Cablegate: Weighing Corporate Turkey's Foreign Exchange Risk

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





E.O. 12958: N/A

Sensitive but Unclassified. Not for internet distribution.

1. (SBU) Summary: Central Bank Governor Sureyya Serdengcti
this month added his voice to those expressing concern about
the risks to the Turkish economy posed by the growing open
positions of companies in the real sector. Observers agree
that while the Turkish banking sector-- whose own open
positions in 2001 contributed to the depth of that year's
banking crisis-- is now in a much more solid position, the
real sector is increasingly exposed to foreign exchange risk.
Recent Central Bank statistics show that at the end of the
first quarter, 43 leading industrial companies had a net
exposure of 4.3 billion USD, with ten leading firms
accounting for three-quarters of that total, while the total
exposure of the 214 companies on the Istanbul stock exchange
was over 6 billion USD. Despite Serdengecti's warning,
company officials downplay the risk, and many economists
concur that worry about the issue is exaggerated. End

2. (U) Central Bank Concerns: Speaking to the Ankara Chamber
of Industry on September 18, Serdengecti invoked a
traditional Turkish proverb to warn companies in the real
sector that "if you get burned by a risk you took knowingly,
don't cry." He noted that while the banking sector currently
has only limited exposure to foreign exchange risk because of
its small open position, the growing open position of Turkish
firms leaves them increasingly exposed to unforeseen
movements in the lira's foreign exchange rate. He conceded
that this is not a problem if the firm has foreign exchange
earnings, but that if they do not, and are "seized by
illusions," then they will be burned.

3. (SBU) An Angry Reaction: Industrial leaders did not react
well to Serdengecti's counsel. Ibrahim Ozdogan, head of
GISAD YK, commented that a country's central bank head should
work first to provide confidence to the markets, and only
then turn to offering advice, while leading exporter Ahmet
Zorlu noted that his group has little foreign exchange
exposure, but has been hurt by the dollar's decline.
Suleyman Orakcioglu, head of the textile companies
association IKTIB, emphasized that he did not wish to enter
into a dispute with the Central Bank, but that his
organization's key goal is to lower the price of exporters'
inputs, given their current high level, despite the dollar's

4. (SBU) Statistical backing: Recent statistics drawn both
from Central Bank reports and company filings with the
Istanbul Stock Exchange highlight the issue, though they
provide contradictory indications about whether it has grown
in scope in the recent past. Stock exchange figures show
that 43 companies in the exchange's industrial index have a
total foreign exchange exposure of 4.3 billion USD.
Three-quarters of that total is held by just the ten largest
firms. Moreover, Central Bank officials told Emboffs that
the largest exposures were with the oil refiner Tupras and
the petroleum distributor Petrol Ofisi. They expressed a
lack of concern about these two companies' foreign exchange
exposure given that they were in the dollar-linked oil
business. The exposure increases only marginally when all
214 companies in the exchange are included, reaching a total
of 6 billion USD. An analysis by Disbank's economic research
team, however, shows that this total actually represents a
decline from these firms' total exposure in the fourth
quarter of 2002 (which then approached 7 billion USD).
Interestingly, while there has been a steady (albeit gradual)
decline in the exposure of firms with foreign investment
since the second quarter of 2002, the exposure of firms
without foreign investment shot up at the end of that year,
and has only now begun to decline gradually.

5. (SBU) Varying Motives: Historically, much of corporate
Turkey's borrowing has taken place offshore, given high
interest rates on Turkish lira loans. (Even today real rates
are hovering in the 12-14 percent range on short term
instruments, well above comparable dollar or Euro rates).
Companies thus traditionally borrow at low interest rates in
foreign currency, and then either import inputs or convert
the loan into lira for domestic consumption or investments.
As Serdengecti noted, the degree of risk to which they are
exposed depends on the use to which they put the loan, and
whether they have a natural hedge in the form of foreign
currency earnings.

E.O. 12958: N/A

6. SBU) How Significant?: Given these varying motives and
risk factors, analysts and economists are divided on the
significance of the issue. Vural Akisik, Chairman of the
board of Petrol Ofisi, which has one of the largest open
positions among Turkish companies (but is in a dollar-linked
industry), argued that the total open position figure is not
particularly meaningful, given that companies open positions
for many reasons. If the open position is financing a
capital import, he argued, which will be used to generate a
foreign currency income stream, this is less of a problem
than if it is financing a consumption or intermediary good.
Unfortunately, however, there are no good figures available
which separate out what percentage of foreign exchange
borrowings are being used for this purpose. Akisik concurred
that if companies are using the funds to invest in treasury
bills, as banks did before the last crisis, they would be
exposed to significant risk in the event of a correction.
Given that few foreign banks would extend credits for such a
purpose, however, he saw this risk as being limited. Ersin
Ozince, CEO of Isbank, similarly argued that the largest
exchange rate challenge facing Turkey's real sector is not
that posed by its open position, but that posed to its
competitiveness. He cited the example of the Is company that
produces soda ash for glass production, noting that it is
currently cheaper to import that raw material from abroad
than to produce it in Turkey.

7. (SBU) A Mixed Bag: Investment analysts largely agree that
the open position problem is not at a critical level. A
recent analysis by ATA Invest, one of Istanbul's largest
brokerages, noted that many companies are largely hedged
against recent foreign exchange developments because while
their exports are largely denominated in Euros, which has
moved less against the lira, their raw material inputs and
even some local purchases are dollar denominated. For those
companies with largely Turkish lira income flows, recent
exchange movements will benefit them in the short term.
Hence, in ATA's view, the dollar debts of Turkcell and Petrol
Ofisi should give those companies large FX gains in the
second quarter, though of course exposing them to FX losses
if there is a correction. ATA noted that most firms' debts
were to finance inputs, but did highlight two companies,
Cimsa and Migros, a large food retailer, which had placed
their liquid assets in TL instruments (a long-standing
tradition in the fast-moving retailing sector, where profit
has typically stemmed more from cash-flow management than
core operations.)

8. (SBU) Comment: Most analysts agree that the current
situation is less worrisome than that which preceded the last
crisis, in that the banking system itself no longer is at
risk; instead, specific companies have put themselves at the
mercy of the foreign exchange rate. Bender analysts Emin
Ozturk and Murat Gulkan make one noteworthy caveat to this
reassuring picture, however: given that banks and real sector
firms coexist inside the same large holdings, it can be
argued that some holdings have simply moved their foreign
exchange games from a sector where they are now forbidden by
regulatory rules (the banks) to one where there is less
supervision (the real sector). But given the natural hedge
of foreign currency income, and the fact that a not
insignificant part of the exposure is related to capital
goods purchases, the overall problem looms less large than it
did in the past. Beyond this, many see no reason for a lira
correction in the near to mid-term; indeed some commentators
have even outlined scenarios where the lira could reach 1.3
million to the dollar or higher. End Comment.

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