US embassy cable - 04ANKARA3585

UNCLAS SECTION 01 OF 03 ANKARA 003585 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SE, AND EB/IFD 
TREASURY FOR OASIA - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, TU 
SUBJECT: UNEVEN GROWTH IN THE REAL ECONOMY 
 
 
This is a joint Embassy Ankara-Consulate Istanbul-Consulate 
Adana cable. 
 
1. (Sbu) Summary:  Despite relatively strong GNP growth, 
local 
economists and businesspeople paint a mixed picture for 
Turkey,s real economy, with surging sales in interest-rate 
sensitive sectors like autos, white goods, and televisions, 
but a less rosy picture in labor-intensive sectors like 
textiles and particularly, construction.   Even in some 
of the strongest sectors, sales growth is stronger than 
profit growth.  Growth also appears to be stronger among 
large companies and among the larger cities of western 
Turkey.  Though there are signs of a resurgence of domestic 
consumption, it is unevenly distributed across sectors, and 
many companies continue to rely heavily on export growth. 
Job creation and investment still lag. End Summary. 
 
2.  (Sbu)  Despite strong GDP growth numbers--5.8 percent 
in 2003 and an expectation of about 5 percent in 2004--many 
business contacts continue to tell emboffs that business is 
not so good.  Embassy Ankara, Congen Istanbul, and Consulate 
Adana have sought out economists, businesspeople and business 
groups to ask their views on the state of the real economy. 
 
Surging Interest-Rate Sensitive Sectors: 
--------------------------------------------- ----- 
 
3. (Sbu) Auto sales are up sharply.  According to TOBB, the 
union of Turkish chambers of commerce, in 2003 domestic car 
sales increased 130%, production increased by 54%,  and 
exports increased by 34% .  April 2004 car sales were the 
highest ever recorded in Turkey.  According to press reports, 
January-April auto sales totaled 244,000, or 61 percent of 
the 2003 total.  Renault and Toyota have announced 
investments 
in new capacity: a rare occurrence in other sectors.   Ergun 
Okur, an executive at Renault,s partner, Oyak, told 
econoffs that Renault had decided to make Turkey the lead 
European platform for production of its Clio model. 
 
4.  (Sbu)  In addition to the $7 billion in 
auto exports in 2003, the automotive supply industry 
exported $3 billion in 2003 and seems to be a growth area. 
Zafer Yavan, Ankara Representative of the 
Turkish Industrialists, Association (TUSIAD), told econoffs 
that autos and auto supplies combined represent about 30 
percent of industrial production, of which only about half 
consists of autos.  Birol Aydemir, Deputy Undersecretary 
at the State Planning Organization, noted the importance 
of the shift in the composition of exports from a reliance on 
textiles to higher-value-added autos and electronics. 
 
5. (Sbu) An Istanbul business consultant and Mehmet Hizal, 
Sales Director at white goods manufacturer Profilo-Bosch, 
considered 
higher purchases of cars and white goods as distinct from 
broader 
consumer demand.  They argued that the recent decline in 
interest 
rates had led well-to-do consumers to begin to shift from 
financial 
investments to purchase of cars and white goods(kitchen 
applicances, washers and dryers). 
 
Lower Interest Rates and Aggressive Consumer Credit: 
--------------------------------------------- ------ 
 
6. (Sbu) The growth in durables sales is widely 
attributed to the substantial decline in interest rates 
over the past year and a more aggressive lending posture to 
consumers, as banks strive to replace shrinking government 
securities revenues.  Turkish consumers are taking advantage. 
 
State banks contributed to this newfound consumer borrowing 
appetite by offering below-market rates, but have now been 
reined 
in to conform with the IFI-required state bank privatization 
strategy. 
 
Signs of broader revival of domestic consumption and 
company sales: 
--------------------------------------------- ------- 
 
7. (Sbu) There are signs of a broader, if less spectacular, 
revival in domestic consumption and company sales growth. 
Industrial production in the first four months of 2004 
increased 14.3% compared to the same period last year. 
Central Bank 
Vice-Governor Sukru Binay told econoffs that checks 
in circulation--a leading indicator of business activity--had 
increased 
substantially.  Several contacts reported higher supermarket 
sales: 
a 20% rise at Carrefour and a 28% rise at the more widespread 
Migros chain. 
 
