US embassy cable - 03ANKARA2363

UNCLAS ANKARA 002363 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, P, EUR/SE AND EB 
TREASURY FOR U/S TAYLOR AND OASIA - MILLS 
NSC FOR QUANRUD AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, PREL, TU 
SUBJECT: TURKEY'S ECONOMY APRIL 11:  INTEREST RATES REMAIN 
HIGH 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
 
 
Markets Flat, Lack of Confidence Looking Forward 
--------------------------------------------- --- 
 
 
1.  (U) At mid-day April 11, Turkish markets were quiet.  FM 
Gul's April 10 statements that U.S. forces would prevent a 
(Kurdish) fait d'accompli calmed market fears of a Turkish 
military intervention.  However, T-bill yields at week's end 
remain above the April 8 auction levels, meaning the Turkish 
banks who bought in the auction have lost money.  Market 
sentiment remains generally gloomy as described below. 
 
 
--  The April 28, 2004 bond is trading at 64.5 percent 
compounded; the lira is flat at TL 1,650,000; the Istanbul 
Stock Exchange is 0.03 percent. 
 
 
2.  (SBU) Interest rates on government securities aren't 
coming down  partly because they reflect a higher than usual 
risk of debt default, according to market contacts like OYAK 
Holding Exec VP Ergun Okur.  (He does expect some decrease in 
rates as northern Iraq fears subside, but only to the 
mid-50's.)  Concerns about an eventual "debt event" also 
affect companies' investment decisions, he added.  Turkish 
companies are staying liquid, making money from the high 
interest rates rather than investing.  OYAK (Turkey's second 
largest car manufacturer) reports exports are also down 
slightly from last year because of weak conditions in their 
main European markets.  He and others here expect low growth 
this year, 1-2 percent rather than the GOT's 5 percent growth 
target. 
 
 
3.  (SBU) Lack of foreign inflows into Turkish markets is a 
problem for  Bender Securities, a local stock brokerage half 
owned by Deutsche Bank and with Turkey's largest foreign 
equity client base.   Bender analyst Golkan returned from a 
"depressing" road show in Europe.  He told us that long-time 
Turkey investors are staying out, and have no trust in AK's 
ability to turn around the negative sentiment.  Golkan said 
the GOT's recent personnel changes just further damage 
credibility.  On the high roll-over rates in the April 9 
auctions, Golkan said this isn't a sign of Turkish bank 
confidence; instead it's a sign that Treasury needs the cash 
now.  Otherwise, he asked, why would Treasury lock in this 
amount of debt at the current high rates?   From the London 
investment bank perspective, Citigroup emerging markets 
analyst Wyman said the only foreigners in Turkish lira 
investments are now in purely for the moral hazard based on 
prospects of U.S. aid. 
 
 
4.  (U) The Central Bank released the results of its early 
April survey of inflationary expectations on April 10. 
Increases in the consumer price index, looking 12 months into 
the future, averaged 28.3 percent in early April (compared 
with the GOT year-end target of 20 percent).  In early March, 
CPI expectations averaged 26.2 percent. 
PEARSON