VZCZCXRO9911
RR RUEHDA
DE RUEHAK #1746/01 0930516
ZNR UUUUU ZZH
R 030516Z APR 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 4465
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEHAAA/NSC WASHDC
RUEHIT/AMCONSUL ISTANBUL 0213
RUEHDA/AMCONSUL ADANA 0599
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ANKARA 001746 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TU
SUBJECT: The Anatolian Tiger Roars: 7.4% GDP Growth in 2005 
 
 
1.(U) Summary:  Turkish Statistical Agency (TUIK) announced 
7.4% GDP growth (7.6% GNP) for 2005, well above expectations 
and the 5% program target.  Surprisingly high (10.2%) growth 
in the fourth quarter, with the construction sector the star 
performer, raised the full-year growth figure and surprised 
analysts. Per capita GNP exceeded $5,000 for the first time, 
and average GNP growth since the 2001 crisis is now 7.8%. 
The strong growth provides a dramatic counterpoint to 
business complaints, mostly in export sectors, and is likely 
to reinforce the need for tight fiscal policy and make it 
harder for the Central Bank to lower interest rates.  End 
Summary. 
 
------------------------ 
Blockbuster Data Release 
------------------------ 
 
¶2. (U) Fourth quarter GNP data surprised the markets, which 
expected a 6.7 percent GNP growth for the fourth quarter and 
5.79 percent growth for the year as a whole. According to 
the data released by the State Statistical Agency (TUIK), 
fourth quarter GDP and GNP rose by 9.5% and 10.2%, 
respectively -- well above the market consensus estimates. 
This surge of growth in the fourth quarter, combined with 
upward revisions in earlier quarters' data, put full-year 
real growth at 7.4% for GDP and 7.6% for GNP.  Both for the 
fourth quarter and the full year, the star performer was the 
construction sector, which grew 14.8% in the fourth quarter 
and 21.5% on the year in real terms. The construction boom 
and continued strong durables sales reflect Turkey's credit 
boom, as interest rates fell in 2004 and 2005 to affordable 
levels after years in the stratosphere. 
 
¶3. (U) On the demand side, private sector consumption 
increased by 16.7% y-o-y, marking the highest annual growth 
rate recorded since 1995.  However, investment spending grew 
even more: gross fixed capital formation grew 33% in the 
fourth quarter and 24% on the year.  GDP per capita exceeded 
the $5,000 level ($5,008) for the first time as total GDP 
reached $361.5bn. 
 
------------- 
What It Means 
------------- 
 
¶4. (U) The surprising strength of the Turkish economy in 
2005 has implications for policy.  First, it helps vindicate 
the IMF-sponsored tightening of fiscal policy in 2006, which 
the GOT accepted in the fall.  Had fiscal policy not 
tightened, continued disinflation and control of the current 
account deficit would be that much harder.  Strong growth is 
also likely to bolster the IMF's arguments in favor of 
continued fiscal austerity and against tax cuts like the 
GOT's recent VAT rate cut for the textile sector. 
 
¶5. (SBU) Higher-than-expected growth would also argue for 
tighter monetary policy to damp down inflationary pressures. 
This is likely to slow the Central Bank's expected rate- 
cutting path, despite declining inflation. On the other 
hand, Tolga Ediz of Lehman Brothers points out that the 
persistence of strong growth despite the Central Bank's 
disinflationary tightening suggests a better inflation- 
growth trade-off than had been factored into the Bank's 
forecast. 
 
¶6. (SBU) The strong growth also has interesting implications 
for the debate over Turkey's burgeoning current account 
deficit and the controversy over the GOT's decision to 
replace outgoing Governor Serdengecti.  Despite a drumbeat 
of exporter complaints about Serdengecti and the allegedly 
overvalued exchange rate, the strong growth vindicates his 
policies, as does the strong investment spending.  World 
Bank economist Rodrigo Chavez pointed out to us that 
Turkey's continued strong investment supports the argument 
of Willem Buiter of the Centre for European Policy Studies 
that the current account deficit represents increased 
investment more than increased consumption.  Buiter argued 
(before the growth data were released) that Turkey's current 
account deficit was sustainable in a fast-growing economy 
and that the increased private investment that is a major 
driver of the deficit is a much-needed positive. 
 
----------------------- 
Shot in the Arm for GOT 
----------------------- 
 
ANKARA 00001746  002 OF 002 
 
 
 
¶7. (SBU) Even though the strong growth data will strengthen 
the IMF's argument for fiscal discipline, the GOT can only 
be pleased about the remarkably strong growth data, which 
strengthen their credentials as successful stewards of the 
economy. 
 
McEldowney