TURKISH ECONOMY CONTRACTS 13.8 PERCENT IN FIRST QUARTER

UNCLAS SECTION 01 OF 02 ANKARA 000958



TREASURY FOR INTERNATIONAL AFFAIRS - JWEISS



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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





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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