US embassy cable - 03ANKARA5801

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