US embassy cable - 02ANKARA8369

UNCLAS ANKARA 008369 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR EUR/SE, EB/IFD/OMA AND E 
TREASURY FOR OASIA - MILLS AND GUNARATNE 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TURKISH MARKETS RALLY ON EU, CYPRUS NEWS 
 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
 
Honeymoon Continues; Economic Data Also Strong 
--------------------------------------------- - 
 
 
1.  (U) The two-week market rallies continued strongly on the 
morning of November 18: 
 
 
--  Treasury bill yields dropped 1.5 percentage points. With 
the benchmark July 2 bill now at 49.5 percent, in compounded 
terms, rates have dropped over 14 percentage points since the 
November 3 elections. 
-- The stock market, up 4.5 percent in morning trading, has 
risen about 40 percent since the elections. 
 
 
--  The lira appreciated about 1.5 percent since Friday, and 
is now trading at TL 1,580,000 to the dollar.  This 
represents appreciation from one year ago even in nominal 
terms (not counting the approximately 35 percent inflation of 
the past 12 months.) 
 
 
2.  (U) Year-end growth data continues to support an optimist 
outlook.  The Turkish Treasury officially revised its 
year-end 2002 projection upwards, from 3 to 4 percent GNP 
growth.  Central Bank economist Ilker Domac says 4 percent 
remains a conservative figure; the Central Bank's internal 
projections have year-end growth at 4.4 percent.  Treasury 
U/S Oztrak told us privately Treasury now projects 5 percent 
growth.  Comment: The 2002 growth data has to be seen in 
light of last year's decline of 9.7 percent:  this is a 
partial recovery.  The tricky part now involves forecasting 
2003 growth, and to do that we'll need to see the assumptions 
in the new government's budget.  End Comment. 
 
 
Markets React to Gul, Cyprus and EU News, 
Less About the Economy 
----------------------------------------- 
 
 
3.  (SBU) Market analysts and participants tell us the 
markets are being driven by the AK party's "sensible 
positions on Cyprus, the EU and on relations with President 
Sezer," according to Bender Securities strategist Murat 
Gulkan.  The selection of Abdullah Gul as PM was also 
welcome, since Gul is AK's best known figures to the 
financial markets.  JP Morgan/Chase treasurer had a 
cautionary note, telling us, "it's about Cyprus and the EU, 
which means there's room for correction."  Disbank Treasurer 
Bayazit concurred, adding that some Turkish banks are playing 
the risky, but traditional game of borrowing dollars and 
Euros to invest in lira instruments (especially T-bills.) 
 
 
4.  (SBU)  There have been some foreign inflows to the local 
capital markets, though most of the buying continues to be 
local, per brokers.  One broker told us that the Istanbul 
Stock Exchange's largest U.S.  investor - Capital Assets 
Management - has been selling most of its holdings into this 
rally. 
 
 
5.  (SBU) Market participants also note that the new 
government's economic policies are still not clear,  The 
"One-Year Action Plan" released by AK Chairman Erdogan 
November 16 had a mixed reception (see septel).  For now, the 
markets are largely ignoring it, and focusing on the positive 
approach of the new Government to political issues. 
PEARSON