POWERFUL RALLY ON CONFLUENCE OF POSITIVE NEWS

UNCLAS SECTION 01 OF 02 ANKARA 006269 SIPDIS SENSITIVE STATE FOR E, EB/IFD, AND EUR/SE TREASURY FOR OASIA - MMILLS AND JLEICHTER NSC FOR BRYZA AND MCKIBBEN E.O. 12958: N/A TAGS: EFIN PREL TU SUBJECT: POWERFUL RALLY ON CONFLUENCE OF POSITIVE NEWS REF: A. ANKARA 6001 ¶B. ANKARA 6122 ¶C. ANKARA 6209 ¶D. ANKARA 6231 ¶E. ANKARA 6241 ¶1. (Sbu) Turkish markets rocketed forward on October 6 in reaction to several bits of positive news over the weekend. The High Election Council's decision not to invalidate last year's election, better-than-expected inflation numbers, GOT movement toward a parliamentary resolution on troops for Iraq, and premature press reports of progress on the IMF's Sixth Review combined to send markets forward. The stock market rose 10.62 percent, interest rates fell over two hundred basis points to 32.82 percent, and the lira hit TL 1,367,643 per dollar. The stock market level and interest rates attained are records for 2003. End Summary. NEW RALLY STARTED FRIDAY: -------------- ¶2. (Sbu) Turkish markets' rally paused last week, as profit-taking and worries about a possible High Election Council invalidation of the November 2002 election results (ref B) caused stock prices to ease and the benchmark treasury bill to stay over 34 percent Monday through Thursday. Adding to market worries last week were signs of increasing politicization of the U.S. credit, including critical comments by military leaders (ref C). On Thursday, the lira closed above TL 1.4 million to the dollar. On Friday, October 3, however, the markets returned to their earlier bullishness, encouraged by continued strong export data and indications of U.S.-Turkish cooperation on the PKK-Kadek issue. On Friday, the IMKB 100 stock market index closed up 2.3 percent, the lira was at 1,395,742 per dollar and the benchmark treasury bill at 34.97. . CONFLUENCE OF POSITIVE NEWS OVER THE WEEKEND: -------------- ¶3. (Sbu) Just as the markets closed Friday, the Central Bank announced better-than-expected inflation numbers for September. The Consumer Price Index was up 1.9 percent, and the Wholesale Price Index increased only 0.1 percent. The good inflation numbers are to a large extent attributable to the strong lira. However, these numbers reinforce earlier indications and private comments to Emboffs from key GOT officials that the full-year CPI numbers will hit the IMF program's 20 percent target and that full-year WPI numbers could beat the target. ¶4. (Sbu) On Saturday, the High Election Council removed a big worry by ruling that it would not invalidate the results of the November 2002 elections. Press reports over the weekend and Monday morning also suggested that the GOT was moving to ask Parliament for authorization to contribute Turkish troops to the Iraq stabilization force. Since any such troop contribution would help U.S.-Turkish relations, this was an additional positive for markets. At the end of the day, the GOT announced it was submitting a motion on trooops to parliament this evening. ¶6. (Sbu) One local newspaper prematurely reported in its Monday morning edition that the GOT was near agreement with the IMF mission currently in town to work on the Sixth Review. Whether or not markets put much stock in this report, several newspapers reported that the 2004 budget was sufficiently prepared to be presented to the GOT's High Planning Council, and that the budget included ambitious and IMF-blessed macroeconomic targets: a 6.5 percent primary surplus, 5 percent GDP growth and 12 percent inflation on a CPI basis. MARKETS JUMP ON MONDAY: -------------- ¶7. (Sbu) With all this good news, and nothing negative to slow down the bulls, the markets surged forward at the opening. By the close, the TL was at 1,367,643, the IMKB 100 was up 10.62 percent to 15,719 and the benchmark treasury bill had fallen over 200 basis points from 34.97 percent at the closing Friday to 32.82 percent. In addition to being records for the year in the stock and Treasury bond markets, the benchmark interest rate was at its lowest level since pre-crisis August 2000. In fact, in 2000 the benchmark was only a six-month maturity, making the current twelve-month benchmark interest rate's relatively low level that much more impressive. EDELMAN