US embassy cable - 03ISTANBUL1068

UNCLAS SECTION 01 OF 02 ISTANBUL 001068 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, AND EB 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR QUADRUD AND BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, TU, Istanbul 
SUBJECT: NEW STUDIES HIGHLIGHT FRAGILE RECOVERY 
 
 
 1.  Sensitive but Unclassified.  Not for internet 
distribution. 
 
 
2. (U) Summary:  Two new national surveys of Turkish 
companies highlight signs of recovery from the devastating 
financial crisis of 2001.  The studies, carried out 
separately by the Istanbul Chamber of Industry (ISO) and the 
Islamic-influenced Independent Industrialists' and 
Businessmen's Association (MUSIAD), show a modest recovery, 
led largely by growth in exports.  ISO Chairman Tanil Kucuk 
stressed in announcing his organization's survey of the 
country's top 500 industrial companies that Turkey has 
benefited from booming exports but has much work to do to 
achieve "sustainable" economic growth. Though the study 
showed that Turkish industry returned to profitability in 
2002, he warned that recent headline growth figures in GNP 
(at 7.8 percent for 2002 and 8.1 percent in this year's first 
quarter) exaggerate the economy's strength and are "too good 
to be true."  End Summary. 
 
 
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Turkey's Industrial 500 
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3. (U) Return to Profitability: The annual ISO study provides 
an authoritative snapshot of Turkish industry.  Overall, the 
industrial sector's share in GNP increased to 25.6 percent in 
2002 from 23 percent the previous two years, with the top 500 
companies accounting for 53.9 percent of that total (13.2 
percent of GNP).  Sales of the top 500 companies grew 5.8 
percent in real terms over 2001, with four-fifths of the 
companies registering a profit for the year, for an overall 
profit level of 5.7 percent (versus a 0.5 percent loss for 
the 500 companies in 2001).  Sales and profits were largely 
export driven, with the 500 achieving a 17.3 percent increase 
in exports, for a total of 17.3 billion USD, 49.5 percent of 
the country's total exports.  Other key factors in increasing 
profitability were decreasing labor costs (which took only 27 
percent of sales revenue in 2002, versus 34 percent in 2001), 
lower interest rates, and decreasing rent.  While the ratio 
of "other revenues" (interest earnings, real estate sales, 
and earnings from foreign currency exchange) over earnings 
from core operational activities was 114 percent in 2002 (it 
has been over 100 percent since 1999), it declined 
significantly from its level of 547 percent in 2001.  The 
decline reflects a significant shift by firms back towards 
their core activities, a trend that should be reinforced in 
coming years if real interest rates and inflation continue to 
decline. 
 
 
4. (U) Public vs. Private: The survey also provides a useful 
breakdown of state ownership in the industrial sector.  While 
Turkey's two largest industrial concerns, the state refinery 
Tupras (slated for privatization this year) and Electricity 
Production Ltd. (EUAS) are state-owned (with sales quadruple 
and double the next largest companies, respectively), overall 
only 30 of the top 500 companies are in the state's hands. 
While private sector exports boomed in 2002, public sector 
industrial exports dropped from 1.2 billion USD to 972 
million USD.  Employment figures show that the IMF program is 
having an effect: the three largest employers on the list 
(TEKEL, Turkish Sugar Factories, and the Turkish Coal Mining 
Companies) are state owned, but overall employment in public 
sector companies fell 21.86 percent from 178,005 to 139,102. 
Private sector industrial employment rose 5 percent to 
365,694.  The increased efficiencies resulting from the cuts 
brought an impressive turnaround in profitability for public 
sector companies, from negative 6.1 percent to plus 8.3 
percent.  Private companies also saw increasing 
profitability, though the rise was more modest, with 
profitability reaching 5.1 percent in 2002 from 1.3 percent 
in 2001. 
 
