VZCZCXRO5710
RR RUEHDA
DE RUEHAK #4365/01 2121236
ZNR UUUUU ZZH
R 311236Z JUL 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 7539
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHIT/AMCONSUL ISTANBUL 1006
RUEHDA/AMCONSUL ADANA 0974

UNCLAS SECTION 01 OF 02 ANKARA 004365 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN TU LE IZ IR IS
 
SUBJECT: Turkish Markets Unfazed by Middle East Crisis, but Tourism 
Sector Worried 
 
Ref: Ankara 1568 
 
This cable was coordinated with Congen Istanbul. 
 
1.(SBU)  Summary:  The Middle East crisis has yet to have a 
significant impact on the Turkish Economy though some business 
people worry it could if it persists or broadens to other countries. 
 After falling as the Israeli-Hezbollah fighting began, Turkish 
markets have recovered and even rallied along with other Emerging 
Markets.  Lebanon is only a minor trading partner; however there are 
early signs of a fall in tourists from Lebanon and possibly other 
countries.  The biggest economic impact derives from the conflict's 
effect on world oil prices, and Turkish business people worry more 
about Iran- and Iraq-related developments.  End Summary. 
 
--------------------------------------------- ----- 
Turkish Markets Not Focused on Middle East crisis: 
--------------------------------------------- ----- 
 
¶2. (SBU) The crisis in the Middle East has not been a significant 
factor in Turkish financial markets over the past two weeks. 
Although Turkish markets fell in line with other Emerging Markets 
(EM) immediately after Israel began its military action in Lebanon 
July 12, Turkey's geographic proximity did not cause Turkish markets 
to be hit harder than other EM.  Over the week of July 24-30, in the 
absence of negative domestic news, and with portfolio investors 
regaining their appetite for Emerging Market securities, Turkish 
markets have been gradually strengthening with the exchange rate 
appreciating to a two-month high of 1.49 per dollar on July 27. 
Market analysts are barely mentioning the Israeli-Lebanese conflict 
in their newsletters. 
 
--------------------------------------------- ------ 
Minor Trade Relationship, but Worries about Tourism 
--------------------------------------------- ------ 
 
¶3. (SBU) Turkey conducts only a modest level of trade with Lebanon: 
$345 million in two-way trade of which $196 million are exports. 
Compared to Turkey's total exports of   $ 76 billion in 2005, sales 
to Lebanon are of negligible importance.  Turkey has a much bigger 
trading relationship with Israel with $1.46 billion in exports in 
2005 but these sales are likely to continue despite the conflict. 
Turkish-Lebanon Business Council Co-chairman Mehmet Habbab said 
150,000 Lebanese tourists come to Turkey in a year.  If the crisis 
causes these numbers to dry up, it could exacerbate the already down 
year the Turkish tourism sector is experiencing but this is not a 
disaster.  The Chairman of the Turkish Hotel Federation was quoted 
in the press July 28 saying that not only Lebanese tourist arrivals 
but also arrivals from neighboring countries such as Jordan have 
already stopped.  He said Turkey will miss out on the developing 
tourist potential from the Middle East.  With regard to the major 
source countries for Turkish tourism, however, there are no signs 
yet that the proximity of the conflict is causing other tourists to 
cancel trips to Turkey.  The owner of a hotel in the Mediterranean 
resort of Gocek who caters to British tourists did not even mention 
the Middle Eastern situation in an extended conversation about this 
year's season on July 23. 
 
--------------------------------------------- --- 
Businessmen Calm About Short-term but Some Worry 
--------------------------------------------- --- 
 
4.(SBU) At a recent dinner in Istanbul with executives for U.S. 
companies in Turkey, none seemed concerned about the conflict's 
impact on their bottom line.  The Ankara representative of TUSIAD, 
the Turkish Industrialists' Association, said TUSIAD was not 
concerned about any immediate short-term impact, nor was a leading 
Istanbul market analysts we spoke to.  The US company executives 
were quite concerned on the other hand, about the plight of Lebanese 
civilians, including employees of their groups.  In general, our 
business contacts, like most Turks, feel for the Lebanese civilians 
caught in the fighting and believe the Israeli actions to have been 
disproportionate (reftel). 
 
5.(SBU) Some business contacts expressed the concern that, if the 
conflict persists or broadens to other countries it could come to 
have a negative impact on the economy of many eastern Mediterranean 
countries.  The Union of Mediterranean Business Confederations, of 
which TUSIAD is currently president, put out a statement July 25 
expressing this concern.  The Chairman of the Union of Turkish 
Chambers of Commerce, TOBB, pointed out that the "Ankara Forum," a 
TOBB-led initiative to develop ties between Israeli and Palestinian 
chambers of commerce would have had its fourth meeting had it not 
been for the current conflict.  TOBB also told us that its project 
to revive the Erez Industrial Zone in Gaza has taken a huge step 
backwards because the recent fighting badly damaged the 
 
ANKARA 00004365  002 OF 002 
 
 
previously-intact Industrial Zone.  Some Turkish business contacts 
also noted the danger that the AKP Government's penchant to care 
more about developments in the Muslim world than other Turkish 
Governments, holds the potential to create either domestic political 
frictions or frictions with the western world, either of which can 
add to financial market nervousness. 
 
-------------------------- 
Oil Price Always a Concern 
-------------------------- 
 
6.(SBU) With Turkey importing over 90% of its petroleum, high oil 
prices have been a major factor in the growth of Turkey's current 
account deficit in 2005 and so far in 2006. The IMF estimates that 
Turkey's oil imports will total $23 billion in 2003, roughly 
equivalent to the expected size of the current account deficit. 
Though Middle East tensions are one of many factors in high oil 
prices, the surge in prices on the news of the Israeli movement into 
Lebanon exacerbates the outlook for a continued large current 
account deficit in Turkey, and higher oil prices, if they persist, 
are likely to exacerbate the slowdown in growth in the second half 
of 2006 that is now expected as a result of the May-June fall in the 
exchange rate and higher interest rates.  But few analysts expect 
the high oil prices to be a bigger problem for Turkey than it 
already is, unless prices surge higher than current levels. 
 
---------------------------------- 
Bigger Impact if Conflict Broadens 
---------------------------------- 
 
¶7. (SBU) If the current conflict broadens or exacerbates instability 
in other Middle Eastern countries, particularly Iran or Iraq, that 
would be a far bigger concern for the Turkish economy.  Although 
Turkey signed a free trade agreement with Syria, Turkey's exports to 
Syria were only $495 million in 2005.  By contrast, Iran- and 
Iraq-related developments worry Turkish business people and market 
analysts.  Not only do Iran and Iraq have a much bigger effect on 
oil markets, but they are larger trading partners and both are 
viewed as important to the Turkish economy.  Iraq was Turkey's 
largest trading partner prior to 1991 and Turkey exported $2.4 
billion to Iraq in 2005.  Turkey exported $820 million to Iran in 
2005 and imported $3.2 billion, mostly natural gas.  An MFA official 
also told us Turkey sees Iran as a vital gateway for trade with 
Central Asia since most of this trade is trucked through Iran.  The 
prospect of possible UN sanctions on Iran, therefore, causes Turks 
to fear a repeat of the perceived damage to their economy from the 
UN sanctions on Iraq. 
 
McEldowney