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Cablegate: Local Businesses Less Euphoric Than Financial

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 ANKARA 006364

SIPDIS


E.O. 12958: N/A
TAGS: ECON EFIN ETRD PGOV TU
SUBJECT: LOCAL BUSINESSES LESS EUPHORIC THAN FINANCIAL
MARKETS


1. Summary. Recent discussions with business executives in
Bursa, Istanbul, Kayseri and Izmir indicate increased
optimism about the economic recovery and the AK Government.
But business people show none of the euphoria exhibited by
the IMF- and politics-focused financial markets. There is
widespread unhappiness over high tax rates and electricity
costs. Though the executives are concerned over the lira's
strength, their comments track with analysts, explanations
of continued export strength. Corporate managers,
complaints that the government needs to cut taxes while
providing increased support reflect a lack of understanding
of the GOT,s fiscal constraints. End Summary.


----------------------------------
The Economic Recovery
----------------------------------


2. In a series of recent meetings with visiting Econoffs
in Istanbul, Kayseri, Bursa and Izmir, corporate executives
were divided over how much the economy is improving. In
Kayseri, business people cited the easing of inflation and
concomitant reduction in interest rates, the end of the Iraq
war (which has improved consumer confidence), and the Iraqi
reconstruction effort as all contributing to economic growth.
Both Ford/Koc and Toyota representatives confirmed press
reports that, after a disastrous 2002, 2003 domestic car
sales are up significantly. However, businesses are also
concerned that the recovery remains fragile, and do not fully
share the enthusiasm that has recently been displayed by the
financial markets. Several businesses commented that domestic
demand remains weak. Comment: These contradictory views are
in line with positive but uneven GDP growth numbers, and
highlight the fact that the financial markets, with their
near-obsession with political and external factors, are way
ahead of the "real economy." End Comment.


3. Despite the relatively undeveloped financial sector,
businesses claimed they had adequate access to capital --
mostly in the form of their own equity. They say, however,
that they are hesitant to invest until they are more
confident about the durability of the recovery, and until the
government reduces tax rates and otherwise improves the
investment environment.


----------------------------------
Exports/Competition
----------------------------------


4. Executives confirm that exports are driving the
recovery. For instance, TV/appliance maker Vestel expects
exports to rise from $1.1 billion in 2002 to $1.5 billion
this year. The lira,s strength versus the dollar is a
concern, particularly to the textile/apparel sector. One
exporter said he had shifted production from Turkey to Egypt,
and government and analyst contacts have told of Turkish
companies moving production to lower-cost Bulgaria and
Romania. Because of high prices, manufacturers report being
unable to fill many of their U.S. import quotas. However, the
relative stability of the Euro vs. the TL has better
protected businesses that export to the EU (70 percent of
Kayseri,s exports are to the EU zone, and but 7-8 percent to
the U.S.). Also, businesses with significant
dollar-denominated inputs are not being hurt as much.
Kayseri's Boydak conglomerate (which has just opened a New
Jersey office), echoing comments made by others, stated that
it is prepared to accept low profits for some time in order
to maintain or build market share. Businesses that are more
thinly capitalized, however, do not have this luxury.
Comment: These statements track with analysts, theories as
to why Turkish exports remain strong despite the appreciation
of the Lira. A large share of the Turkish export sector --
particularly electronics and automotive companies -- has a
natural hedge against lira volatility because of their
foreign exchange-denominated inputs. Moreover, analysts and
bankers have told emboffs that the 2001 crisis drove out all
but the most efficient and fast-reacting entrepreneurs,
especially in the textile sector, and led to significant
productivity increases. End Comment.


5. Some textile/apparel manufacturers predicted the demise
of their sector after quotas are lifted in 2005. They report
already losing sales to Chinese competition in the U.S. and
other export markets, and are keen to see U.S. trade
safeguard action against Chinese goods. Others are more
sanguine, viewing Turkey's customs union with the EU as
providing them with a competitive advantage over Chinese
goods. In contrast to their counterparts in Izmir and Bursa,
executives in Kayseri were surprisingly indifferent to EU
accession, and suggested it would not provide much of an
economic boost beyond that already provided by the customs
union.


----------------------------------
Role of Government/Free Zones
----------------------------------


6. Businesses consistently complained about high taxes and
electricity costs. Because of widespread non-compliance,
taxpaying businesses are charged very high rates. Several
executives blamed the IMF for forcing GOT to raise taxes, and
want the government to provide more incentives or
infrastructure, showing little appreciation for the GOT's
severe budget constraints.
7. The Aegean Free Zone and Kayseri Organized Industrial
Zone, unlike most such economic zones, are doing well.
Aegean Free Zone exports are up 42 percent through August,
and employment is up from 10,000 to 10,500, with perhaps
another 500 jobs to be added by year-end. Executives
attribute this to tax breaks, and warn that a GOT decision to
end those breaks would mean the end to new investment in the
Zone. Comment: The IMF,s direct tax reform proposal is
designed to eliminate some of the Free Zone tax breaks,
including exemptions from corporate and personal income tax.
Though high tax rates are unquestionably a problem for the
Turkish economy, the executives, complaints need to be
balanced against the GOT,s severe fiscal constraints and the
IFI's legitimate concerns about the distortionary impact of
so many generous tax incentives. End Comment.


8. With the exception of those in Izmir, the business
people with whom we spoke were relatively satisfied with the
current government, viewing it as business-friendly and
trying to reduce corruption. Executives praised the GOT,s
commitment to privatization and the recently-streamlined
company establishment procedures, under which businesses can
now register in as little as one day. Izmir-based executives
stressed the need for the government to continue to reduce
its role in the economy, although this did not stop them from
complaining that the government needed to offer more
incentives and provide better infrastructure.


9. Comment: Our visits to regional commercial centers
served as a useful reminder that Turkey's "real economy" is
still going through difficult times, despite the financial
markets' recent rally. This is not a criticism of Turkey's
IMF-backed economic reform program, as there inevitably will
be a time lag between implementation of reforms and increased
domestic demand. However, our discussions highlighted the
need for further structural reform -- privatizations, tax
reform, improved investment environment, and better
regulation -- if Turkey is to achieve the sustained growth
and international competitiveness it needs to prosper.
EDELMAN

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