FIRST WAVES OF FINANCIAL CRISIS REACH TURKEY

C O N F I D E N T I A L ANKARA 001829

SIPDIS

E.O. 12958: DECL: 10/20/2018
TAGS: ECON EFIN TU
SUBJECT: FIRST WAVES OF FINANCIAL CRISIS REACH TURKEY

REF: A. ANKARA 1763

B. ANKARA 1744

Classified By: Economic Counselor Dale Eppler for reasons 1.4 b and d.



1. (C) Summary: The financial crisis is affecting Turkey by
reducing its GDP growth, employment, and exports, and by
reducing capital and credit flows into Turkey. Combined,
these have the potential to undermine Turkey,s relatively
well-capitalized and lightly-leveraged banks (reftels).
Economic indicators are turning negative, with the dollar
exchange rate at a two-year high and interest rates
exceeding 21%. Foreign banks have experienced a mini-run on
deposits, and there are doubts whether some Turkish banks and
companies will be able to rollover large foreign currency
credit lines coming due in the next few months. Two recent
privatization deals have hit financial snags due to banks
pulling their promised financing. The GOT has responded to
the crisis with public displays of optimism and a few policy
initiatives. The Central Bank was widely praised for opening
an FX Depot market to improve inter-bank liquidity, and the
Finance Ministry has announced an incentive plan to convince
Turks to repatriate
some of their $100 billion in funds held offshore. But the
GOT approach thus far has been reactive, not proactive, and
the business community wants the GOT to negotiate quickly a
full standby agreement with the IMF and increase deposit
insurance to get ahead of the crisis. The GOT seems to
assume that the Turkish banking sector is immune to the
crisis due to the 2001 banking reforms, but banks face both
increasing credit risk (as the slowing economy hurts
borrowers) and FX risks (from borrowing abroad and lending at
home). Financial problems in any of the seven largest banks
(holding 79% of banking assets) likely would cause systemic
problems. End summary.

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How the Crisis is Reaching Turkey
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2. (C) Despite recent public assertions by the Prime
Minister that Turkey would not be significantly affected by
the global financial crisis, there are many indications that
Turkey already is feeling its effects. There are two major
paths for the crisis to reach Turkey. The first is via the
expected drop in Turkey,s GDP growth due to global recession
and, in particular, a sharp recession in Europe
(the EU is Turkey,s main trading partner). The second way
is through finance. Europe is the source of much of
Turkey,s investment capital, and the chaos in Europe,s
financial sector will reduce capital and credit flows to
Turkey. Turkey needs to import billions to finance its large
current account deficit (CAD),and the Turkish private sector
has built up an estimated USD 100 billion in foreign
currency-denominated debt (taking advantage of low interest
rates offshore and the strong lira) that they will have
difficulty rolling over. Repaying this debt will not only
expose them to currency risk but also force them to reduce
business activity and employment in the absence of financing.
These two channels combined have the potential to open
undermine the financial strength of Turkey,s relatively
well-capitalized and not highly leveraged banks (reftels).

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Economic Indicators Turning Negative
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3. (SBU) The 2009 budget being presented to the parliament on
October 17 reportedly has 2009 GDP growth estimated at 4% and
inflation at 7.5%. Private estimates already are lower, some
projecting only 2.5% growth, with higher inflation.


4. (SBU) The dollar hit a two-year peak of 1.52 YTL ($.66)
the morning of October 17. The lira has fallen approximately
20% against the dollar since the end of August. Until now,
the high lira exchange rate has been one of the best Turkish
defenses against inflation (because Turkey imports a large
amount of intermediate goods and industrial inputs) and
private analysts are increasing their inflation projections.
Reflecting inflation concerns, the benchmark bond rate jumped
to 21.37% on October 16, up from 20.35% just one day earlier.



5. (SBU) The most recent data shows unemployment increased
from 8.8% to 9.4% in June-August. Agribusiness and government
officials in Adana (with 17% unemployment) told us recently
that they expect unemployment to increase as European trade
and investment slow. The textile sector, with its large
labor force, is expected to be particularly hard hit.

6. (SBU) The current account deficit for August matched the
consensus estimate of $3.3 billion, and was
lower than July's $4.1 billion. However, it was still almost
double the CAD in August 2007. The one-year moving average
CAD was $49 billion, around 6.5% of GDP, and we expect the
year-end CAD to reach 7% of GDP. On the financing side, net
foreign direct investment covered only 25% of the August CAD,
down from two-thirds coverage one year earlier.

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Financing is Becoming More difficult
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6. (SBU) A senior foreign banker in Istanbul told us that
local depositors withdrew USD 100 million from his bank
earlier this month, and that other foreign-owned banks were
experiencing similarly high withdrawal rates. He attributes
this to Turks reading about foreign banks experiencing
financial problems and pulling their money out of fear. He
added that three large Turkish banks, Garanti, Vakif, and
Akbank, are vulnerable in the short term because they have
USD $3 billion in foreign currency-denominated debt coming
due and it was a "big question" whether they would be able to
roll it over. He thought these banks could get by without
rollovers for about six months, but would then experience
financing problems. He noted the GOT also has significant
short-term, foreign currency-denominated debt coming due, and
he thinks it will be "complicated" for the GOT to roll all of
this debt over.