Geographic and Income Distribution of Growth: 
--------------------------------------------- 
 
8.  (Sbu) There are signs of an income and geographic 
skew in the distribution of the growth.  Though 
Okur claimed that the growth in car sales was nationwide, 
he admitted that sales growth was weaker in the 
depressed Black Sea region, a comment echoed by Profilo's 
Hizal. 
Okur pointed out that greater Istanbul accounts for 40 
percent of the economy, such that it always has a 
disproportionate 
impact. 
 
9.  (Sbu) TUSIAD,s Yavan said that the current recovery is 
following the typical Turkish pattern of starting off with 
the larger companies in greater Istanbul, Izmir, and Ankara 
and gradually flowing to smaller businesses in Anatolia. 
Access to affordable credit is a key factor: he noted that 
the 
very large conglomerates own banks, and that a broader group 
of large corporates can borrow in much lower-interest rate 
foreign exchange, whereas small business face 
the hurdle of uneconomic real interest rates on lira loans. 
 
Mixed picture in textile sector: 
-------------------------------- 
 
10.  (Sbu)  The large textile sector is not among those 
showing 
strong growth.  Contacts agreed with press reports that 
inexpensive Chinese exports are hurting Turkish textile 
companies 
in the domestic market, and that the prospect of an end to 
textile quotas 
in 2005 was daunting for exporters.  However, several 
contacts believed 
Turkish textile companies could remain competitive because of 
their 
post-crisis restructurings and labor productivity gains, and 
their 
moves into competitive, higher-quality niches. 
 
Construction sector still moribund: 
----------------------------------- 
 
11. (Sbu) Although fourth quarter 2003 GNP data show the 
construction sector beginning to grow for the first time in 
years, key contacts told us the sector is unlikely to grow 
much in the near future.  Emin Sazak, 
Vice-Chairman of one of Turkey,s largest construction 
companies, Yuksel, told econoff he saw no prospect of 
revival in the domestic market in 2004 or even 2005. 
Executives from large construction companies active in 
Southeast Turkey told Consulate Adana personnel that 
construction is flat, and any small profit is from 
Iraq-related business.  Both Sazak and Oyak,s Okur 
attributed this situation to public investment having 
been cut to the bone, and to the continued absence of 
financing at long enough maturities to spur growth in 
the housing market.  Cement prices have nearly doubled since 
their 2001 lows, but this may have more to do with exports 
than domestic demand. 
 
The export lifeline: 
----------------------- 
 
12. (Sbu)  Because of the uneven growth of domestic 
consumption, many sectors rely on export sales, which 
grew 27.9 percent in the first quarter of 
2004, compared to first quarter 2003. Auto exports for 
January-April 2004 were up 38 percent, according to press 
reports.  In the moribund construction sector, foreign 
contracts are the name of the game for Turkish companies 
like Yuksel.  Oyak,s Okur said the silver lining for 
cement companies has been sales to Iraq, Syria, and Iran. 
TOBB notes that Turkey remains the second largest textile 
supplier to the EU after China.  The Economist magazine,s 
recent claim that, on the basis of its "Big Mac" index, 
the lira is 11 percent undervalued versus the dollar, which 
may help explain the continued strength of exports. 
 
Job Creation and Investment Still Lag: 
--------------------------------------------- ----- 
 
13.  (Sbu) Contacts, press reports and the available data 
are virtually unanimous that the revival of growth have yet 
to translate into significant investment or job creation. 
Oyak,s Okur pointed out that even his group,s 
successful auto operation was able to go from 110,000 
to 200,000 per year production without hiring.  He said his 
group, like many others laid off staff after the crisis 
but retained some in the hopes of a later revival in sales. 
Outside the auto and steel sectors, there is little evidence 
that companies have begun to invest much, given 
the poor investment climate.  Okur cited the continued high 
real interest rates on government securities, crowding out 
other investments. 
 
Conclusion: 
---------- 
 
14. (Sbu)  Although it is uneven, Turkey,s real economy is 
clearly 
experiencing growth.  Some Istanbul analysts have recently 
said they are considering upping their forecasts for 2004 
growth to around 6%.  However, many business people remain 
less 
than enthusiastic, either because of disparities across 
sectors, 
or because profit growth is not as strong as sales growth. 
Contacts cited competition squeezing margins in supermarkets, 
autos, and white goods, for example. Okur also cited a 
psychological 
dimension to businesses, lack of enthusiasm: having 
experienced 
astronomic nominal sales growth in the past, business people 
have 
trouble getting excited about nominal sales growth of only 20 
or 30 percent. 
 
EDELMAN 
EDELMAN