MARKETS STRONG DESPITE DISAPPOINTING SECOND

UNCLAS SECTION 01 OF 02 ANKARA 005801 SIPDIS SENSITIVE DEPARTMENT FOR E, EB/IFD/OMA, AND EUR/SCE TREASURY FOR OASIA - MMILLS AND JLEICHTER NSC FOR MCKIBBEN E.O. 12958: N/A TAGS: EFIN PGOV TU SUBJECT: MARKETS STRONG DESPITE DISAPPOINTING SECOND QUARTER GDP GROWTH NUMBER REF: A. ANKARA 5736 ¶B. ANKARA 5757 ¶1. (SBU) Summary: Markets continued their summer rally this week, buoyed by the news of the likely signature of the U.S. financial assistance agreement. On Wednesday, the rally was strong enough to propel the benchmark t-bill rate to its lowest level of the year, the stock market to its highest level this year,and the lira to a level prompting Central Bank intervention. Yet the macro numbers released this week were mixed: good news on the fiscal front and on inflation expectations was balanced by second quarter GDP growth numbers which were below expectations. The postponement of the court ruling on the DEHAP election- participation case further reassured markets. End Summary. Increased likelihood of U.S. Financial Assistance Encourages Market Rally: -------------- -------------- ¶2. (SBU) Turkish markets extended their summer rally this week, as the news of the U.S. notification to Congress of the Financial Agreement emerged, and the markets developed greater confidence the deal will be signed the week of September 20 in Dubai. With the notable exception of the disappointing second quarter growth numbers (see para 4 below),there had been other encouraging indicators in recent days: Minister Unakitan's announcement on Tuesday afternoon of a better-than-expected August primary surplus (ref b) and the Central Bank's expectations survey showing businesses expect year-end consumer price inflation to be 21.1 percent, approaching the 20 percent target in the IMF program. Wednesday was a particularly strong ay in the markets: The IMKB 100 stock index reached its highest point since the beginning of the year at 12,317 and the benchmark t-bill hit its lowest level of the year at 37.1 percent before closing at 37.64. On Thursday, the IMKB 100 closed slightly higher at 12.507 and the benchmark t-bill interest rate reached 37.02. Market analysts believe the t-bill rate cannot go much lower since it is bumping up against Central Bank reluctance to reduce the overnight borrowing rate from 37.7 (ref A). Central Bank intervenes to stabilize the Lira: -------------- ¶3. (SBU) In the foreign exchange market, when the lira hit a new high of TL 1,370,000 to the dollar on Wednesday, the Central Bank intervened, driving the lira back to TL 1,388,000 at the close. The Bank spent $704 million and also announced that it was increasing the amount of dollars at its daily auction from $40 million to $50 million, with an option to buy an additional $25 million. It was the fifth Central Bank intervention of the year. The Bank's public statement claimed that it was only intervening because of excess volatility in the market, and that the lira's level will be determined by market forces. Market participants, however, believe the Bank is concerned about the strength of the lira. Disappointing growth numbers and the DEHAP court case: -------------- ¶4. (SBU) Ironically, on the day before the rally, the first disappointing real economy indicator in several months came out: second quarter GNP growth was only 3.7 percent, well below analysts' expectations of around 6 percent. According to Istanbul-based Bender Securities, monthly industrial production statistics, which showed higher growth than quarterly industrial production numbers, have proven to be poor indicators of the large industrial production component of GNP and GDP growth, such that analysts appear to have been misled. The sectoral breakdown shows a mixed picture, with construction continuing its long decline, private sector consumption growing only 2.5 percent and public sector investment down 11.3 percent, as the GOT's investment budget bears the brunt of its efforts to comply with its fiscal targets. Private sector investment, on the other hand, rose by 11.9 percent. Net exports were a negative, as import growth surpassed strong export growth. Despite the disappointing growth figure, analysts still predict there is a good chance of achieving the full year target of 5 percent growth. ¶5. (SBU) Another factor weighing on the market was the political uncertainty caused by the court case which could result in the disqualification of the Kurdish DEHAP party's participation in last year's elections. Markets have been concerned that a ruling could result in a change in parties' representation in parliament, which might in turn precipitate early elections. On Thursday, the court postponed a decision on DEHAP, which at least temporarily put off the potential disqualification. ¶6. (SBU) In morning trading Friday, the markets postive tone persists: the benchmark is trading at 36.74 percent and the IMKB 100 is up to 12,728. EDELMAN EDELMAN