VZCZCXRO1628
RR RUEHDA
DE RUEHAK #0795/01 1561243
ZNR UUUUU ZZH
R 051243Z JUN 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 9834
INFO RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHIT/AMCONSUL ISTANBUL 5832
RUEHDA/AMCONSUL ADANA 3905

UNCLAS SECTION 01 OF 03 ANKARA 000795 
 
DEPT FOR EUR/SE 
TREASURY FOR INTERNATIONAL AFFAIRS - JWEISS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EIND TU
SUBJECT: ERDOGAN UNVEILS NEW INCENTIVE PACKAGES 
 
¶1. (U) Summary: Turkish Prime Minister Tayyip Erdogan 
unveiled a new set of incentive and employment packages 
on June 4.  Erdogan said that because of the global 
downturn, employment and industry have been negatively 
affected, but that the impact of the crisis was limited 
by the strong banking sector and the GOT's fiscal 
discipline since 2002. Under the new incentive package, 
Turkey will be divided into four regions and 12 
industrial sectors will be prioritized.  Investments in 
certain regions or priority industries will receive 
varying degrees of incentives such as tax rate cuts, 
social security premium supports and subsidized loans. 
Small and Medium Enterprises (SMEs) will be supported 
through a credit guarantee fund, which was recently 
fortified with an additional USD 1 billion.  In the 
employment package, the GOT aims to provide short-term 
solutions before implementing long-term remedies to the 
problem.  Erdogan also noted that discussions with the 
IMF continue.  Businessmen, economists, and analysts 
welcomed the packages, but questioned the wisdom of 
incurring a high budget burden when fiscal balances are 
deteriorating sharply.  End Summary. 
 
 
¶2. (U) Turkish PM Recep Tayyip Erdogan announced the 
long-awaited incentive and employment packages on June 4. 
Erdogan said that the impact of the global crisis had 
been mitigated by Turkey's sound banking sector and the 
GOT's fiscal discipline since 2002. He described the 
packages as collaborative efforts between the GOT and 
business NGOs such as TOBB (Turkish Union of Chambers and 
Commodity Exchanges) and TUSIAD (Turkish Industrialists 
and Businessmen Association).  The packages aim at 
supporting investment, decreasing regional economic 
disparities and increasing employment.  Erdogan stressed 
during his speech that the government has so far provided 
a total stimulus of about TL 54 billion (USD 36 billion), 
which will be used through 2009 and 2010. He also noted 
that the new incentive scheme will add another TL 6 
billion (USD 4 billion), bringing the total stimulus 
introduced so far to TL 60 billion (USD 40 billion). 
Erdogan underlined that the exact fiscal cost of these 
packages may vary depending on the number of applications 
for assistance.  According to early press reports, the 
total cost of the new package was estimated to be around 
TL 3.1 billion. 
 
Incentive Package 
----------------- 
 
¶3. (U) The incentive package will apply to new investment 
projects in three categories: 
 
-- large scale investment projects (in excess of TL 250 
million); 
 
-- regional investments (Turkey is divided into four 
regions); and 
 
-- sector-based investments in twelve identified priority 
industries (electronics, chemicals, energy, 
transportation, automotive manufacturing, infrastructure 
investments for railroads and port services, healthcare, 
pharmaceuticals, machinery, aviation manufacturing, and 
mining). 
 
¶4. (U) The incentive scheme will divide Turkey into four 
regions, each of which will receive different benefits. 
 
-- The first will cover Istanbul and its environs.  In 
this zone, high technology sectors (motor vehicles, 
electronics, pharmaceuticals, machinery) will benefit 
from a reduction of the corporate tax rate to 10 percent 
and reduced social security premium contributions for two 
years. 
 
-- The second region, which covers most of central 
Anatolia and coastal Turkey, will receive support for 
technology investments (machinery, non-metallic minerals, 
technical textile, food & drink, paper) through reduction 
of the corporate tax rate to 8 percent and reduced social 
security premium contributions for 3 years. 
 
-- The third and fourth zones cover East & Southeast 
Turkey, where labor-intensive sectors (agriculture, 
textile, clothing, leather, plastics, tourism, health, 
 
ANKARA 00000795  002 OF 003 
 
 
education) will receive a reduction of the corporate tax 
rate to 2-4 percent, and reduced social security premium 
contributions for 5-7 years. 
 
