Cablegate: Turkish Market Swings Over Cyprus Referendum,

Published: Thu 22 Apr 2004 04:51 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
1. (SBU) Summary: Turkish financial markets were flat today
in the final day of trading before Saturday's referendum in
Cyprus. The relative calm came
after a week in which the IMKB-100 bounced up and down as
sentiment shifted on prospects for a favorable outcome to the
vote. A strong rally late last week
and early this week was followed by profit-taking and
nervousness on April 20 and 21 as many foreign investors
closed their positions. One leading analyst here estimates
that as much as 800 million USD may have left the country
this week though a Central Bank official put it at 500
milion. As a result, the lira continued to weaken through
the week, breaking through the 1.39 million per USD level in
early trading today, before easing to 1.382 at the close.
Many analysts attribute the lira weakness against the dollar
this week as much to anticipation of an upcoming Federal
Reserve rate hike in the U.S. as to Cyprus worries.
Meanwhile, this week's economic indicators have painted a
mixed picture of the Turkish economy, with strong capacity
utilization figures and tourism results sparking optimism,
but an expanding current account deficit raising concerns
about the worsening trade balance. The Central Bank is
waiting until after this weekend,s referendum to decide
whether to reduce foreign exchange purchase auctions and,
apparently, whether to reduce interest rates. End Summary.
2. (SBU) Markets Yo-Yo: The markets rallied by a strong 3.11
percent on Friday, April 16, and another 3.46 percent on
April 19 to flirt with the 20,000 level
as sentiment waxed positive on Cyprus. As investors perceived
an increase in tensions over the referendum the IMKB 100
stock exchange gave back half of
those gains in mid-week to close yesterday at 19,279, just
above its April 16 level. The market firmed slightly today,
increasing to 19,431.5, in moderate
trading as investors finalized their positions in advance of
tomorrow's national holiday and the Saturday referendum.
Interest rates also moved upward slightly during the week.
The Turkish Treasury sold 2.187 quadrillion (1.6 billion USD)
in three month bills at an auction on Tuesday, meeting its
sale target but at a higher than
expected yield. By the close today, the benchmark bond was
trading at 22.81, compared with 22.36 at Monday,s close and
below 22 earlier in the month. With Cyprus concern
compounded by the parity movements that saw the dollar
strengthen on rumors of a Federal Reserve rate hike, the
Turkish lira weakened throughout the week, reaching 1.395
million in morning trading on April 22, before easing to
1.382 million at the close. Much of the weakening against
the dollar arose from the dollar,s rally against Euro: the
TL,s decline against the Euro was much more muted. Against
the Euro, the TL fell only from 1.625 at the end of last week
close to 1.642 at today,s close.
3. (SBU) Market analysts tell econoffs that recent volatility
was predictable in the run-up to the Cyprus referendum,
though Fed Chairman Greenspan,s comments--causing increased
expectations of higher U.S. interest rates later this
year--added to the impact on Turkey. Over the past week
equity investors tested the 20,000 level, which the market
approached on Monday, and then moved to take profits.
Baturalp Candemir of HC Istanbul, a leading brokerage, echoed
other Istanbul analysts in noting that the market has
essentially priced in a yes/no outcome in Saturday's vote and
implicitly removal of Cyprus as an
obstacle to securing a negotiation date from the EU this
December. Tevfik Aksoy of Deutsche Bank said only if the
outcome does not reflect the North-yes/South-no outcome will
the markets be volatile on Monday, though a
higher-than-expected yes vote in the South, even if below 50
percent, might cause a modest rally. According to Candemir,
the Friday-Monday (April 16-19) rally led many foreigners to
decide to close their positions and take their profits on
Tuesday and Wednesday.
4. (SBU) Emrah Eksi, of the Central Bank Markets Deparment
echoed Aksoy in putting greater importance on the Greenspan
comments and the newly-increased expectation of higher U.S.
interest rates than on Cyprus in explaining the sell-off in
Turkish markets Tuesday and Wednesday. Aksoy noted that the
Greenspan comments hit the broader class of Emerging Market
Debt, not just Turkish bonds.
5. (SBU) Candemir estimated that the outflow this week
totalled 800 million USD, and cited it rather than Turkey's
worsening current account deficit as the major reason for the
Turkish lira's depreciation this week to 1.382
million/dollar. The Central Bank,s Eksi, on the other hand,
told econoff only about $500 million left the market this
week, and placed less emphasis than Candemir on the impact of
foreigners leaving the market. Aksoy said the foreigners
pulling out were mostly at the short end of the yield curve
or in equities, rather than longer-dated fixed income
6. (SBU) Candemir argued that the current account issue has
been evident since last fall, but that the Turkish lira
remained strong in the face of continued inflows of portfolio
investment from abroad. Only once the foreigners began to
sell, he argued, did the rate begin to weaken. The effect
was compounded by the movement of Turkish banks to reduce the
open positions
they had established in recent months. Candemir suggested
that an added reason for the foreign exodus from the market
is the fact that there is "no good news on the horizon for
the next several months." With both Cyprus and diminishing
inflation priced in by the market, no further decline in
interest rates or lira appreciation is on the horizon. He
thus forsees a sluggish period in the market, which may last
until the NATO summit again focuses world attention on Turkey.
7. (SBU) Good News/Bad News: While February's burgeoning
trade deficit (up to nearly 2.4 billion USD) and the 12-month
cumulative deficit of 24 billion USD raised concerns about
the sustainability of Turkey's current account deficit, there
was good news on the tourism front. January to March
arrivals were up by nearly 43 percent from last year,
reaching 1.924 million. While the base year effect played a
large role, given that tourism slowed in the run up to last
year's Iraq war, the increase showed the sector is clearly on
the road to recovery and that this year's target of 11.5
billion in tourism revenue is within reach.
8. (SBU) Central Bank Wait-and-See: Despite the fall of the
lira this week, the Central Bank continued its foreign
exchange purchase auctions. Eksi told Econoff the Bank
purchased $40 million at auction yesterday and another $40
million at auction today, plus an additional $30 million
outside the auction. According the Eksi, the Bank wants to
avoid constantly altering its FX buying policy, and prefers
to await the results of the referendum before deciding
whether to ease off on the purchases. With the summer
tourism FX inflow season beginning, the Bank wants to avoid
cutting back on purchases only to resume a high level of
purchases shortly therafter as tourism FX inflows pick up.
Aksoy noted that the markets were unhappy with frequent
changes in the Central Bank,s FX purchase levels.
9. (SBU) Aksoy also revised his predictions of a coming
interest rate cut this week, expecting the cut to come later
in the year and for a lesser amount. Whereas many analysts
had been expecting a rate cut after the IMF Seventh Review
board vote, the Bank appears to have preferred to wait out
the pre-referendum volatility before making a decision.
Aksoy told econoff that the weakened lira and signs of strong
growth are likely to contribute to Central Bank caution about
a rate cut.
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