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Cablegate: New Studies Highlight Fragile Recovery

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 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
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.


-----------------------
Turkey's Industrial 500
-----------------------


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.


-------------
MUSIAD Survey
-------------


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

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