Cablegate: Stronger Than Expected 2003 Gdp Growth; Mixed

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

011344Z Apr 04





E.O. 12958: N/A

1. (SBU) Summary: Final numbers released March 31 show
Turkey's GNP grew 5.9 percent in 2003, well above the market
consensus forecast of 5.2 percent. For 2004, there is a
significant divergence of views among Turkish economists --
both inside and outside the GOT -- with some forecasting
growth as low as 4 percent and others more bullish. End

Statistical Agency announces higher-than-expected 2003
--------------------------------------------- ------

2. (U) On March 31, the State Statistical Agency announced
final 2003 GDP and GNP growth rates of 5.8 and 5.9 percent,
respectively. With the market consensus for GNP at 5.2
percent and the target under the IMF program only 5.0
percent, the announced growth rates were a positive surprise.
Strong fourth quarter growth rates of 6.1 and 7.2 percent for
GDP and GNP caused the full-year numbers to come in higher,
led by strong growth in the industrial and non-construction
services sectors.

...Especially in the Industrial Sector and the Trade
Component of Services:
--------------------------------------------- ------

3. (SBU) Within the sectoral breakdown of growth data, the
industrial sector, along with services trade, showed the
strongest fourth quarter growth, with each enjoying a 9.2
percent increase over fourth quarter 2002. Although
construction declined 9.0 percent for the full year, it grew
1.3 percent in the fourth quarter, suggesting that this
hard-hit sector may finally be emerging from its downturn.
Although a growing current account deficit served as a drag
on growth, the continued strength of exports -- despite the
strong Lira -- prevented trade from weighing down growth even

4. (SBU) Istanbul-based Deutsche Bank economist Tefvik Aksoy
was among the more bullish -- and, therefore, accurate --
forecasters of fourth quarter 2003 growth, with a 5.8 percent
prediction. In a meeting with econoff March 26, Aksoy made
the case that the export sector was not as badly hurt as one
might expect because many exporters' inputs are Asian-sourced
and dollar-denominated, whereas these companies' sales to
Europe are Euro-denominated. Although the Lira has
appreciated against the Euro as well as the dollar, it has
appreciated substantially more against the latter. Though
Aksoy said the overvaluation of the Lira was comparable to
pre-crisis 2000 levels, there has been a 30 to 35 percent
gain in labor productivity which has acted as a brake on the
deterioration of the trade balance. Aksoy also said that Iraq
has been wonderful for Turkey's leading white goods and
electronics producers, Beko, Arcelik, and Vestel.

Local Economists' Mixed Views on the 2004 Growth Outlook:
--------------------------------------------- ------

5. (SBU) In recent meetings with us, senior GOT economic
technocrats, Treasury U/S Ibrahim Canakci, State Planning
Organization U/S Ahmet Tiktik, and his Deputy Birol Aydemir
all were predictably optimistic on growth. Aydemir even went
so far as to worry about overheating, saying he had disagreed
with the IMF on the issue, and citing a 170 percent increase
in consumer loans in 2003. Tiktik (like most private
economists) was less worried about overheating, though he
noted a surge in consumer credit-financed consumer goods
purchases with a high import content -- a potential drain on
growth. On the other hand, he predicted a strong year for the
important agricultural sector, which tends to be strong in
alternate years and is due for a good year in 2004. The data
seem to support Tiktik: the Agriculture component of GNP
shrank 2.5 percent in 2003, following a 6.9 percent increase
in 2002.

6. (SBU) In meetings with private economists in Istanbul
March 26, growth expectations were more of a mixed bag.
Deutsche Bank's Aksoy and Citigroup's Olgay Buyukkayali
tended more to the bullish side. Buyukkayali even
acknowledged that Aydemir's concerns about overheating had a
theoretical basis, but were probably premature. Buyukkayali,
like Aksoy, accurately predicted the strong 2003 GDP growth
figure, and forecast 2004 growth in line with the program
target of 5 percent.

7. (SBU) There are some bears, however. Murat Ucer of
Eurosource, a former IMF staffer and one of the few private
economists not affiliated with a financial institution,
expects growth of only 4 percent in 2004, well below the IMF
program's 5 percent target and at a level unlikely to produce
any growth in employment. Ucer bases his pessimism on the
base effect of stronger growth in 2003 and on the absence of
investment. He and his colleague Atila Yesilada were
pessimistic about medium-term growth because of the absence
of structural reforms and the inability of the Turkish
leadership to recognize that they were in a global race and
needed to take radical action about things like expanding
English language instruction and computer usage, and finding
a way to reduce tax rates.

8. (SBU) Likewise, Sinan Gumusdis of JP Morgan/Chase told
econoff March 26 that Morgan's economists had recently
downgraded their 2004 growth forecast from 5 percent to 4.5
percent. Gumusdis believes that some of the recent growth
derived from pent-up demand from the crisis period which is
likely to lessen in 2004. John McCarthy of ING Barings, an
American banker with long experience of Turkey, told
econcouns he did not see any surge in consumer demand.
Earlier, Birol Aydemir of State Planning said the lack of
increased domestic consumption is a result of the GOT's
restrictive incomes policy under its tight fiscal policy.
That's why, according to Aydemir, it was so critical that the
private sector increase investment, a prospect about which
McCarthy was notably pessimistic, pointing out that some
foreign companies in Turkey, such as ING, were actually

Unemployment Worries:
--------------------------------------------- ------

9. (SBU) While the better-than-expected growth numbers are
encouraging, the mixed views on the growth outlook contrast
with a pessimistic consensus on employment issues. Across the
spectrum of economists and bankers, worries about
unemployment and underemployment abound. Aydemir noted the
"social risk" arising from very high rates of unemployment
(25 percent) among educated young people. Gumusdis did not
foresee a pick-up in employment. Yesilda also noted that two
or three million Turks work for only $100 or $200 dollars a
month. At this income level, "they only eat" and can't spend
any money on durable goods. Separately, a survey conducted by
TESEV, the Turkish Foundation for Economic and Social
Studies, indicated that unemployment has replaced inflation
as the public's most important concern, though it also found
Turks more optimistic about economic progress than in the
past three years.

10. (SBU) Comment: One wild card on growth is Iraq. Data
indicates Turkish exports to Iraq are surging, and we see
significant anecdotal evidence that Iraq,s reconstruction
will be a boon to the Turkish economy. It is hard to predict
how much Iraq will contribute to Turkish growth in 2005, but
little doubt the impact will be positive.

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