Cablegate: Markets Strong Despite Disappointing Second

This record is a partial extract of the original cable. The full text of the original cable is not available.

121223Z Sep 03

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

© Scoop Media