Cablegate: Executives Highlight Buoyant Stock Market But

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





E.O. 12958: N/A

Sensitive but Unclassified - not for internet distribution.

1. (SBU) Summary: In meetings with Ambassador Edelman on
February 26, executives at the Istanbul Stock Exchange (ISE)
and Foreign Investors' Association (YASED) focused on two
extremes of Turkey's current economic performance: the
buoyant stock market, which has risen 80 percent over the
last year, and Turkey's continued failure to attract foreign
investment. ISE leaders attributed positive market sentiment
to increasing portfolio investment, lower interest rates, and
the rising profits of ISE-traded companies, suggesting that
continued commitment to Turkey's IMF program and structural
reforms will further boost the market. YASED President Saban
Erdikler, however, criticized the government for its failure
to move more aggressively on one key reform: improving
Turkey's investment environment. Since November 2003, he
argued, nothing "tangible" has been done to attract foreign
direct investment, in part due to the "stronger than
expected" resistance of the Turkish bureaucracy. End Summary.

2. (SBU) A Rising Market: In their meeting and lunch with
Ambassador Edelman, ISE Senior Vice Chairman Aril Seren and
Vice Chairman Huseyin Erkan stressed that Turkey's improving
economic fundamentals have positively impacted the exchange.
Falling interest rates, reduced inflation, and strong growth
in 2003 led to a considerable increase in trading volume, as
compared with the crisis year of 2001 and 2002. Companies
traded on the ISE, they noted, recorded a notable 176 percent
jump in profits in 2003. In addition, the strong Turkish
lira and increased political and economic stability attracted
portfolio investments from outside Turkey. Interestingly,
they argued that the bulk of this inflow was likely savings
held outside the country by Turkish investors. Although the
exact amount is not known, they estimated that such external
savings may be as high as 150 billion USD. Seren added that
decreasing profit margins in government papers due to lower
interest rates makes the ISE more attractive for investors.
Recent Capital Market Board decisions to make dividend
payments compulsory and to apply international accounting
standards further enhance the ISE's advantages as an
investment alternative.

3. (SBU) Room to Grow: Seren and Erkan added that they
believe there is still potential for a further rise in the
exchange since company price/earnings ratios are still at
reasonable levels. Erkan added that the ISE's recent rise
essentially represents recovery from 2001 and 2002's low
levels. Seren said they expect more IPO's in 2004 as trade
volume grows. The recent IPO of the Fenerbahce Football Club
was very successful and encouraged other companies to follow
suit. Both executives agreed that a solution to the Cyprus
conflict by May this year and a positive message from the
European Union at the end of 2004 are critical for the
Turkish economy and for healthy growth at the ISE.

4. (SBU) No Investment: Less optimistic, however, was the
prognosis of the leadership of the Foreign Investors'
Association (YASED). Ambassador Edelman voiced his concern
about the low level of direct foreign investment that Turkey
receives despite its high potential and need, particularly in
the energy, tourism, and transportation sectors. He noted
that Turkey's current FDI level of 400 million USD is far
from adequate, a point YASED President Erdikler seconded.
Erdikler argued that Turkey must target an annual FDI level
of 30 billion by 2008.

5. (SBU) Bureaucratic Resistance: Erdikler stressed that
while YASED was initially encouraged by the AK government's
commitment to improving the investment climate, and by the
personal commitment of individual members of the government
to investment issues, resistance by the Turkish bureaucracy
had prevented any real improvement over the last year and a
half. He said YASED is disappointed by the recent lack of
determination of the government, and was critical of the
failure to keep pushing ahead to complete the remaining
regulations concerning the investment environment.

6. (SBU) March Investment Conference: Erdikler echoed his
recent public criticism of organization of the mid-March
Turkey Investment Promotion Conference, noting that the
government had not coordinated with NGO's. Only 16
executives of major multinational companies responded, of
whom 12 are CEO's. YASED will take part in the conference
and support the cause, he said, but he added that it will not
be easy to convince executives to invest in Turkey at a time
when Turkey cannot demonstrate success in resolving the
problems of past investors. The difficulties of Motorola,
Nokia, and Cargill are closely followed by potential
investors, he noted, as are IPR concerns, particularly those
relating to pharmaceuticals.

7. (SBU) Continuing Needs: Erdikler conceded that some steps
have been taken by the AK government, including simplifying
investment and company registration procedures. Much remains
to be done, however, including restructuring of the judicial
system to meet the needs of the business community, and
transparency in public services to establish confidence in
the rule of law. Erdikler added that long-term political and
economic stability is the most critical factor for investment
and agreed with his ISE counterparts that Turkey must both
continue working with the IMF to complete needed structural
reforms and with the EU to complete political preconditions
for EU negotiations.

8. (SBU) Comment: Erdikler's disappointment is shared in
other quarters, including domestic industry. Istanbul
Chamber of Industry President Tanil Kucuk echoed many of
Erdikler's points in an eloquent address to the chamber's
general assembly at the end of January, arguing that 2003 was
"not put to good use" on the structural reform front.
Seconding Erdikler's point about Turkey's need for
investment, he warned that key indicators still remain below
their 1997 levels, and that only new investment will permit
Turkey to exceed them, as the economy has exhausted its
ability to expand through productivity growth and increased
capacity utilization. End Comment.

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