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Cablegate: Istanbul in the Springtime: Resurgent Optimism

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ISTANBUL 000671

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
SUBJECT: ISTANBUL IN THE SPRINGTIME: RESURGENT OPTIMISM


Sensitive but Unclassified - not for internet distribution.


1. (SBU) Summary: As a belated spring bursts forth on the
Bosphorus following an unusually cold and protracted winter,
"spring is also in the air" in Istanbul business circles.
The resurgent optimism stems from speedy conclusion to the
war in Iraq and belief that its short-term cost for Turkey
was limited, and will easily be surpassed by the long-term
benefits access to the Iraqi market can provide. With
declining interest rates, a strengthening lira, and improving
inflation performance, Istanbul business leaders believe that
four-five percent GDP growth is no longer out of the
question. Some tourism industry leaders now indicate that in
place of the 50-60 percent dropoff they earlier predicted,
Turkey's tourism loss can be held to 15 percent, leaving the
country ahead of last year's levels. With strong export
growth, the key issue remains domestic demand, which has
rebounded in some sectors, but not across the board.
Istanbul's business elite expects the turn around to deepen
in the second half of 2003, however, as the uncertainty
caused by the war recedes. End Summary.


2. (SBU) Gloom Recedes: In place of the extreme pessimism
that characterized the run-up to the Iraq war and
accompanying concern about U.S.-Turkish relations and the
depth of the government's commitment to the IMF program,
optimism is now in the air in Istanbul. Whereas analysts two
months ago saw no engine for growth in the economy other than
exports, and saw serious impacts from the war on domestic
demand, tourism, and public investment, there is now
widespread expectation that only the latter will act as a
brake on growth. The improvement in sentiment is evident in
the latest Central Bank Survey, which reports improving
expectations on growth (up to 3.7 percent), inflation (down
to 26.6 percent) and interest rates.


3. (SBU) Tourism: While tourism leaders we canvassed in March
gloomily predicted a 50-60 percent drop to 5.5 billion as a
result of the war, they are now relatively more sanguine.
The sector did experience a 25 percent drop in March,
following a 15 percent gain in the first two months of the
year, but some industry leaders believe recovery to near 2002
levels is not out of the question. Turkish Tourist Agency
Union (TURSAB) head Basaran Ulusoy told us on May 7 that he
believes the loss can be held to 10-15 percent from the
year-end target of 15 million tourists, leaving Turkey ahead
of last year's level. Tourism Investors' Association
Secretary General Nedret Koruyan is more circumspect,

SIPDIS
suggesting that while tourist numbers may recover to last
year's level, overall revenues will decline, as foreign
travel agencies are agressively pressing for discounts for
last minute bookings. She noted, though, that the decline
will not approach the magnitudes the industry earlier feared.


4. (SBU) Exports: One of the driving forces behind last
year's growth seems only to have picked up pace in the first
four months of 2003, with an impressive 36 percent increase
in exports. Total volume is close to USD 14 billion, and
analysts predict that exports will reach USD 40 billion for
the year, exceeding even the ambitious year-end target of 39
billion. Analysts see the possibility of an annual export
volume of up to USD 6 billion with Iraq, once trade is
normalized, arguing that Turkey is ideally positioned to
supply that country's consumer needs. Meanwhile, in the last
quarter, the leading export items readywear and automotive
products recorded 28 and 66 percent increases respectively.
Suleyman Orakcioglu, head of the Istanbul Readywear
Exporters' Union and creator of the successful "Damat" brand,
told us on May 6 that Turkish exporters gained valuable
experience after the 2001 crisis when domestic demand
plummeted and companies were forced to exploit international
markets. Aggressive marketing is supported by the benefit
provided by the strong Euro in European markets, which
account for more than 50 percent of Turkey's exports.
Orakcioglu predicted that Turkish textile makers will also
benefit from the SARS epidemic in Asia, noting that they are
already seeing new orders from companies that are not
interested in travelling to the Far East. He expressed
concern, however, that existing quota limits will prevent
Turkey from filling the expected additional demand from U.S.
customers.


5. (SBU) Domestic Demand: The wild card in the deck remains
the ability of domestic demand to rebound and take the place
of stock accumulation, which accounted for the bulk of GDP
growth last year. Initial indications are promising.
Industrial production grew 7.5 percent in the first quarter
on y-o-y terms, including a surprisingly strong 5.6 percent
in March, far exceeding analysts' expectations of 1.3
percent. Earlier predictions of 0-2 percent growth for 2003
have been revised to 4-5 percent by some analysts (in line
with the Central Bank survey's 3.7 percent). Selected
retailers report up to a 30 percent increase in sales during
the past few weeks, and expect demand to increase further as
the uncertainty caused by the war recedes. Domestic sales of
passenger cars and light commercial vehicles also rose 271
percent in the first quarter (from an admittedly weak 2002
figure-- the lowest in the last decade), while consumer
durables recorded a 20 percent increase. These trends are
expected to continue as improving inflation performance and
declining interest rates spur the release of pent-up demand.


6. (SBU) Comment: The mood on the Bosphorus is definitely
more hopeful than it was six weeks ago, but significant risk
factors remain. Chief among them are continued government
implementation of the reform program and the strengthening
lira, which could begin to hurt Turkey's international
competitiveness. Contrarians also note that while Turkish
markets always expect an easy summer, something usually
happens to change the picture-- from the Russia crisis in
1998 to early elections in 2002. While no such event is on
the horizon, any such external or internal shock could easily
change the current picture, given the economy's underlying
fragility. End Comment.
ARNETT

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