ECONOMIC FUNDAMENTALS SOUND, SO FAR

UNCLAS ANKARA 001744 SENSITIVE SIPDIS E FOR U/S JEFFERY EEB FOR A/S SULLIVAN TREASURY FOR VELTRI AND MORAVEC E.O. 12958: N/A TAGS: ECON EFIN TU SUBJECT: ECONOMIC FUNDAMENTALS SOUND, SO FAR ¶1. Summary and comment: The effects of the global financial crisis on Turkey's economy have not been significant, thus far. The stock market, known for volatility, has lost value and the lira has depreciated slightly. Structural reforms implemented by the GOT, especially in the banking sector, have helped shore up Turkey's economy. Additionally, Turkey is enjoying the benefits of being relatively unsophisticated with respect to complex financial instruments and by not having a bona fide mortgage system. A continued global economic downturn will likely sour Turkey's economy by reducing exports and FDI flows but will also have the positive effect of easing the growth of Turkey's large current account deficit and its challenge to find financing. Financing for the private sector will continue to be difficult. End summary and comment. Turkish Lira Depreciating -------------- ¶2. The benchmark two-year Turkish Lira bond rate widened by 70 basis points on October 6 to 20.6%. In the last month, the equity market lost 19.3%, falling 8.6% on October 6. The Istanbul Stock Exchange has lost 42% of its value in 2008. The lira has depreciated 13.1% against the U.S. dollar and 6% against the Euro since the beginning of 2008. The lira is currently at a 13-month low against the dollar. Future Trends: Exports Will Decline -------------- ¶3. A sharper-than-foreseen slowdown in the global economy and reduced risk appetite are expected to affect Turkey,s external balances through two channels; effects on the current account (C/A) balance and capital flows. Baturalp Candemir from EFG Istanbul Securities estimates that a 2% deceleration in global growth would decrease Turkey's exports by $7 billion. By his calculations, such a decline in global growth and exports would, in turn, cause a deceleration in economic growth of around 0.5%. The deceleration in growth and the decline in exports would curb Turkey,s import demand by around $3 billion. Candemir says in the event of a $20 per barrel drop in oil prices, Turkey,s energy import bill would ease by around $10.5 billion. Future Trends: Current Account Growth Will Slow -------------- -- ¶4. Candemir notes that global slowdown could lead to a decline in the C/A deficit; however, financing requirements will continue to rise because of the private sector,s increased debt service obligations in 2009. Finding financing may be more difficult because of growing risk aversion and disruptions in global credit markets. In 2009, Candemir expects a significant drop in FDI from $12 billion (year-end 2008 estimate) to $6 billion, and in private sector foreign borrowings from $67 billion to $56 billion. Candemir adds that portfolio inflows could accelerate by around $3.5 billion, as the global turmoil dissipates. A higher financing requirement and reduced borrowing capacity and FDI imply that Turkish reserves may be depleted by $10-12 billion. Inflation Down -------------- ¶5. Year-on-year inflation fell to 11.1% in September 2008. The Central Bank of Turkey (CBRT) expects that in 2009, with slowing growth and demand conditions, inflation may fall back to single digit levels seen in 2004-2007. The GOT economic team: Economy Minister Nazim Ekren, Treasury Minister Mehmet Simsek, and Finance Minister Kemal Unakitan; the CBRT; and leading Turkish analysts all expect a slowdown in economic activity. Slower growth will be good for Turkey,s high C/A deficit, which is estimated to reach 7% of GDP by year,s end ¶2008. Global slowdown should lead to a decline in the C/A deficit; however, financing requirements continue to rise, with the private sector,s debt service obligations in 2009 expected to reach $100 billion. ¶6. On October 6, the CBRT announced that core inflation remained on an essentially downward trend and that annual inflation would continue to decline, provided that food and energy prices keep going down. Tim Ash from the Royal Bank of Scotland notes that with the economy showing signs of slowing abruptly and unemployment likely to rise in the months ahead, the GOT will want greater flexibility on the budget front. Motivational Messages from the Central Bank and GOT -------------- -------------- ¶7. With pressure mounting on Turkish markets, CBRT Governor Durmus Yilmaz on October 6 said in the current environment Turkey still needs an anchor--noting the previous IMF program served Turkey well. Yilmaz commended good GOT fiscal performance in 2008, but expressed concern over a possible surge in budget spending in the run up to the March 2009 local elections. He believes an IMF program would help cap that spending. In September, PM Erdogan promised he would announce a decision on any future program that Turkey might request from the IMF. On October 7, Erdogan said that the GOT has taken measures against the global crisis with the help of its strong banking system, sound financial structure, and prudent economic programs. Erdogan said he expects the negative impact on Turkey to be minimal. ¶8. On October 2, Finance Minister Unakitan said the GOT would soon announce measures to increase Turkey,s resilience to the global crisis, and added that FDI was still flowing to Turkey through privatizations. Trade Minister Kursat Tuzmen called attention to Turkey,s export diversification and noted that Turkish exports to the Gulf countries increased 75% in 2008 from 2007, underlining Turkey,s decreasing dependence on Euro-zone economies. Treasury Minister Simsek praised the high capital adequacy ratio of the banking sector and noted that the economy was insulated against liquidity problems with YTL 30 billion ($22.4 billion) in circulation. On October 7, Simsek said Turkey will continue to implement fiscal discipline, cautious monetary policy, and attract foreign investors. Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey WILSON