 
5. (U) Winners: Koc Holding remains Turkey's largest private 
industrial group, with 19 companies in the top 500, and five 
in the top 10 private companies.  Koc leads in all areas, 
including total sales, profits, exports, and employment. 
With group sales of 4.85 billion USD, the holding accounted 
for 9 percent of total sales and 11 percent of total private 
sector sales among the top 500.  The country's second largest 
holding, the Sabanci group, has 15 companies in the top 500, 
but in a reflection of its increasing orientation towards 
financial services, has no companies in the top 10 private 
companies for either overall sales, exports, or profits. 
 
 
6. (U) Words of Warning: In his public comments announcing 
the survey results, ISO President Tanil Kucuk noted that 
conditions are generally improving, but stressed that 
headline growth figures (7.8 percent in 2002 and 8.1 percent 
in this year's first quarter) are "too good to be true," and 
will not be sustainable until fundamental changes occur in 
the economy.  He echoed points he has made frequently to us 
in recent meetings about the difficulties facing Turkish 
companies, including the unavailability of affordable credit, 
which requires companies to finance investments from their 
own resources, the high cost of energy and other inputs, and 
high tax and social security payments on wages, including 
particularly the increasing weight of indirect taxes (which 
now account for 70 percent of all tax revenues).  Action is 
needed, he stressed, to expand Turkey's tax base and thereby 
reduce the size of the shadow economy and the unfair 
competition it represesents. 
 
 
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MUSIAD Survey 
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7. (U) Improving Morale: The MUSIAD survey, carried out in 27 
provinces with participation by 1800 companies, showed a 
similar improvement in morale, while also highlighting the 
challenges on the horizon.   50 percent of the companies 
surveyed increased production in the first half of 2003, 54 
percent experienced an increase in domestic sales, 58 percent 
saw an increase in exports, and 45 percent increased their 
workforce.  Profitability presented a more mixed picture, 
however, with 36 percent seeing increased profits, 29 percent 
seeing no change, and 35 percent suffering a drop in 
profitability.  Expectations for the second half of the year 
were more positive, with predictions for increases outpacing 
first half results for sales (61 percent), exports (76 
percent) and employment (57 percent).  One-third of 
respondents noted that they operate at 70-80 percent of 
capacity, with 22 percent utilizing 60-70 percent, and 
another 22 percent utilizing less than half. 
 
 
8. (U) Continuing Challenges: The MUSIAD survey highlights 
the fact that even small companies are heavily dependent on 
exports, with 58 percent of respondents exporting 61-80 
percent of their production, and 9 percent exporting 
virtually everything they produce.  Exports continue despite 
the appreciating Turkish lira, but many respondents warned 
that the profit margin on exports is becoming dangerously 
low.  The survey also highlighted the continuing financing 
problems facing Turkish industry, with general reluctance 
(and inability) to use outside funding sources forcing 
two-third's of respondents to utilize their own equity to 
continue their operations.  Only 21 percent utilized bank 
loans. 
 
 
9. (U) MUSIAD Chairman Ali Bayramoglu suggested that 
increasing growth and declining inflation show that the 
wounds of 2001 are gradually healing.  He argued that 
business confidence in the government is increasing, but 
pressed for action to reduce the domestic borrowing 
requirement of the government and to bring Turkey's widening 
current account deficit under control.  If action is not 
speedily taken on these issues, he warned, including through 
a "controlled flexible currency policy," Turkey faces a 
possible crisis in the fall. 
 
 
10. (SBU) Comment: The MUSIAD and ISO studies confirm what we 
are hearing anecdotally from other contacts here in Istanbul: 
the real economy has improved over the past year and a half, 
but remains fragile, and sensitive to macroeconomic shocks. 
Most concur that headline growth figures exaggerate the 
extent of improvement in the economy, and that the important 
motor of domestic demand has only improved marginally over 
the past year.  Given the critical problem of financing, 
which hampers almost all Turkish companies, most business 
groups remain strong backers of Turkey's economic reform 
program, hoping that by reducing inflation and changing the 
country's risk profile real interest rates can be brought to 
a more business-friendly level.  MUSIAD, long a strong critic 
of the program, remains the only significant exception to 
that rule.  End Comment. 
ARNETT