Cablegate: Economic Fundamentals Sound, so Far


DE RUEHAK #1744/01 2820551
P 080551Z OCT 08




E.O. 12958: N/A

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

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.

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