VZCZCXYZ0002
PP RUEHWEB

DE RUEHAK #1744/01 2820551
ZNR UUUUU ZZH
P 080551Z OCT 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 7616
INFO RUEHIT/AMCONSUL ISTANBUL PRIORITY 4810
RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHAAA/NSC WASHDC PRIORITY

UNCLAS ANKARA 001744 
 
SENSITIVE 
SIPDIS 
 
E FOR U/S JEFFERY 
EEB FOR A/S SULLIVAN 
TREASURY FOR VELTRI AND MORAVEC 
 
E.O. 12958: N/A 
TAGS: ECON EFIN TU
SUBJECT: ECONOMIC FUNDAMENTALS SOUND, SO FAR 
 
¶1. Summary and comment:  The effects of the global financial 
crisis on Turkey's economy have not been significant, thus 
far.  The stock market, known for volatility, has lost value 
and the lira has depreciated slightly.  Structural reforms 
implemented by the GOT, especially in the banking sector, 
have helped shore up Turkey's economy.  Additionally, Turkey 
is enjoying the benefits of being relatively unsophisticated 
with respect to complex financial instruments and by not 
having a bona fide mortgage system.  A continued global 
economic downturn will likely sour Turkey's economy by 
reducing exports and FDI flows but will also have the 
positive effect of easing the growth of Turkey's large 
current account deficit and its challenge to find financing. 
Financing for the private sector will continue to be 
difficult.  End summary and comment. 
 
Turkish Lira Depreciating 
------------------------- 
 
¶2.  The benchmark two-year Turkish Lira bond rate widened by 
70 basis points on October 6 to 20.6%.  In the last month, 
the equity market lost 19.3%, falling 8.6% on October 6.  The 
Istanbul Stock Exchange has lost 42% of its value in 2008. 
The lira has depreciated 13.1% against the U.S. dollar and 6% 
against the Euro since the beginning of 2008.  The lira is 
currently at a 13-month low against the dollar. 
 
Future Trends:  Exports Will Decline 
------------------------------------ 
 
¶3.  A sharper-than-foreseen slowdown in the global economy 
and reduced risk appetite are expected to affect Turkey,s 
external balances through two channels; effects on the 
current account (C/A) balance and capital flows.  Baturalp 
Candemir from EFG Istanbul Securities estimates that a 2% 
deceleration in global growth would decrease Turkey's exports 
by $7 billion.  By his calculations, such a decline in global 
growth and exports would, in turn, cause a deceleration in 
economic growth of around 0.5%.  The deceleration in growth 
and the decline in exports would curb Turkey,s import demand 
by around $3 billion.  Candemir says in the event of a $20 
per barrel drop in oil prices, Turkey,s energy import bill 
would ease by around $10.5 billion. 
 
Future Trends: Current Account Growth Will Slow 
--------------------------------------------- -- 
 
¶4.  Candemir notes that global slowdown could lead to a 
decline in the C/A deficit; however, financing requirements 
will continue to rise because of the private sector,s 
increased debt service obligations in 2009.  Finding 
financing may be more difficult because of growing risk 
aversion and disruptions in global credit markets.  In 2009, 
Candemir expects a significant drop in FDI from $12 billion 
(year-end 2008 estimate) to $6 billion, and in private sector 
foreign borrowings from $67 billion to $56 billion.  Candemir 
adds that portfolio inflows could accelerate by around $3.5 
billion, as the global turmoil dissipates.  A higher 
financing requirement and reduced borrowing capacity and FDI 
imply that Turkish reserves may be depleted by $10-12 
billion. 
 
Inflation Down 
-------------- 
 
¶5.  Year-on-year inflation fell to 11.1% in September 2008. 
The Central Bank of Turkey (CBRT) expects that in 2009, with 
slowing growth and demand conditions, inflation may fall back 
to single digit levels seen in 2004-2007.  The GOT economic 
team: Economy Minister Nazim Ekren, Treasury Minister Mehmet 
Simsek, and Finance Minister Kemal Unakitan; the CBRT; and 
leading Turkish analysts all expect a slowdown in economic 
activity.  Slower growth will be good for Turkey,s high C/A 
deficit, which is estimated to reach 7% of GDP by year,s end 
¶2008.  Global slowdown should lead to a decline in the C/A 
deficit; however, financing requirements continue to rise, 
with the private sector,s debt service obligations in 2009 
expected to reach $100 billion. 
 
¶6.  On October 6, the CBRT announced that core inflation 
remained on an essentially downward trend and that annual 
inflation would continue to decline, provided that food and 
energy prices keep going down.  Tim Ash from the Royal Bank 
of Scotland notes that with the economy showing signs of 
slowing abruptly and unemployment likely to rise in the 
months ahead, the GOT will want greater flexibility on the 
budget front. 
 
Motivational Messages from the Central Bank and GOT 
--------------------------------------------- ------ 
 
¶7.  With pressure mounting on Turkish markets, CBRT Governor 
Durmus Yilmaz on October 6 said in the current environment 
Turkey still needs an anchor--noting the previous IMF program 
served Turkey well.  Yilmaz commended good GOT fiscal 
performance in 2008, but expressed concern over a possible 
surge in budget spending in the run up to the March 2009 
local elections.  He believes an IMF program would help cap 
that spending.  In September, PM Erdogan promised he would 
announce a decision on any future program that Turkey might 
request from the IMF.  On October 7, Erdogan said that the 
GOT has taken measures against the global crisis with the 
help of its strong banking system, sound financial structure, 
and prudent economic programs.  Erdogan said he expects the 
negative impact on Turkey to be minimal. 
 
¶8.  On October 2, Finance Minister Unakitan said the GOT 
would soon announce measures to increase Turkey,s resilience 
to the global crisis, and added that FDI was still flowing to 
Turkey through privatizations.  Trade Minister Kursat Tuzmen 
called attention to Turkey,s export diversification and 
noted that Turkish exports to the Gulf countries increased 
75% in 2008 from 2007, underlining Turkey,s decreasing 
dependence on Euro-zone economies.  Treasury Minister Simsek 
praised the high capital adequacy ratio of the banking sector 
and noted that the economy was insulated against liquidity 
problems with YTL 30 billion ($22.4 billion) in circulation. 
On October 7, Simsek said Turkey will continue to implement 
fiscal discipline, cautious monetary policy, and attract 
foreign investors. 
 
Visit Ankara's Classified Web Site at 
http://www.intelink.sgov.gov/wiki/Portal:Turk ey 
 
WILSON