VZCZCXRO7310
RR RUEHDA
DE RUEHAK #1105/01 0621621
ZNR UUUUU ZZH
R 031621Z MAR 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 3689
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 9987
RUEHDA/AMCONSUL ADANA 0464

UNCLAS SECTION 01 OF 03 ANKARA 001105 
 
SIPDIS 
 
TREASURY FOR CPLANTIER 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD TU
SUBJECT: THE ALLEGED OVERVALUATION OF THE TURKISH LIRA 
 
REF: a) Ankara 40; b) Ankara 346 
 
This cable has been coordinated with Congen Istanbul. 
 
1.(SBU) Summary:  Although the lira appreciated 20 
percent in in real terms in 2005, and has hit a 25-year 
high, the IMF and some respected Turkish economists, 
however, are far from certain the Turkish lira is 
overvalued, citing the continued strength of exports. 
Still, the drumbeat of complaints from labor-intensive 
industries that cannot compete in the global market 
will no doubt continue, while thriving, competitive 
businesses keep quiet.  It is a real possibility that 
the government could respond with populist measures 
that undercut reforms.  End Summary. 
 
------------------------- 
The Strength of the Lira. 
------------------------- 
 
¶2. (SBU) By most indicators, the Turkish lira has been 
remarkably strong over the past two to three years, 
holding roughly constant against the dollar in nominal 
terms, even though inflation was considerably higher in 
Turkey than in virtually all of its trading partners' 
economies.   Depending on which start date is used, the 
same is broadly true for the euro.   The real effective 
exchange rate - the exchange rate adjusted for 
inflation differentials with Turkey's trading partners 
-- has risen to a twenty-five year high, and is higher 
than the level before the 2001 crisis with its 
subsequent sharp depreciation after the lira was 
allowed to float. In 2005 the real effective exchange 
rate appreciated by 20%. 
 
------------------------------------- 
..May Threaten Export Competitiveness 
------------------------------------- 
 
3.(SBU) The real appreciation of the lira is widely 
presumed to be squeezing exporters, many of whom say 
they are maintaining volume only by constantly 
reinvesting in productivity improvements and by 
squeezing or eliminating their profit margins to 
maintain market share.  The President of the Turkish 
Exporters' Association, Oguz Satici, has been the most 
vocal of many critics of the Central Bank's exchange 
rate policies.  Satici and his fellow critics perceive 
the Central Bank to be following a strong lira policy, 
dismissing the Central Bank's contention it is merely 
allowing the market to set the exchange rate. 
 
---------- 
IMF Doubts 
---------- 
 
¶4. (SBU) The IMF remains attentive to the risks 
associated with Turkey's growing current account 
deficit - these concerns drove the Fund's push for a 
slight tightening of Turkey's already-tight fiscal 
policy for the 2006 budget year.  However, Fund staff 
is far from certain that the lira is substantially 
overvalued.  The IMF Resrep, saying export 
competitiveness will be an important focus for the Fund 
in the coming months, explained his doubts about lira 
overvaluation by citing the continued strength of 
exports.  Exports grew 15.8% in value in 2005.  The 
Resrep distinguished between sectors like textiles, in 
which some companies may be structurally unable to 
compete in the global market against Chinese 
competitors, and sectors such as autos.  Turkish 
exporters in the latter sectors continue to gain market 
share in Europe - hardly what would be expected if the 
exchange rate is overvalued.  Vehicle exports grew 15% 
in 2005. 
 
Selected Exports by Sector ($ billions): 
 
                         2004      2005      change 
                         ----      ----      ------- 
 
Motor Vehicles           8.29      9.53      15% 
Electrical Equipment     4.79      5.42      13% 
Machinery                4.13      5.23      27% 
Iron and Steel products  7.59      7.68      1% 
Apparel                 10.80     11.45      6% 
 
---------------------------- 
 
ANKARA 00001105  002 OF 003 
 
 
Shared by Turkish Economists 
---------------------------- 
 
¶5. (SBU) Several respected Turkish economists also 
question the wisdom of focusing on the level of the 
exchange rate. Turkish Treasury Under Secretary Ibrahim 
Canakci, acknowledges the lira appreciation in real 
terms, but notes that productivity improvements and 
lower interest rates have helped control businesses' 
costs.  In a similar vein, Baturalp Candemir, lead 
economist of EFG Istanbul Securities, and former 
Treasury Under Secretary Faik Oztrak argue that export 
competitiveness does not depend solely on the lira's 
value against other currencies.  They attach greater 
importance to factors such as production costs, raw 
material prices, and tax rates on business.  Empirical 
studies also show that Turkish exports are more 
sensitive to the growth rate in the global economy than 
to the level of the exchange rate. 
 
