VZCZCXRO1766
RR RUEHDA
DE RUEHAK #0998/01 0591448
ZNR UUUUU ZZH
R 281448Z FEB 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 3578
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 9940
RUEHDA/AMCONSUL ADANA 0450
RUEHBS/USEU BRUSSELS
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 04 ANKARA 000998 
 
SIPDIS 
 
TREASURY FOR CPLANTIER 
PASS USTR FOR LISA ERRION 
USDOC FOR ITA/MAC/CRUSNAK 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV EFIN BEXP TU
SUBJECT: FDI TO TURKEY BREAKS RECORDS 
 
This cable has been coordinated with Congen Istanbul. 
 
1.(SBU) Summary:  After years of attracting anemic  FDI 
inflows, in 2005 Turkey finally recorded a major 
inflow: $9.6 billion.  The leap in FDI is attributable 
to large privatizations and opportunities in the 
financial, retail and telecoms sectors, as well as 
Turkey's rapid growth, EU candidate status, resolution 
of investor disputes, streamlined investment procedures 
and increasingly stable political and economic 
situation.  While higher FDI looks set to continue 
through 2007 as installments for deals concluded in 
2005 come due, sustaining these levels over time will 
require continued reforms, particularly in improving 
the climate for doing business and making the judicial 
and regulatory systems more transparent and 
predictable. End Summary. 
 
----------------------------------------- 
Nearly Ten Billion Dollars in FDI in 2005 
----------------------------------------- 
 
¶2. (SBU) For years Turkey has attracted an anemic level 
of FDI despite its strategic geographic position, 
substantial internal market, youthful population, EU 
customs union agreement, relatively low-cost/good 
quality labor force and high average annual GDP growth. 
The paltry FDI flows were attributed to Turkey's boom- 
and-bust economic instability, wobbly and anti-reform 
coalition governments, corruption, high taxes and an 
anti-foreigner and anti-private sector bias among 
Turkish judges and bureaucrats.  From 1995 through 
2000, net FDI never got above one billion dollars in a 
single year.  Even in 2004, with two years of post- 
crisis stabilization and growth under its belt, Turkey 
attracted only $2.8 billion, of which $1.3 billion was 
real estate purchases by foreigners.  These figures are 
small both in relation to GDP and in relation to 
comparator countries. 
 
¶3. (SBU) Full year 2005 Balance of Payments data 
confirm what had become increasingly clear in the 
course of the year: 2005 was a turning point, and FDI 
has taken off.  FDI inflows surged to $9.65 billion-a 
239 percent increase -- of which only $1.8 billion was 
for real estate purchases.  Using the Institute for 
International Finance's calculation that FDI to 29 
major emerging markets totaled $135 billion in 2005, 
Turkey accounted for seven percent of the total for 
this group of countries. 
 
 
                              2003      2004      2005 
                              ----      ----      ---- 
FDI inflows to Turkey         1.75      2.82      9.65 
(in $ billions) 
 
% of Turkey's GNP             0.76%     0.95%     2.7% 
 
% of major EM FDI inflows     1.8%      2.1%      7.1% 
 
Source: Central Bank, IIF 
 
--------------- 
Why the Change? 
--------------- 
 
¶4. (SBU) Though the current AK Party government has 
been talking a pro-foreign investment line since taking 
office in November, 2002, it is striking that FDI only 
took off in 2005.  Several of the negative factors 
remain: corruption, high taxes, an anti-foreigner 
judiciary, and regulatory bias for domestic companies, 
as well as an over-regulated labor market that inflates 
the cost of hiring and firing.  These factors explain 
the near-total absence of greenfield investment: 
foreign investors almost always take a local partner 
who knows how to work the Turkish system. 
 
¶5. (SBU) In 2005, however, the balance clearly tipped 
in favor of new FDI.  Among the key factors explaining 
the change: 
 
--Firmed up EU accession country status: the EU's 
 
ANKARA 00000998  002 OF 004 
 
 
December 17, 2004 decision to set a date to begin 
accession negotiations gave investors a high 
probability that Turkey would at least start the 
accession process with the launch of negotiations.  The 
October 3 launch confirmed investors' bets.   The 
prospects of Turkey being locked into the stabilizing, 
modernizing EU accession process -- even if ultimate 
accession is far from assured -- provides an "anchor" 
that gives investors a degree of confidence. 
 
--Continued stabilization and growth of the economy: 
Though Turkey's economy performed well every year since 
the crisis, by 2005 Turkey had three straight years of 
strong growth, fiscal discipline, declining inflation 
and declining interest rates.  Turkey's economy has 
grown 22 percent since the crisis.  With the risk of 
another crisis greatly reduced, prospects for continued 
strong growth coupled with reasonable levels of 
inflation were key. 
 
--Relative political stability: Turkey suffered through 
coalition governments throughout the 1990's, with 
attendant spoils-seeking and indecisveness on reform. 
Since the November 2002 eletion, Turkey has had three 
straight years of single-party, more or less pro-reform 
AKP government.  With AK likely to hold onto power into 
2007, and perhaps beyond, investors were willing to 
take the plunge. 
 
--Sectoral opportunities: Certain sectors in particular 
held out the prospect of strong growth over the long- 
term.  Strong current sales and excellent prospects in 
retail, financial, automotive, housing and white goods 
are partly due to the fall in inflation and both real 
and nominal interest rates.  Turkey's thirty-plus years 
of high inflation and interest rates effectively 
eliminated access to credit for all but blue chips and 
wealthy individuals who could borrow offshore.  When 
borrowing money finally became affordable, Turkey's 
growing middle class, encouraged by banks trying to 
transition away from over-reliance on government 
securities portfolios, borrowed to buy cars, washing 
machines, housing, etc.   In each sector there were 
other factors as well: auto and white goods companies 
like Turkey as a low-cost platform for export to the 
EU; supermarkets are taking business from mom-and-pop 
stores; and retail banking is underdeveloped.  The 
telecoms sector, long dominated by the state telecoms 
company, is poised to take off through a combination of 
privatization, liberalization, internet and computer 
penetration, and rising incomes. 
 
