US embassy cable - 04ISTANBUL356

UNCLAS SECTION 01 OF 02 ISTANBUL 000356 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, TU, Istanbul 
SUBJECT: EXECUTIVES HIGHLIGHT BUOYANT STOCK MARKET BUT 
LAGGING INVESTMENT IN MEETINGS WITH AMBASSADOR 
 
 
Sensitive but Unclassified - not for internet distribution. 
 
 
1. (SBU)  Summary: In meetings with Ambassador Edelman on 
February 26, executives at the Istanbul Stock Exchange (ISE) 
and Foreign Investors' Association (YASED) focused on two 
extremes of Turkey's current economic performance: the 
buoyant stock market, which has risen 80 percent over the 
last year, and Turkey's continued failure to attract foreign 
investment.  ISE leaders attributed positive market sentiment 
to increasing portfolio investment, lower interest rates, and 
the rising profits of ISE-traded companies, suggesting that 
continued commitment to Turkey's IMF program and structural 
reforms will further boost the market.  YASED President Saban 
Erdikler, however, criticized the government for its failure 
to move more aggressively on one key reform: improving 
Turkey's investment environment.  Since November 2003, he 
argued, nothing "tangible" has been done to attract foreign 
direct investment, in part due to the "stronger than 
expected" resistance of the Turkish bureaucracy.  End Summary. 
 
 
2. (SBU) A Rising Market: In their meeting and lunch with 
Ambassador Edelman, ISE Senior Vice Chairman Aril Seren and 
Vice Chairman Huseyin Erkan stressed that Turkey's improving 
economic fundamentals have positively impacted the exchange. 
Falling interest rates, reduced inflation, and strong growth 
in 2003 led to a considerable increase in trading volume, as 
compared with the crisis year of 2001 and 2002.  Companies 
traded on the ISE, they noted, recorded a notable 176 percent 
jump in profits in 2003.  In addition, the strong Turkish 
lira and increased political and economic stability attracted 
portfolio investments from outside Turkey.  Interestingly, 
they argued that the bulk of this inflow was likely savings 
held outside the country by Turkish investors.  Although the 
exact amount is not known, they estimated that such external 
savings may be as high as 150 billion USD.  Seren added that 
decreasing profit margins in government papers due to lower 
interest rates makes the ISE more attractive for investors. 
Recent Capital Market Board decisions to make dividend 
payments compulsory and to apply international accounting 
standards further enhance the ISE's advantages as an 
investment alternative. 
 
 
3. (SBU) Room to Grow:  Seren and Erkan added that they 
believe there is still potential for a further rise in the 
exchange since company price/earnings ratios are still at 
reasonable levels.  Erkan added that the ISE's recent rise 
essentially represents recovery from 2001 and 2002's low 
levels.  Seren said they expect more IPO's in 2004 as trade 
volume grows.  The recent IPO of the Fenerbahce Football Club 
was very successful and encouraged other companies to follow 
suit.  Both executives agreed that a solution to the Cyprus 
conflict by May this year and a positive message from the 
European Union at the end of 2004 are critical for the 
Turkish economy and for healthy growth at the ISE. 
 
 
4. (SBU) No Investment: Less optimistic, however, was the 
prognosis of the leadership of the Foreign Investors' 
Association (YASED).  Ambassador Edelman voiced his concern 
about the low level of direct foreign investment that Turkey 
receives despite its high potential and need, particularly in 
the energy, tourism, and transportation sectors.  He noted 
that Turkey's current FDI level of 400 million USD is far 
from adequate, a point YASED President Erdikler seconded. 
Erdikler argued that Turkey must target an annual FDI level 
of 30 billion by 2008. 
 
 
5. (SBU) Bureaucratic Resistance: Erdikler stressed that 
while YASED was initially encouraged by the AK government's 
commitment to improving the investment climate, and by the 
personal commitment of individual members of the government 
to investment issues, resistance by the Turkish bureaucracy 
had prevented any real improvement over the last year and a 
half.  He said YASED is disappointed by the recent lack of 
determination of the government, and was critical of the 
failure to keep pushing ahead to complete the remaining 
regulations concerning the investment environment. 
 
 
6. (SBU) March Investment Conference: Erdikler echoed his 
recent public criticism of organization of the mid-March 
Turkey Investment Promotion Conference, noting that the 
government had not coordinated with NGO's.  Only 16 
executives of major multinational companies responded, of 
whom 12 are CEO's.  YASED will take part in the conference 
and support the cause, he said, but he added that it will not 
be easy to convince executives to invest in Turkey at a time 
when Turkey cannot demonstrate success in resolving the 
problems of past investors.  The difficulties of Motorola, 
Nokia, and Cargill are closely followed by potential 
investors, he noted, as are IPR concerns, particularly those 
relating to pharmaceuticals. 
 
 
7. (SBU) Continuing Needs: Erdikler conceded that some steps 
have been taken by the AK government, including simplifying 
investment and company registration procedures.  Much remains 
to be done, however, including restructuring of the judicial 
system to meet the needs of the business community, and 
transparency in public services to establish confidence in 
the rule of law.  Erdikler added that long-term political and 
economic stability is the most critical factor for investment 
and agreed with his ISE counterparts that Turkey must both 
continue working with the IMF to complete needed structural 
reforms and with the EU to complete political preconditions 
for EU negotiations. 
 
 
8. (SBU) Comment: Erdikler's disappointment is shared in 
other quarters, including domestic industry.  Istanbul 
Chamber of Industry President Tanil Kucuk echoed many of 
Erdikler's points in an eloquent address to the chamber's 
general assembly at the end of January, arguing that 2003 was 
"not put to good use" on the structural reform front. 
Seconding Erdikler's point about Turkey's need for 
investment, he warned that key indicators still remain below 
their 1997 levels, and that only new investment will permit 
Turkey to exceed them, as the economy has exhausted its 
ability to expand through productivity growth and increased 
capacity utilization.  End Comment. 
ARNETT