US embassy cable - 03ISTANBUL796

UNCLAS SECTION 01 OF 02 ISTANBUL 000796 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU, Istanbul 
SUBJECT: EXPORTS REMAIN STRONG, BUT LIRA WORRIES PERSIST 
 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
 
1. (SBU)  Summary: New figures released by the Turkish 
Exporters Assembly (TIM) on June 2 show that Turkey's 
exporters withstood the challenge of a strengthening lira and 
set a new monthly export record of USD 3.9 billion in May, a 
30.7 percent increase over 2002.  For the year ending May 31, 
exports were USD 40.7 billion, up 28 percent from the 
previous 12 month period.  Meanwhile, however, declining 
tourism revenues and an even sharper pickup in imports led 
the GOT to revise its 2003 current account deficit projection 
from USD 3.7 billion to 6.1 billion.  Exporters warned too 
that the appreciating lira threatens their competitiveness 
and added their voice to calls on the Central Bank for a 
decline in interest rates and more consistent exchange rate 
policy.  Central Bank officials counter that continued low 
unit labor costs and productivity increases are keeping 
Turkish exports competitive, and that exporters are focusing 
excessively on the lira-dollar rate, which--for trade 
purposes--is much less important than the lira-Euro rate, 
where the lira's appreciation has been much smaller.  End 
Summary. 
 
 
2. (SBU) A new record: The statistics unveiled June 2 in 
Istanbul show Turkish exports moving from record to record, 
with April's USD 3.74 billion giving way to May's 3.916 
billion, despite the lira's appreciation.  For the first five 
months of the year exports were USD 17.9 billion (versus 
13.36 billion in the same period last year), while for the 
last twelve months they totalled USD 40.7 billion.  The 
record was paced by sharp gains in exports of textiles (up 
28.6 percent to USD 993 million) and automotive products (up 
48.4 percent to USD 596 million). 
 
 
3. (SBU) But a widening deficit: Even with the export record, 
however, the GOT also moved on June 2 to revise Turkey's 
projected 2003 current account deficit up to USD 6.1 billion. 
 While projected exports were revised up to 40.6 billion from 
39.4 billion, even more quickly growing imports and a 
projected decline in tourism revenues (though of a lesser 
magnitude than was predicted earlier in the year) account for 
the widening gap.  In announcing the shift, State Minister 
Babacan also pointed to the impact of the strong lira and 
what he characterized as strong private sector demand. 
 
 
4. (SBU) Statistical Anomolies: While a welcome and positive 
development, commentators argue that the headline export 
figure is not necessarily as impressive as it first appears. 
Given that the bulk of Turkey's exports (nearly 66 percent) 
goes to the European Union and is priced in Euros, "Sabah's" 
Abdurrahman Yildirim noted, a portion of the January-May 
increase (perhaps as much as a quarter by our rough 
calculations) stems from the Euro's increase in value against 
the dollar. 
 
 
5. (SBU) Shoals Ahead: In announcing the May figures, TIM 
Chairman Oguz Satici warned that notwithstanding the positive 
results of the last five months, export growth is becoming 
unsustainable because of the appreciating lira.  May's 
figures, he said, reflect orders placed in the first three 
months of the year, while currently exporters are coming to a 
situation where they "cannot accept orders" because the 
appreciating exchange rate does not permit them to accurately 
predict costs and income, and consequently prices.  Arguing 
that the current rate serves the interests of "rentiers" and 
not the real economy, he called for an exchange rate "in the 
same line as inflation and input costs," and warned the 
Central Bank that "those who avoid responsibility even though 
they have authority will be called to account." 
 
 
6. (SBU) Comment: Central Bank officials question exporters' 
arguments.  First, they point out that, while the lira-dollar 
exchange rate is important in financial markets, the 
lira-Euro rate is much more significant for trade.  Although 
the lira has appreciated against the Euro, its rise has been 
much more modest than against the dollar.  Furthermore, 
imported inputs for exports tend to be priced in dollar 
terms, so the lira's appreciation against the dollar is not a 
complete negative for exporters.  In addition, these 
officials point out, Turkish exporters continue to benefit 
from low unit labor costs, which still have not recovered 
from the 2001 crisis, and from rising productivity.  End 
Comment. 
 
 
 
 
ARNETT