In addition to these incentives, companies that transfer 
their existing operations of more than 50 employees in 
the textiles, clothing and leather sectors from the first 
two regions to Eastern or Southeastern Turkey will 
receive an additional tax rate cut, a social security 
premium payment exemption for a five-year period, and GOT 
logistical support.  These incentives will be provided 
for new investments through the end of 2010. 
 
Employment Package 
----------------- 
 
¶5. (U) The employment package aims to curb the sharp rise 
in unemployment, which hit 16.1% in March, by creating 
temporary employment and training or retraining the 
unemployed. Among the measures, the public sector will 
hire 120,000 temporary workers for six months to provide 
public services, and the GOT will finance six-month 
internships for 100,000 people and vocational training of 
200,000 more. 
 
¶6. (U) Erdogan noted that the government is still 
studying a more comprehensive employment creation remedy 
package for long-term solutions.   Half a million people 
are expected to benefit from the system at a cost of TL 1 
billion by end-2010, and these costs will be financed by 
the Unemployment Insurance Fund. 
 
Credit Guarantee Fund for SMEs 
------------------------------- 
 
¶7. (U) A Credit Guarantee Fund for SMEs will insure 65 
percent of the loans provided by banks to SMEs over two 
years; the remaining 35 percent of the risk will be borne 
by the banks.  The Treasury will transfer TL 1 billion to 
the Credit Guarantee Fund and this guarantee is expected 
to sustain a total loan amount of TL 10 billion. 
 
Analyst and Press Reactions 
--------------------------- 
 
¶8. (SBU) Guldem Atabay, Chief Economist from Ekpres 
Invest said that the measures announces sound positive if 
they can be implemented.  Hikmet Tanriverdi, President of 
the Istanbul Ready-Wear Exporters Association, said that 
while he thinks the new incentive package is a positive 
step, it is not realistic to pick up and move the textile 
industry to the east and southeast in the short term. 
Tanriverdi also noted that employment creation package 
lacked direct remedies for the labor-intensive textile 
sector, which the industry had been hoping would be 
included.  Baturalp Candemir, Chief Economist from EFG 
securities, observed that the new investment incentive 
scheme seems well-conceived to deal with short-term 
problems and compatible with Turkey's medium and long- 
term economic vision.  Candemir thinks the IMF reaction 
to the budgetary implications will be limited due to the 
Fund's long-term focus, but worries that the scheme will 
increase the Turkish Treasury's borrowing needs.  On the 
unemployment package, Candemir was also concerned that 
some corporations may be inclined to lay off unqualified 
workers and replace them with government-funded interns 
at a cheaper cost. 
 
¶9. (U) Public statements echoed these private sentiments, 
but tended to be more critical of the plan.  TUSIAD 
President Arzuhan Yalcindag noted that without an IMF 
deal the government will fund this package through 
domestic borrowing, which will squeeze out the private 
sector and reduce growth.  Istanbul Chamber of Industry 
Chairman Tanil Kucuk said that the private sector "longed 
for more powerful measures" and lamented the lack of 
financial support for industry.  Diyarbakir Chamber of 
Commerce Chairman Galip Ensarioglu criticized the lack of 
incentives for the mining sector. 
 
¶10. (SBU) Comment: The new package could help alleviate 
some of the real sector's pain and lead to increased 
demand, but the effect is likely to be muted.  The main 
drawback is that the government has not discussed the 
fiscal implications of the new stimulus package.  The 
deterioration in fiscal balances has been significant and 
 
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without IMF funds the government will have to lean 
heavily on domestic markets to finance the budget deficit 
(heading towards 6 percent of GDP this year, up from just 
over 1 percent in 2008). According to most analysts, the 
best platform to bolster the GOT's fiscal credentials 
would be an IMF stand-by program, a move that is 
especially important with the GOT's domestic debt 
rollover at close to 120 percent.  During his remarks, 
Erdogan reiterated that the IMF is not a "must" for 
Turkey and that they will not cave into "politically- 
motivated demands of the IMF", while adding that talks 
would continue until the end of June.  Unless the GOT is 
able to come to terms with the IMF or convince other 
investors to finance the budget gap, the negative effects 
of the fiscal deterioration and the crowding out of 
private sector borrowing may offset any positive gains 
from the new incentive structure.  End comment. 
 
SILLIMAN