Cablegate: Turkish Business Leaders Express Optimism In

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DE RUEHIT #0167/01 1350544
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P 150544Z MAY 09
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8944
INFO RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
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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

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