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Cablegate: Uneven Growth in the Real Economy

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

241641Z Jun 04





E.O. 12958: N/A

This is a joint Embassy Ankara-Consulate Istanbul-Consulate
Adana cable.

1. (Sbu) Summary: Despite relatively strong GNP growth,
economists and businesspeople paint a mixed picture for
Turkey,s real economy, with surging sales in interest-rate
sensitive sectors like autos, white goods, and televisions,
but a less rosy picture in labor-intensive sectors like
textiles and particularly, construction. Even in some
of the strongest sectors, sales growth is stronger than
profit growth. Growth also appears to be stronger among
large companies and among the larger cities of western
Turkey. Though there are signs of a resurgence of domestic
consumption, it is unevenly distributed across sectors, and
many companies continue to rely heavily on export growth.
Job creation and investment still lag. End Summary.

2. (Sbu) Despite strong GDP growth numbers--5.8 percent
in 2003 and an expectation of about 5 percent in 2004--many
business contacts continue to tell emboffs that business is
not so good. Embassy Ankara, Congen Istanbul, and Consulate
Adana have sought out economists, businesspeople and business
groups to ask their views on the state of the real economy.

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Surging Interest-Rate Sensitive Sectors:
--------------------------------------------- -----

3. (Sbu) Auto sales are up sharply. According to TOBB, the
union of Turkish chambers of commerce, in 2003 domestic car
sales increased 130%, production increased by 54%, and
exports increased by 34% . April 2004 car sales were the
highest ever recorded in Turkey. According to press reports,
January-April auto sales totaled 244,000, or 61 percent of
the 2003 total. Renault and Toyota have announced
in new capacity: a rare occurrence in other sectors. Ergun
Okur, an executive at Renault,s partner, Oyak, told
econoffs that Renault had decided to make Turkey the lead
European platform for production of its Clio model.

4. (Sbu) In addition to the $7 billion in
auto exports in 2003, the automotive supply industry
exported $3 billion in 2003 and seems to be a growth area.
Zafer Yavan, Ankara Representative of the
Turkish Industrialists, Association (TUSIAD), told econoffs
that autos and auto supplies combined represent about 30
percent of industrial production, of which only about half
consists of autos. Birol Aydemir, Deputy Undersecretary
at the State Planning Organization, noted the importance
of the shift in the composition of exports from a reliance on
textiles to higher-value-added autos and electronics.

5. (Sbu) An Istanbul business consultant and Mehmet Hizal,
Sales Director at white goods manufacturer Profilo-Bosch,
higher purchases of cars and white goods as distinct from
consumer demand. They argued that the recent decline in
rates had led well-to-do consumers to begin to shift from
investments to purchase of cars and white goods(kitchen
applicances, washers and dryers).

Lower Interest Rates and Aggressive Consumer Credit:
--------------------------------------------- ------

6. (Sbu) The growth in durables sales is widely
attributed to the substantial decline in interest rates
over the past year and a more aggressive lending posture to
consumers, as banks strive to replace shrinking government
securities revenues. Turkish consumers are taking advantage.

State banks contributed to this newfound consumer borrowing
appetite by offering below-market rates, but have now been
in to conform with the IFI-required state bank privatization

Signs of broader revival of domestic consumption and
company sales:
--------------------------------------------- -------

7. (Sbu) There are signs of a broader, if less spectacular,
revival in domestic consumption and company sales growth.
Industrial production in the first four months of 2004
increased 14.3% compared to the same period last year.
Central Bank
Vice-Governor Sukru Binay told econoffs that checks
in circulation--a leading indicator of business activity--had
substantially. Several contacts reported higher supermarket
a 20% rise at Carrefour and a 28% rise at the more widespread
Migros chain.

Geographic and Income Distribution of Growth:

8. (Sbu) There are signs of an income and geographic
skew in the distribution of the growth. Though
Okur claimed that the growth in car sales was nationwide,
he admitted that sales growth was weaker in the
depressed Black Sea region, a comment echoed by Profilo's
Okur pointed out that greater Istanbul accounts for 40
percent of the economy, such that it always has a

9. (Sbu) TUSIAD,s Yavan said that the current recovery is
following the typical Turkish pattern of starting off with
the larger companies in greater Istanbul, Izmir, and Ankara
and gradually flowing to smaller businesses in Anatolia.
Access to affordable credit is a key factor: he noted that
very large conglomerates own banks, and that a broader group
of large corporates can borrow in much lower-interest rate
foreign exchange, whereas small business face
the hurdle of uneconomic real interest rates on lira loans.

Mixed picture in textile sector:

10. (Sbu) The large textile sector is not among those
strong growth. Contacts agreed with press reports that
inexpensive Chinese exports are hurting Turkish textile
in the domestic market, and that the prospect of an end to
textile quotas
in 2005 was daunting for exporters. However, several
contacts believed
Turkish textile companies could remain competitive because of
post-crisis restructurings and labor productivity gains, and
moves into competitive, higher-quality niches.

Construction sector still moribund:

11. (Sbu) Although fourth quarter 2003 GNP data show the
construction sector beginning to grow for the first time in
years, key contacts told us the sector is unlikely to grow
much in the near future. Emin Sazak,
Vice-Chairman of one of Turkey,s largest construction
companies, Yuksel, told econoff he saw no prospect of
revival in the domestic market in 2004 or even 2005.
Executives from large construction companies active in
Southeast Turkey told Consulate Adana personnel that
construction is flat, and any small profit is from
Iraq-related business. Both Sazak and Oyak,s Okur
attributed this situation to public investment having
been cut to the bone, and to the continued absence of
financing at long enough maturities to spur growth in
the housing market. Cement prices have nearly doubled since
their 2001 lows, but this may have more to do with exports
than domestic demand.

The export lifeline:

12. (Sbu) Because of the uneven growth of domestic
consumption, many sectors rely on export sales, which
grew 27.9 percent in the first quarter of
2004, compared to first quarter 2003. Auto exports for
January-April 2004 were up 38 percent, according to press
reports. In the moribund construction sector, foreign
contracts are the name of the game for Turkish companies
like Yuksel. Oyak,s Okur said the silver lining for
cement companies has been sales to Iraq, Syria, and Iran.
TOBB notes that Turkey remains the second largest textile
supplier to the EU after China. The Economist magazine,s
recent claim that, on the basis of its "Big Mac" index,
the lira is 11 percent undervalued versus the dollar, which
may help explain the continued strength of exports.

Job Creation and Investment Still Lag:
--------------------------------------------- -----

13. (Sbu) Contacts, press reports and the available data
are virtually unanimous that the revival of growth have yet
to translate into significant investment or job creation.
Oyak,s Okur pointed out that even his group,s
successful auto operation was able to go from 110,000
to 200,000 per year production without hiring. He said his
group, like many others laid off staff after the crisis
but retained some in the hopes of a later revival in sales.
Outside the auto and steel sectors, there is little evidence
that companies have begun to invest much, given
the poor investment climate. Okur cited the continued high
real interest rates on government securities, crowding out
other investments.


14. (Sbu) Although it is uneven, Turkey,s real economy is
experiencing growth. Some Istanbul analysts have recently
said they are considering upping their forecasts for 2004
growth to around 6%. However, many business people remain
than enthusiastic, either because of disparities across
or because profit growth is not as strong as sales growth.
Contacts cited competition squeezing margins in supermarkets,
autos, and white goods, for example. Okur also cited a
dimension to businesses, lack of enthusiasm: having
astronomic nominal sales growth in the past, business people
trouble getting excited about nominal sales growth of only 20
or 30 percent.


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