US embassy cable - 04ANKARA1926

UNCLAS SECTION 01 OF 02 ANKARA 001926 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD, EUR/SE 
TREASURY FOR OASIA - JLEICHTER AND MMILLS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, TU 
SUBJECT: STRONGER THAN EXPECTED 2003 GDP GROWTH; MIXED 
VIEWS ON 2004 
 
 
1. (SBU) Summary: Final numbers released March 31 show 
Turkey's GNP grew 5.9 percent in 2003, well above the market 
consensus forecast of 5.2 percent. For 2004, there is a 
significant divergence of views among Turkish economists -- 
both inside and outside the GOT -- with some forecasting 
growth as low as 4 percent and others more bullish. End 
Summary. 
 
 
Statistical Agency announces higher-than-expected 2003 
growth... 
--------------------------------------------- ------ 
 
 
2. (U) On March 31, the State Statistical Agency announced 
final 2003 GDP and GNP growth rates of 5.8 and 5.9 percent, 
respectively. With the market consensus for GNP at 5.2 
percent and the target under the IMF program only 5.0 
percent, the announced growth rates were a positive surprise. 
Strong fourth quarter growth rates of 6.1 and 7.2 percent for 
GDP and GNP caused the full-year numbers to come in higher, 
led by strong growth in the industrial and non-construction 
services sectors. 
 
 
...Especially in the Industrial Sector and the Trade 
Component of Services: 
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3. (SBU) Within the sectoral breakdown of growth data, the 
industrial sector, along with services trade, showed the 
strongest fourth quarter growth, with each enjoying a 9.2 
percent increase over fourth quarter 2002.  Although 
construction declined 9.0 percent for the full year, it grew 
1.3 percent in the fourth quarter, suggesting that this 
hard-hit sector may finally be emerging from its downturn. 
Although a growing current account deficit served as a drag 
on growth, the continued strength of exports -- despite the 
strong Lira -- prevented trade from weighing down growth even 
more. 
 
 
4. (SBU) Istanbul-based Deutsche Bank economist Tefvik Aksoy 
was among the more bullish -- and, therefore, accurate -- 
forecasters of fourth quarter 2003 growth, with a 5.8 percent 
prediction. In a meeting with econoff March 26, Aksoy made 
the case that the export sector was not as badly hurt as one 
might expect because many exporters' inputs are Asian-sourced 
and dollar-denominated, whereas these companies' sales to 
Europe are Euro-denominated. Although the Lira has 
appreciated against the Euro as well as the dollar, it has 
appreciated substantially more against the latter. Though 
Aksoy said the overvaluation of the Lira was comparable to 
pre-crisis 2000 levels, there has been a 30 to 35 percent 
gain in labor productivity which has acted as a brake on the 
deterioration of the trade balance. Aksoy also said that Iraq 
has been wonderful for Turkey's leading white goods and 
electronics producers, Beko, Arcelik, and Vestel. 
 
 
Local Economists' Mixed Views on the 2004 Growth Outlook: 
--------------------------------------------- ------ 
 
 
5. (SBU) In recent meetings with us, senior GOT economic 
technocrats, Treasury U/S Ibrahim Canakci, State Planning 
Organization U/S Ahmet Tiktik, and his Deputy Birol Aydemir 
all were predictably optimistic on growth. Aydemir even went 
so far as to worry about overheating, saying he had disagreed 
with the IMF on the issue, and citing a 170 percent increase 
in consumer loans in 2003. Tiktik (like most private 
economists) was less worried about overheating, though he 
noted a surge in consumer credit-financed consumer goods 
purchases with a high import content -- a potential drain on 
growth. On the other hand, he predicted a strong year for the 
important agricultural sector, which tends to be strong in 
alternate years and is due for a good year in 2004. The data 
seem to support Tiktik: the Agriculture component of GNP 
shrank 2.5 percent in 2003, following a 6.9 percent increase 
in 2002. 
 
 
6. (SBU) In meetings with private economists in Istanbul 
March 26, growth expectations were more of a mixed bag. 
Deutsche Bank's Aksoy and Citigroup's Olgay Buyukkayali 
tended more to the bullish side. Buyukkayali even 
acknowledged that Aydemir's concerns about overheating had a 
theoretical basis, but were probably premature. Buyukkayali, 
like Aksoy, accurately predicted the strong 2003 GDP growth 
figure, and forecast 2004 growth in line with the program 
target of 5 percent. 
 
 
7. (SBU) There are some bears, however. Murat Ucer of 
Eurosource, a former IMF staffer and one of the few private 
economists not affiliated with a financial institution, 
expects growth of only 4 percent in 2004, well below the IMF 
program's 5 percent target and at a level unlikely to produce 
any growth in employment. Ucer bases his pessimism on the 
base effect of stronger growth in 2003 and on the absence of 
investment. He and his colleague Atila Yesilada were 
pessimistic about medium-term growth because of the absence 
of structural reforms and the inability of the Turkish 
leadership to recognize that they were in a global race and 
needed to take radical action about things like expanding 
English language instruction and computer usage, and finding 
a way to reduce tax rates. 
 
 
8. (SBU) Likewise, Sinan Gumusdis of JP Morgan/Chase told 
econoff March 26 that Morgan's economists had recently 
downgraded their 2004 growth forecast from 5 percent to 4.5 
percent. Gumusdis believes that some of the recent growth 
derived from pent-up demand from the crisis period which is 
likely to lessen in 2004. John McCarthy of ING Barings, an 
American banker with long experience of Turkey, told 
econcouns he did not see any surge in consumer demand. 
Earlier, Birol Aydemir of State Planning said the lack of 
increased domestic consumption is a result of the GOT's 
restrictive incomes policy under its tight fiscal policy. 
That's why, according to Aydemir, it was so critical that the 
private sector increase investment, a prospect about which 
McCarthy was notably pessimistic, pointing out that some 
foreign companies in Turkey, such as ING, were actually 
disinvesting. 
 
 
Unemployment Worries: 
--------------------------------------------- ------ 
 
 
9. (SBU) While the better-than-expected growth numbers are 
encouraging, the mixed views on the growth outlook contrast 
with a pessimistic consensus on employment issues. Across the 
spectrum of economists and bankers, worries about 
unemployment and underemployment abound. Aydemir noted the 
"social risk" arising from very high rates of unemployment 
(25 percent) among educated young people. Gumusdis did not 
foresee a pick-up in employment. Yesilda also noted that two 
or three million Turks work for only $100 or $200 dollars a 
month. At this income level, "they only eat" and can't spend 
any money on durable goods. Separately, a survey conducted by 
TESEV, the Turkish Foundation for Economic and Social 
Studies, indicated that unemployment has replaced inflation 
as the public's most important concern, though it also found 
Turks more optimistic about economic progress than in the 
past three years. 
 
 
10. (SBU) Comment: One wild card on growth is Iraq. Data 
indicates Turkish exports to Iraq are surging, and we see 
significant anecdotal evidence that Iraq,s reconstruction 
will be a boon to the Turkish economy. It is hard to predict 
how much Iraq will contribute to Turkish growth in 2005, but 
little doubt the impact will be positive. 
EDELMAN