VZCZCXRO7285
RR RUEHRN
DE RUEHAK #0801/01 0961427
ZNR UUUUU ZZH
R 061427Z APR 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 1610
INFO RUEHIT/AMCONSUL ISTANBUL 2472
RUEHDA/AMCONSUL ADANA 1829
RUEATRS/DEPT OF TREASURY WASHDC
RUEHSS/OECD POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 ANKARA 000801 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JONATHAN ROSE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV EU TU
SUBJECT:  FIFTH YEAR OF STRONG GROWTH IN TURKEY 
 
 
ANKARA 00000801  001.2 OF 002 
 
 
1.(U) Summary:  Despite sharply higher interest rates, the Turkish 
economy (GDP) grew 6.1% in real terms in 2006, surpassing 
expectations and the official target of 5.0%.  Per capita income 
reached $5,477 almost doubling from $2,642 in 2002.  The Turkish 
economy has grown by an annual average of 7.2% over the past five 
years.  A relative slowdown in this growth pace is expected in 2007, 
but the 2007 target of 5.0% is still within reach.  Ongoing reforms 
will be required to sustain high growth and investment rates into 
the medium-term.  End Summary. 
 
---------------------------------------- 
ECONOMY RECOVERED FROM MID- 2006 TURMOIL 
---------------------------------------- 
 
¶2.  (U)  According to fourth quarter 2006 growth figures released 
April 2, the Turkish economy grew faster than projected in 2006. 
Despite global market volatility and tight monetary policy in 2006, 
GDP growth in the fourth quarter of 2006 came in at 5.2% -- well 
above market expectations.  Overall GDP growth in 2006 was 6.1% and 
GNP growth was 6.0%, whereas the target was 5% and most analysts 
were expecting growth to come in between 5% and 5.5%.  The data 
suggest the economy has recovered from the market turmoil in the 
second quarter of 2006. 
 
------------------------ 
Growth Driven by Exports 
------------------------ 
 
¶3.  (U)  The principal sources for the high 2006 growth on the 
expenditure side were private sector capital formation and trade 
(both imports and exports).  On the production side, the main 
drivers were services and industry (2.7 points and 2.2 points 
respectively), followed by the booming construction sector with 0.9 
points for the whole year.  The construction sector's weight in GDP 
growth increased significantly in the past five years. 
 
¶4. (U) The construction sector grew 16.1% in the last quarter and 
total growth in the sector reached 19.4%, on the back of strong 
performances in the first three quarters of the year (27.1%; 14.9%, 
and 21.3% respectively for the first three quarters).  The 
agriculture sector also grew by 9.7% in the last quarter after poor 
performances in the second and third quarters of the year (-0.4% in 
Q2 and 0.5% in Q3).  For the full year, growth in the agriculture 
sector thus reached 2.9%. 
 
¶5. (U) The 2006 growth data also showed significant change in the 
structure of growth in Turkey as the motor of economic growth shifts 
from domestic demand to exports.  Private consumption growth 
declined from 11.5% in Q2 to a mere 0.1% in Q4. In addition, the 
contribution of government spending to growth has also declined. 
Whereas the rate of growth of government spending was 18.3% in Q2, 
in Q4 it declined sharply to 0.7%. 
 
---------------------------------- 
Strong Private Investment Spending 
---------------------------------- 
 
¶6. (U) Domestic demand growth (2.7% year-on-year; year-on-year) 
contributed 2.8 percentage points to the overall 5.2% GDP growth 
registered in Q4, but the bulk of this came from private sector 
investment (1.2 percentage points) and inventory growth (1.3 
percentage points).  Both private and public sector consumption 
growth (0.1% year-on-year and 0.7% year-on-year, respectively) 
remained subdued and contributed a mere 0.1 percentage points to 
overall GDP growth, each. Meanwhile net exports continued to 
recover, adding 2.5 percentage points to overall GDP growth. 
 
---------------------------------- 
Relative Slowdown Expected in 2007 
---------------------------------- 
 
¶7.  (U)  Relatively robust economic growth is expected to continue 
in 2007 although perhaps at a slower pace, with  industry and 
construction expected to be key drivers.  The Central Bank's tight 
monetary policy to bring down inflation to the 4% target from a 
current annual level of 10.92% will be quite challenging, and if the 
high interest rate policy continues, it may be contribute to slower 
growth of domestic demand in 2007. 
 
---------------------------- 
Highest Growth Rates in OECD 
---------------------------- 
 
¶8.  (SBU)  The Turkish economy grew an average of 7.2% in the past 
five years, one of the highest rates of growth -- perhaps the 
highest -- in the OECD.  Per capita income in dollar terms nearly 
doubled since 2002, from $2,642 to $5,477.  Even allowing for the 
 
ANKARA 00000801  002.2 OF 002 
 
 
unevenness of income growth, this dramatic improvement must be 
having an impact on individual Turks' sense of financial well-being. 
 The AK Party Government can point with pride to the fact that the 
period of sustained strong growth -- the longest in recent memory in 
Turkey -- has coincided with the AK Party's period in power. 
Stronger-than-expected growth also improves ratios to GDP that are 
considered indicators of vulnerability: in particular, Net Public 
Debt to GDP is now only 44% -- down from 90% after the crisis -- and 
the Current Account Deficit to GDP, while still high, is 7.8%, 
projected to decline to 7.2% in 2007. 
 
--------------------------------------------- --- 
But Sustaining High Growth Requires More Reforms 
--------------------------------------------- --- 
 
¶8. (SBU) To sustain Turkey's strong growth well into the future, the 
next Government will need to keep moving forward with a second 
generation of reforms.  As the Central Bank often reminds the 
Government, labor market reforms, judicial reform and revamping the 
educational system to build a skilled labor force will raise 
Turkey's growth potential in Turkey and will help attract Foreign 
Direct Investment, perhaps even greenfield investment. 
WILSON