US embassy cable - 03ANKARA8014

UNCLAS SECTION 01 OF 02 ANKARA 008014 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD/, EUR/SE 
TREASURY FOR OASIA - JLEICHTER AND MMILLS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, TU 
SUBJECT: TURKISH MARKETS END YEAR ON BULLISH NOTE 
 
 
1. (Sbu) Summary:  Despite news that would normally buffet 
the market--in both directions--Turkish debt and foreign 
exchange markets have been notably calm, with a positive 
trend in recent weeks.  In thin trading close to the year-end 
 balance sheet date, interest rates on GOT debt have 
gradually declined in a narrow range while the lira has 
gradually strengthened.  The more volatile stock market has 
continued its 2003 rally to reach a three-and-a-half year 
high.  But even the stock market has not been prone to the 
sharp movements that were common earlier in the year. End 
Summary. 
 
 
Lots of news--little volatility: 
------------------------------- 
 
 
2. (Sbu)  There has been an abundance of potentially 
market-moving news in recent weeks, both negative and 
positive: the deadlocked Cyprus election results, IMF Board 
Approval of the Sixth Review, the forced resignation of the 
bank regulatory board Chairman, the passage of the 2004 
budget, and increasing indications that the GOT will hit or 
come close to its year-end growth, primary surplus and 
inflation targets. In recent days, there have also been signs 
of renewed GOT attempts to throw out populist bones, such as 
the above-inflation increase in the minimum wage or the 
proposal to remove names from banks' list of bad creditors. 
 
 
3. (Sbu) While none of these events would be expected to 
cause huge rallies or dizzying falls in the markets, in 
earlier months they might have caused sharp movements. 
Instead, in recent weeks, markets have tended to take 
everything in stride, either trading sideways or moving 
gradually in a positive direction. 
 
 
Interest Rates Continue their Long, Downward March: 
--------------------------------------------- --- 
 
 
4. (Sbu) The market for government securities, for example, 
despite a heavy calendar of debt redemptions and issuance, 
has continued to experience a slow but steady decline in 
yields, as inflation expectations and, perhaps, the Turkish 
government's risk premium, gradually come down.  The interest 
rate on the benchmark bond, for example, declined from 28.54 
percent on December 5 to 25.63 on December 30.  Unlike 
earlier this year, the rates rarely moved back up--or fell 
sharply--but tended to trend down very gradually. 
 
 
Lira Stays Strong: 
----------------- 
 
 
5. (Sbu) The Turkish lira continues to defy gravity.  While 
economic theory would suggest that a high-inflation country's 
currency cannot maintain or even increase its nominal value 
for a sustained period, the Turkish lira has done exactly 
that over the past nine months.  As previously reported, 
local analysts have attributed the lira strength to a 
combination of reverse currency subsitution--i.e. Turks 
moving foreign exchange holdings into lira--foreign 
portofolio investors and inflows from Iraq.  With most 
economists expecting a nominal decline in the exchange rate 
sooner or later, the persistence of lira strenth in December 
is notable. 
 
 
6. (Sbu) Since December 5, the dollar has declined from TL 
1.444 million to TL 1.401 million December 30, and was 
trading below  TL 1.4 million during morning trading December 
31.  Most of the decline in the nominal TL/dollar rate is 
attributable to the sharp decline in the dollar/euro rate in 
recent weeks, as can be seen by the much narrower range in 
which the TL is trading against the Euro: TL 1.748 million on 
December 5 and TL 1.746 million at the close December 30. 
(In between these two dates, the Euro strengthened slightly 
against the TL, but overall has been relatively stable). 
Though the Euro rate is in some ways a more meaningful 
indicator since Turkey trades far more with Euroland 
countries than with dollar or dollar-linked countries, the 
lira-dollar rate has important psychological value here. 
Also, against a basket of its trading partners' currencies, 
the lira is still appreciating slightly in nominal terms, and 
substantially in real terms. 
 
 
7. (Sbu) One veteran local market-watcher and a Central Bank 
official separately told Econoff that the strengthening of 
the lira in the past few days is due to lira demand to make 
year-end tax payments and, especially, due to heavy lira 
purchasing by Turkish banks.  Both noted that a stronger lira 
helps banks' year-end balance sheets, though the Central 
Banker stopped short of the private analyst's allegation of 
market manipulation by the banks.  According to the Central 
Bank official, Turkish banks went long in foreign exchange in 
October and November, expecting the decline in the lira to 
continue. Since that has not happened, and the markets are 
generally quite optimistic about 2004, the banks have piled 
back into lira in recent days.  He noted that the Bank buying 
was strong enough to counteract substantial lira sales by oil 
refiner Tupras and pipeline company Botas in recent days. 
The Central Bank official added that the Bank is considering 
resuming the foreign exchange purchases it stopped conducting 
two months ago.  But rather than act based on thin and quirky 
year-end trading, the Central Bank will probably await next 
week to take a decision. 
 
 
Equity Market Continues to Hit New Highs: 
---------------------------------------- 
 
 
8.  (Sbu) Though it has been less volatile than earlier in 
the year, the stock exchange has continued to move in a 
positive direction. Even after the market-worrying Cyprus 
election deadliock, the stock exchange hardly reacted. 
Overall, the cumulative rise over the past three weeks has 
been impressive: the IMKB 100 index rose from 16,913 December 
5 to 18,541 at noon on December 31, a ten percent increase. 
The stock exchange is now at a three-and-a-half year high. 
 
 
Comment on Volatility: 
--------------------- 
 
 
9.  (Sbu) The Central Banker agreed that the market seems to 
ignore bad news and move up on good news, but that Turkish 
markets are noticeably less volatile.  It's not yet clear 
whether factors unique to the year's end are the principal 
reason for the volatility or whether something more 
fundamental is at hand that could continue into the new year. 
 At least in part the lessened volatility seems to be linked 
to a perception of increased stability in the Turkish 
economy, leaving market participants less inclined to bolt or 
buy at the slightest news. 
 
 
EDELMAN