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Cablegate: Fifth Year of Strong Growth in Turkey

VZCZCXRO7285
RR RUEHRN
DE RUEHAK #0801/01 0961427
ZNR UUUUU ZZH
R 061427Z APR 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 1610
INFO RUEHIT/AMCONSUL ISTANBUL 2472
RUEHDA/AMCONSUL ADANA 1829
RUEATRS/DEPT OF TREASURY WASHDC
RUEHSS/OECD POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 ANKARA 000801

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - JONATHAN ROSE

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN PGOV EU TU
SUBJECT: FIFTH YEAR OF STRONG GROWTH IN TURKEY


ANKARA 00000801 001.2 OF 002


1.(U) Summary: Despite sharply higher interest rates, the Turkish
economy (GDP) grew 6.1% in real terms in 2006, surpassing
expectations and the official target of 5.0%. Per capita income
reached $5,477 almost doubling from $2,642 in 2002. The Turkish
economy has grown by an annual average of 7.2% over the past five
years. A relative slowdown in this growth pace is expected in 2007,
but the 2007 target of 5.0% is still within reach. Ongoing reforms
will be required to sustain high growth and investment rates into
the medium-term. End Summary.

----------------------------------------
ECONOMY RECOVERED FROM MID- 2006 TURMOIL
----------------------------------------

2. (U) According to fourth quarter 2006 growth figures released
April 2, the Turkish economy grew faster than projected in 2006.
Despite global market volatility and tight monetary policy in 2006,
GDP growth in the fourth quarter of 2006 came in at 5.2% -- well
above market expectations. Overall GDP growth in 2006 was 6.1% and
GNP growth was 6.0%, whereas the target was 5% and most analysts
were expecting growth to come in between 5% and 5.5%. The data
suggest the economy has recovered from the market turmoil in the
second quarter of 2006.

------------------------
Growth Driven by Exports
------------------------

3. (U) The principal sources for the high 2006 growth on the
expenditure side were private sector capital formation and trade
(both imports and exports). On the production side, the main
drivers were services and industry (2.7 points and 2.2 points
respectively), followed by the booming construction sector with 0.9
points for the whole year. The construction sector's weight in GDP
growth increased significantly in the past five years.

4. (U) The construction sector grew 16.1% in the last quarter and
total growth in the sector reached 19.4%, on the back of strong
performances in the first three quarters of the year (27.1%; 14.9%,
and 21.3% respectively for the first three quarters). The
agriculture sector also grew by 9.7% in the last quarter after poor
performances in the second and third quarters of the year (-0.4% in
Q2 and 0.5% in Q3). For the full year, growth in the agriculture
sector thus reached 2.9%.

5. (U) The 2006 growth data also showed significant change in the
structure of growth in Turkey as the motor of economic growth shifts
from domestic demand to exports. Private consumption growth
declined from 11.5% in Q2 to a mere 0.1% in Q4. In addition, the
contribution of government spending to growth has also declined.
Whereas the rate of growth of government spending was 18.3% in Q2,
in Q4 it declined sharply to 0.7%.

----------------------------------
Strong Private Investment Spending
----------------------------------

6. (U) Domestic demand growth (2.7% year-on-year; year-on-year)
contributed 2.8 percentage points to the overall 5.2% GDP growth
registered in Q4, but the bulk of this came from private sector
investment (1.2 percentage points) and inventory growth (1.3
percentage points). Both private and public sector consumption
growth (0.1% year-on-year and 0.7% year-on-year, respectively)
remained subdued and contributed a mere 0.1 percentage points to
overall GDP growth, each. Meanwhile net exports continued to
recover, adding 2.5 percentage points to overall GDP growth.

----------------------------------
Relative Slowdown Expected in 2007
----------------------------------

7. (U) Relatively robust economic growth is expected to continue
in 2007 although perhaps at a slower pace, with industry and
construction expected to be key drivers. The Central Bank's tight
monetary policy to bring down inflation to the 4% target from a
current annual level of 10.92% will be quite challenging, and if the
high interest rate policy continues, it may be contribute to slower
growth of domestic demand in 2007.

----------------------------
Highest Growth Rates in OECD
----------------------------

8. (SBU) The Turkish economy grew an average of 7.2% in the past
five years, one of the highest rates of growth -- perhaps the
highest -- in the OECD. Per capita income in dollar terms nearly
doubled since 2002, from $2,642 to $5,477. Even allowing for the

ANKARA 00000801 002.2 OF 002


unevenness of income growth, this dramatic improvement must be
having an impact on individual Turks' sense of financial well-being.
The AK Party Government can point with pride to the fact that the
period of sustained strong growth -- the longest in recent memory in
Turkey -- has coincided with the AK Party's period in power.
Stronger-than-expected growth also improves ratios to GDP that are
considered indicators of vulnerability: in particular, Net Public
Debt to GDP is now only 44% -- down from 90% after the crisis -- and
the Current Account Deficit to GDP, while still high, is 7.8%,
projected to decline to 7.2% in 2007.

--------------------------------------------- ---
But Sustaining High Growth Requires More Reforms
--------------------------------------------- ---

8. (SBU) To sustain Turkey's strong growth well into the future, the
next Government will need to keep moving forward with a second
generation of reforms. As the Central Bank often reminds the
Government, labor market reforms, judicial reform and revamping the
educational system to build a skilled labor force will raise
Turkey's growth potential in Turkey and will help attract Foreign
Direct Investment, perhaps even greenfield investment.
WILSON

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