too much by the state, which leads to 
crowding out of private sector borrowing.  The private sector 
wants to see better exports and higher incomes before 
borrowing and investing.   On the plus side, Keskin concurs 
with the popular view that Turkish corporates have enormous 
amounts of offshore capital, some of which has come back to 
Turkey in recent months. 
 
THE CENTRAL BANK SHOULD "MARKET" LOWER RATES 
¶7.   (SBU)   Cevdet Akcay, lead economist for Yapi Kredi and 
one of Turkey,s most refreshing and provocative economic 
analysts, is more bullish on both the United States and 
Turkey than the consensus.  He believes that credit markets 
are slowly improving in the United States, though he worries 
whether there will be greater demand for bank loans in the 
near term, and he thinks U.S. households will have to save 
more.  Akcay believes that growth in Turkey is crucial, and 
sees a 3.2% contraction in growth this year followed by a 
1.4% expansion in 2010. Trend lines show that industrial 
production may have troughed in late 2008 and early 2009, but 
industrial production accounts for only 20% of GDP, and Akcay 
hopes for a pickup in the services sector.  Unemployment will 
remain a problem, but this is a lagging indicator.  "2009 is 
a lost year, but hopefully there will be a primary surplus in 
2010," he noted.  The Yapi Kredi economist is also optimistic 
on inflation and sees it coming down to 5.5% by this summer. 
 He thinks the Central Bank has embarked on an "unannounced" 
policy of restructuring interest rates as inflationary 
expectations have come down, and believes the Central Bank 
should be more transparent and aggressively "market"  a 
regime change in interest rates and inflation.  In addition, 
he thinks that Central Bank reports are too long and 
academic.  It,s okay to do academic research for a specific 
audience, says Akcay, but the daily reports for the general 
public should be "brief and convincing". 
 
¶8.    (SBU)   Akcay sees the Turkish Lira (TL) in a range 
between 1.50 and 1.65, and scoffs at the notion that it will 
depreciate to 1.80 or worse.  "We have run this scenario 
through our econometric models and it simply can,t happen." 
He thinks Turkey should have low interest rates and an 
exchange rate in the 1.60-1.65 range.  Akcay sees only a 
10-15% chance of no IMF deal this year, and thinks Turkey 
qualifies for an FCL (flexible credit line) although it seems 
headed for a  stand-by agreement with the Fund.  Turkey , he 
believes, needs the EU for political monitoring and the IMF 
for fiscal monitoring.  "We need a fiscal roadmap, and I 
trust IMF officials more than GOT officials," he offers, 
though wryly adding that this is hardly a ringing 
endorsement.   European bank exposure to emerging markets is 
extremely worrisome, Akcay believes, and we should really be 
worried about Europe.  There is huge European exposure to 
emerging market debt, and "God help them if that implodes." 
Turkey will feel this if it occurs, but not like Europe. 
 
TURKEY WANTS A PEACEFUL NEIGHBORHOOD 
 
¶9.    (SBU)    Ferit Sahenk, Chairman of Dogus Holding, along 
with three senior executives in his group participated in a 
later discussion.   Sahenk, a self-described "Kemalist and 
CHP supporter," acknowledges that times are changing.  He 
joked that he recently sold a corporate division named after 
a family member, something his father would not have done. 
He stressed the need for vision in Turkey, vision which would 
 
emphasize reform of the legal system, greater transparency 
and investment in education.  Turkey will not be Iran, he 
declares.  "Turkey wants a peaceful neighborhood."   Echoing 
Chairman Ozince,s sentiments,  Sahenk said Turkey should 
continue to "normalize" in the region.  IMF funding is 
fiscally necessary, not just symbolic, but Turkey also needs 
to restructure to make the corporates more competitive.  (See 
para 12 below). 
 
¶10.    (SBU)   Ergun Ozen, president of Garanti Bankasi, 
noted that after the economic crisis in 2001, the banking 
sector became more transparent and most of its business was 
on balance sheet.  This has helped the sector avoid many of 
the debacles that Western banking has experienced in recent 
months.   Rate spreads will help profits in the first half of 
this year, but when that game ends in the second half volume 
will have to pick up based on economic growth.  Garanti Bank 
forecasts a contraction in growth of 5-6% in 2009, and mild 
positive growth in 2010.  Industrial production improved last 
month, but unemployment will be sticky and could go to 20% at 
the trough. 
 
¶11.    (SBU)   Ozen stated that exports are still very 
important in Turkey, and European growth will probably be 
slow.  Dollarization is rising as real interest rates 
decline.  Since Ozen believes that inflation will be higher 
next year, he worries about the longer term trend for 
interest rates.  "How does the Central Bank reverse monetary 
policy?" he asks.   He also echoes Ekrem Keskin,s concern 
about the public sector crowding out private borrowing, since 
the government roll over rate could eventually exceed 100%, 
and public expenditures will continue to grow.   Ozen thinks 
a 4% budget deficit to GDP ratio would be reasonable. 
 
¶12.    (SBU)    Sahenk thinks that Turkish corporates must be 
more efficient, and emphasized the need for investment in 
intellectual capital.  Risk management and feasibility 
studies are not conducted at a high level in Turkey, he 
noted.  "We have engineers but not site managers." 
Government should not be subsidizing the corporate sector, he 
argued.  Sahenk feels strongly that education in Turkey must 
be democratized, and he states emphatically that education is 
America,s greatest export.  If the United States and Turkey 
enthusiastically continue to promote student visas, both 
countries will benefit.  "And," he implored his Treasury 
guests, "please tell your government to resist trade 
protectionism at all costs." 
 
 
                A NOTE OF CAUTION FROM CITIBANK 
 
 
¶13.    (SBU)    Ilker Domac of Citibank was more cautious 
than the other interlocutors on Turkey's near-term prospects. 
 Domac worries that the government is not putting its fiscal 
house in order, and therefore cannot continue to cut interest 
rates, since large corporations in Turkey have a big open 
foreign exchange (FX) position and continued Central Bank 
easing will lead to currency depreciation.   In addition, 
with a roll over rate of public debt of close to 100% he 
fears that government will crowd out private sector borrowing 
just as the private sector's external payment schedule is 
about to increase.  Domac views an IMF deal as essential to 
Turkey's fiscal and economic stability, and ideally would 
like to see an IMF program that restrains current 
expenditures, especially transfers and discretionary 
spending.  The Citibank official thinks that growth this year 
will contract by 4% and that the budget deficit will go to 5% 
of GDP.  He believes that in 2010 Turkey needs a primary 
deficit of at least  2% in order to keep its debt at 
manageable levels. 
 
¶14.    (SBU)    (Comment).    Noteworthy in these discussions 
was that the mixture of bankers, economists and real sector 
executives was basically optimistic about Turkey,s economic 
future, with obvious caveats such as those raised by Ilker 
Domac.   The general theme of these meetings was that if and 
when the global situation stabilizes, Turkey will be well 
positioned to grow.   Consistent with this was the view that 
the United States remains Turkey's strategic partner, with 
the EU and the IMF as crucial institutional monitors. 
"Stabilize Turkey and you stabilize the region,"  Ozince 
notes. 
Wiener