7. (C) Kazim Turker, Chairman and CEO of Turkerler Group (a
construction and energy company with 2007 revenues of USD 350
million) told the Ambassador October 17 he is worried about
the longer term effects to the Turkish economy from the
global financial crisis. Turker said his company will
weather the storm because they do not have any short term
debts. He also said he has been able to find creative
solutions to financing problems, such as Turkerler,s
purchase of the Derince port on the Marmara Sea. Turkey,s
Akbank had initially agreed to loan USD 400 million for the
project but recently told Turker they could
not make good on the deal and asked for a delay. Turker said
he then decided to sell half of the equity in the project to
Swiss company MSC which brought the necessary financing to
finalize the deal.


8. (C) Turker expressed concerns about Turkish banks having
difficulty rolling over FX debt that will come due in January
and February. Turker also predicted the GOT may face
difficulties renewing its debt and recommended the GOT come
to an agreement with the IMF right away as insurance against
a major financial crisis in Turkey. "They will have to do
it, sooner or later." The GOT is not paying
sufficient attention to the financial crisis and the PM is
getting bad advice, according to Turker.


9. (SBU) Global Investments, which won the tender for the
privatization of the Ankara city gas distribution network,
announced October 17 that it would not be able to fulfill its
$1.115 billion bid because banks had withdrawn their
financing for the project. According to documents on
Global,s website, the five banks involved in the financing
package are Bayerische Hypo-und Vereinsbank AG, ABN Amro
Bank N.V., T. Garanti Bank, Akbank, and Yapi Kredit Bankasi.
According to Turker, the Izmir port privatization may face a
similar collapse due to lack of financing.


10. (U) Tim Ash, Head of CEEMEA research of the Royal Bank of
Scotland, wrote on October 16 that Turkey has particularly
onerous public and external debt financing needs. He
estimates 2009 roll-over volumes of USD $145 billion in
external financing and USD $100 billion in public sector
debt.


11. (C) Leading business association TUSIAD told us they
continue to push for the GOT to focus on the economy and work
on reforms. Privately, they would like to see SDIF insurance
on deposits increased from the current 50,000 YTL ($35,000)
limit to bolster depositor confidence and keep funds in
Turkey. They do not plan to make this call public, to avoid
triggering a run on the banks. TUSIAD also wants the GOT to
increase its EU accession efforts, and thinks it is past time
for the GOT to commit to an arrangement with the IMF.

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GOT Slowly Responding to Crisis
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12. (SBU) While continuing to maintain an optimistic outlook
in public comments (including comments by the Prime Minister
that the crisis could even turn out to be an opportunity for
Turkey),the GOT has begun to take some steps in reaction to
the crisis. As reported reftel A, the Central Bank opened a
Foreign Exchange Depot Market to help with liquidity in the
interbank market, a widely praised move.


13. (SBU) On October 15, Finance Minister Unakitan announced
new GOT initiatives to respond to the crisis. The most
substantive was a new law to give tax incentives for Turkish
citizens to repatriate their offshore funds (estimated to be
around USD $100 billion, mainly held in Europe) over a
three-month period. The GOT,s stated goal is to decrease
Turkey,s Current Account deficit with the inflow of funds.
According to press reports, the GOT proposal would include a
clause stating that "no inspections will be carried out
regarding the money brought to Turkey within the framework of
this regulation." (Comment: while the GOT,s focus seems to
be to provide a tax amnesty for repatriating funds in time of
need, this would seem to open the Turkish banking system to
widescale money laundering concerns. End comment.) Unakitan
also said the 10% withholding tax on domestic investments
would be suspended and that the GOT
would set up a special lending facility for small and medium
enterprises.


14. (SBU) Unakitan also tried to assure investors. He
mentioned the 2009 budget will have a deficit below 1.5%,
which will not curtail public investment (as noted . He
reiterated the GOT,s commitment to fiscal discipline and
said it intends to press ahead with a new fiscal rule.
Unakitan said there was no need for Turkey to increase its
deposit insurance from the current YTL 50,0000 due to
Turkey,s 2001 banking reforms. He also warned banks against
calling in business loans early in an attempt to raise cash.
(Comment: While we have nothing to substantiate rumors that
banks are calling loans, his warning implies the problem is
real. End comment.) The Ministry of Finance later released
a statement that all
discretionary GOT expenditures were suspended until year-end
and urged energy conservation by public institutions.


15. (C) Comment: The Turkish banking sector remains solid,
well-capitalized and lightly leveraged by world standards.
Non-performing loans in September were only 3.02% (less than
a year ago),and the foreign borrowing to deposit ratio for
the system stood at just 18.02%. But this does not mean that
the sector is immune to the financial crisis, as the
government seems to assume. Even the best run bank
can be undermined when its once-solid borrowers have problems
repaying loans, and Turkish banks also face foreign currency
risks in borrowing abroad and lending at home. The Turkish
banking sector is highly concentrated -- 79% of Turkish
banking assets are held by seven banks: Ziraat (state-owned);
Akbank (49% owned by Citigroup); Halkbank (state-owned,
scheduled to be privatized); Isbank; Garanti Bank (49% owned
by GE investments); Vakifbank (state-owned); and Yapi Kredi
Bank (owned by Unicredito of Italy). Financial problems in
one of these banks would likely create systemic problems.
The foreign banking
sector also faces the possibility that a failure of one
foreign bank could undermine Turkish confidence in
foreign-owned banks in general. 25 of the 50 banks operating
in Turkey are 100% foreign-owned. End comment.

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WILSON