US embassy cable - 03ISTANBUL1449

UNCLAS SECTION 01 OF 02 ISTANBUL 001449 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, PGOV, EINV, EFIN, PGOV, TU, Istanbul 
SUBJECT: WEIGHING CORPORATE TURKEY'S FOREIGN EXCHANGE RISK 
 
 
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 
Summary. 
 
 
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 
decline. 
 
 
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. 
TREASURY FOR OSIA - MILLS AND LEICHTER 
USDOC FR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, PGOV, TU 
SUBJECT: WEIGHIG CORPORATE TURKEY'S FOREIGN EXCHANGE RISK 
 
 
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. 
ARNETT