VZCZCXRO6703
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHAK #0958/01 1871306
ZNR UUUUU ZZH
R 061306Z JUL 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0117
INFO RUEATRS/TREASURY DEPT WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHIT/AMCONSUL ISTANBUL 5954
RUEHDA/AMCONSUL ADANA 3973

UNCLAS SECTION 01 OF 02 ANKARA 000958 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JWEISS 
 
SENSITIVE 
SIPDIS 
 
REF: ANKARA 2052 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TU
 
SUBJ: TURKISH ECONOMY CONTRACTS 13.8 PERCENT IN FIRST 
QUARTER 
 
ANKARA 00000958  001.2 OF 002 
 
 
This cable is sensitive by unclassified.  Please protect 
accordingly. 
 
¶1. Summary: The Turkish economy contracted at a higher- 
than-expected 13.8% year-on-year rate in the first 
quarter of 2009, its worst quarter since World War II, 
one of the worst performances among emerging European 
economies, and the worst performance by an OECD member. 
The sharp drop was driven by a collapse of domestic 
consumption and spending, and the Turkish Treasury plans 
to respond by increasing its domestic borrowing for 
public expenditures to offset the declining private 
spending (the GOT's debt rollover ratio will exceed 
100% this year). Analysts are divided on whether the 
Turkish economy has bottomed out or if the worst is still 
to come.  Several economists revised their annual growth 
targets downward to negative 5.5% to 7.0% for 2009 
following the recent data. The GOT still expects an 
annual contraction of 4 to 4.5%.  End Summary 
 
¶2. (U) Turkey's economy contracted at the highest rate 
since World War Two with a first quarter 2009 decline of 
13.8% in real terms.  Value added in all sectors, except 
for financial institutions and hotels, declined 
drastically as well.  The 6.2% drop in GDP in the last 
quarter of 2008 had presaged further declines in 2009, 
but the extent of the contraction surprised many 
analysts.  Economists had been expecting a sharp 
contraction of around 12% in first quarter growth data. 
Following the release of the data, the Industry Ministry 
reiterated its claim that GDP will fall only 4.0 - 4.5% 
in 2009. 
 
¶3. (U) In the breakdown of the data, the highest rate of 
decline was in the wholesale and retail trade sectors 
which fell 25.4%, followed by construction (-18.9%) and 
manufacturing (-18.5%).  Positive growth was recorded 
only in the financial sector and the hotel business.  The 
financial sector grew 10.7%, largely a result of banks 
investing heavily in government securities.  The hotel 
sector grew at 2.9%, likely due to the more favourable 
lira exchange rate for tourists and a series of rate- 
slashing campaigns.  Private consumption dropped by 9.2% 
year-on-year, even worse than the 2001 crisis. 
Similarly, private investments slipped by 35.8%.  Public 
consumption continued to contribute positively to overall 
GDP with growth of 5.7%, mostly increased GOT spending 
leading up to the March 29 local elections.  Public 
sector investments grew 25%, in contrast to the sharp 
fall in private sector investments. Even the agriculture 
sector fell 3%, despite the favourable weather 
conditions. 
 
¶4. (SBU) While the first quarter 2009 growth data is 
discouraging, local economists are unsure whether the 
economy has bottomed out.  Most economists and Turkish 
officials agree that the first quarter saw the worst of 
the crisis and a gradual recovery will begin in the 
second quarter, with positive growth in the last quarter 
of 2009.  Central Bank Governor Durmus Yilmaz said the 
economic recovery will be slow, but the Central Bank 
(CBT) expects growth to resume again by 2010. Ufuk 
Hazirolan, Deputy Director General for Public Finance at 
Turkish Treasury, told us that the growth rate was 
"worrisome" in the first quarter.  Hazirolan said the 
Turkish Treasury will need respond to the data by 
increasing its domestic borrowing for public expenditures 
to offset declining private spending, also noting that 
despite the increasing debt stock, borrowing cost was 
decreasing due to the favourable market conditions (Note: 
Turkish Treasury's rollover ratio increased to above 100% 
in 2009 vice a 75-80% ratio prior to the crisis, mostly 
due to increased GOT spending. End note).  Despite his 
concerns, Hazirolan said he believed the economy has seen 
the worst. 
 
¶5. (SBU) CBT Markets Deputy Director General Ali Cuhadar 
said that slowing demand has dampened inflationary 
pressures and the CBT now expects annual inflation to 
come in at 5.3% versus the target of 6.5%.  Cuhadar noted 
that the increased rollover ratios in Treasury borrowing 
led to a crowding out of funds available for the private 
 
ANKARA 00000958  002.2 OF 002 
 
 
sector, inhibiting that engine for growth, as banks 
started to invest in government securities instead of 
lending. Cuhadar also said if there is no IMF deal, then 
the recovery may take much longer.  Economists like 
Servet Yildirim from CNBC-e, Baturalp Candemir from EFG 
Securities in Istanbul and Erhan Aslanoglu from Marmara 
University expect a slow recovery period, but add that 
the recovery will also depend on how fast Europe 
recovers. 
 
¶6. (SBU) Comment: The GDP first quarter reading was, 
driven by remarkable declines in private consumption and 
expenditures. Indicators on the production and 
consumption sides point to a better picture in the second 
quarter, however, partly stimulated by the introduction 
in March of temporary tax cuts (value added tax and 
special consumption tax) in automotives, white goods, 
electronics, furniture and IT products.  As these 
incentives are scheduled to go away in September, 
however, they may just lend a temporary blip to growth. 
 
¶7. (SBU) Comment cont'd: Export markets will remain 
subdued, inhibiting a more permanent recovery, although 
this will be offset somewhat by the contraction in 
imports, which fell 43.9% in May 2009 from May 2008.  If 
oil prices continue to rise, however, imports may 
increase before exports recover, raising additional risks 
for growth and adding to external financing pressures. 
Most economists we talk to expect economic activity to 
keep contracting in the second and third quarters, though 
at a lesser pace, followed by a mild recovery in the last 
quarter, and expect an annual 5.5 to 7% GDP contraction 
for 2009, with risks to the downside.  End comment. 
 
JEFFREY