 
¶6. (SBU) Guven Sak, who is both a member of the Central 
Bank's Monetary Policy Committee and a key advisor to 
the Chairman of the Turkish Chamber of Commerce, also 
told us he took a skeptical view of complaints about 
the overvaluation of the lira.  While acknowledging 
that Turkish industry in low-cost sectors like textiles 
is losing market share, Sak points out that the scale 
of the depreciation needed to make Turkish exports 
competitive with Asian manufacturers would devastate 
the rest of the economy.   Instead, the focus should be 
on structural reforms, such as modernizing the 
educational system, and moving Turkish industry toward 
the production of products that require greater know- 
how and technology.  Sak also advocates giving priority 
to breaking down structural barriers to trade with 
countries in the Middle East, Black Sea region and 
Central Asia, so as to give Turkey a regional 
competitive edge. Turkish textile companies, for 
example, may survive by moving production to places 
like Egypt, while sourcing high-value inputs from 
Turkey. 
 
¶7. (SBU) The Economist magazine's Big Mac Index, which 
attempts to assess the degree of overvaluation of 
currencies on a purchasing power parity basis, may lend 
support both to Sak's analysis and that of the IMF. 
The Big Mac Index recently showed the lira very 
slightly undervalued against the dollar, with a Turkish 
Big Mac costing $3.07 versus $3.15 in the U.S. 
On the other hand, all other emerging markets priced 
their Big Macs more cheaply than Turkey's from the 
extreme of China's $1.30 to Chile's $2.98.  This 
suggests that, while the lira may not be overvalued, 
labor-intensive manufacturers, may need to move 
production to lower-cost platforms.  The difference 
between Turkey and other emerging markets may be 
overstated by the Big Mac Index, however: McDonalds' 
niche is the urban middle class, which, given Turkey's 
income inequalities does not represent the broader 
economy. 
 
--------------------------------------------- - 
Poll Suggests Exporters May not be so Negative 
--------------------------------------------- - 
 
¶8. (SBU) A recent poll by Referans newspaper of 562 
businesspeople also suggests exporters are far from 
unanimous in their frustration at the Central Bank's 
exchange rate policies.  The poll asked the respondents 
to grade Central Bank Governor Serdengecti's 
performance in several areas on a scale of one to ten. 
On the floating exchange rate regime, the average grade 
from the entire sample was 6.4.  Surprisingly, given 
the Exporter's Association President's rhetoric, 
exporters as a sub-group gave Serdengecti a grade of 
5.4, despite the real appreciation of the lira and 
widespread anecdotal evidence of exporters' problems. 
 
---------------- 
Follow the Money 
---------------- 
 
¶9. (SBU) Governor Serdengecti tells us (ref b) he 
believes that his fiercest critics are those who have 
kept their money offshore, betting against the lira. 
This is a plausible explanation for the disconnect 
between the poll results and the continued export 
 
ANKARA 00001105  003 OF 003 
 
 
growth on the one hand, and the exporters' leaders' 
criticism of the exchange rate on the other. Indeed, 
Prime Minister Erdogan's recent disclosure of his 
personal finances, shows he has gained confidence in 
the lira. Whereas in 2001, the last time Erdogan 
disclosed his finances, most of his money (72.5%) was 
in foreign exchange, his 2006 disclosure showed he had 
81.7% in lira.  As Referans newspaper's headline 
teasingly expressed it: "Erdogan has confidence in 
Serdengecti." 
 
------- 
Comment 
------- 
 
¶11. (SBU) Under a floating exchange rate regime, the 
value of the lira is ultimately determined by what 
people are willing to pay for it, and its "correct" 
value is unknowable, or irrelevant.  There is no doubt, 
however, that labor-intensive industries that thrived 
when the lira's real value was lower are suffering and 
shedding workers as the economy adjusts to the 
structural changes that have been made since 2001. 
Complaints from those industries can be expected to 
continue and intensify, even as other industries more 
quietly thrive.  Though markets are betting on the 
continuation of orthodox policies, as elections 
approach there is a real possibility that the 
government will respond with populist measures that 
could undercut reforms.  If so, there could be a 
significant and disruptive depreciation of the lira 
that could cause even more problems than the recent 
appreciation. 
 
Wilson