Cablegate: Turkish Markets Unfazed by Middle East Crisis, but Tourism

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.

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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

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