--Privatization:  After years of struggling to 
successfully complete transactions, in 2005, the 
Privatization Authority finally solved some of its 
legal and operational problems and successfully 
completed three large privatizations: the Tupras oil 
refinery, Erdemir steel mills, and Turk Telekom.  Only 
the latter was acquired by a majority-foreign buyer, 
but it was also the biggest deal: $6.5 billion to be 
spread over several years.  Also in the telecoms 
sector, the bank deposit guarantee agency sold a $4.5 
billion controlling share in Turkey's second-largest 
cell phone company, Telsim, to Vodafone of the UK, 
however Vodafone's purchase will only be recorded in 
the 2006 balance of payments. 
 
-- Resolution of high-profile investment disputes:  By 
the end of 2005, the AKP government had resolved, in 
one way or another, the high-profile investment 
disputes it inherited from its predecessors.  For U.S. 
companies, this includes Cargill's problems in 
obtaining zoning permission for its $150 million 
sweetener factory near Bursa, and Motorola's settlement 
of its $1.8 billion claim against the bank deposit 
guarantee agency for a fraud committed against it and 
Nokia.  Although other, smaller scale business issues 
remain, putting these headline grabbing disputes behind 
it has undoubtedly contributed to an improved 
reputation in international business circles. 
 
-- Progress in reducing red tape and bureaucracy: 
Turkey's 2003 foreign investment law eliminated prior 
screening requirements for foreign investment, and 
 
ANKARA 00000998  003 OF 004 
 
 
opened nearly all sectors to foreign investment on a 
national treatment basis.  The World Bank's Doing 
Business database reports that it took 9 days and 8 
procedures to create a new business in 2005, compared 
to 38 days and 13 procedures in 2003.  Although there 
is more to be done, particularly in rationalizing 
permitting and licensing procedures, this is remarkable 
progress in a country long known for its oppressive 
bureaucracy. 
 
---------------- 
Financial Sector 
---------------- 
 
¶6. (SBU) Most notable was the action in the financial 
sector.  Even though the process of privatization of 
state-owned banks continues to move at a snail's pace, 
private bank owners proved open to selling stakes or 
control to foreigners.  Garanti Bank, which had been in 
negotiations with an Italian bank in 2004, agreed to 
sell a 50 percent stake to GE Capital of the U.S. in 
2005, and the $1.8 billion payment showed up in the FDI 
data in December of 2005.  Another major transaction 
was the purchase of the shares held by Cukurova group 
in Yapi Kredi Bank by a consortium of Koc Group and 
Unicredito of Italy.  BNP of France bought a stake in 
TEB.  A Greek bank bought a small  brokerage.  Benelux- 
based Fortis Group bought control of Dis Bank.  All in 
all, the share of foreign ownership in the banking 
sector rose from 3% to 13%, according to the Bank 
Regulatory Agency. 
 
--------------------------------------------- - 
Long-term financing in the Balance of Payments 
--------------------------------------------- - 
 
¶7. (SBU) FDI benefits Turkey in a number of ways: 
access to international expertise and technology, 
better integration into an increasingly globalized 
international economy, and long-term, non-debt-creating 
finance for the balance of payments.  The latter is 
particularly welcome now, since Turkey's current 
account deficit suged in 2005, largely due to sharply 
higher energy imports.  FDI, as opposed to short-term 
portfolio investment, provides a stable source of 
financing that cannot run for the exits in a downturn. 
 
--------------------------------------- 
FDI likely to continue in 2006 and 2007 
--------------------------------------- 
 
8.(SBU) As good as the news of strong FDI inflows in 
2005 is the near-certainty these inflows will continue 
in 2006 and 2007.  Many of the above-mentioned 
transactions, such as Turk Telekom and Telsim, call for 
the buyer to pay in instalments over several years. 
The Vodafone deal will show up in 2006 FDI.  Moreover, 
the market is rife with rumors and plans for new deals. 
For example, Finansbank, Denizbank, and Akbank have all 
retained advisors for sale of their shares or of a 
controlling stake. At the same time, the state bank 
privatization process finally looks like it might pull 
off a sale of Halk Bank. 
 
9.(SBU) In a recent poll of its members, the Turkish 
Foreign Investors' Association, YASED, found foreign 
investors in a bullish frame of mind. 73% expected the 
economic climate for FDI likely to get better, 27% 
thought it would stay the same and none thought it 
would get worse, while 51% thought they would be making 
additional investments in the future. 
 
¶10.  (SBU)  Still, sustaining over the long term the 
high levels of FDI Turkey needs to create jobs and 
catch up with EU living standards will require 
continued reforms to improve the business and 
investment climate.  In addition to reducing still 
complicated business registration procedures, licensing 
requirements and other bureaucratic red tape, the World 
Bank's "Doing Business" database shows that Turkey 
compares unfavorably with competitor countries in area 
of labor market regulation, particularly the ease of 
hiring and firing workers 
http://www.osis.gov/state/posts/turkecon/2005 /12/PRN_do 
 
ANKARA 00000998  004 OF 004 
 
 
ing_business_1.html).  Easing up on these regulations 
and fostering a more entrepreneurial environment will 
be a political challenge for this or future 
governments. 
 
WILSON