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					Macro Update

Turkey Weekly Macro Comment
18 February 2008

Bond Rates vs O/N
22 21 20 19 18 17 16 15 12-2006 02-2007 03-2007 04-2007 06-2007 07-2007 08-2007 09-2007 11-2007 12-2007 01-2008

Caution at Home, Caution Abroad
•
The EM realm is then divided into high beta and low beta currency zones mostly on the basis of growth performances and Turkey is mostly categorized in the former although her possible performance in a benign global outlook is promising to most analysts. A giant step towards a solution in Cyprus emerged this weekend when hardliner and Annan Plan refuter Papadopoulos was defeated in the election and failed to be eligible for the runoff election. Current account deficit for year 2007 came out as USD 38.0 billion, corresponding to roughly 7.5% of GDP. What was in our view most striking is corporate sector borrowing that materialized as USD 27.4 billion, exactly USD 8.0 billion above the previous year’s figure. It should be difficult to replicate that performance in 2008 and that could prove to be threatening to growth prospects. Budget figures for the month of January announced by the Ministry of Finance were quite positive as expected following the Treasury’s cash basis accounts announced a week earlier. Unemployment rate for the last quarter of 2007 was up to 10.1% from 9.6% in the same period of last year. Both rural and urban rates were up and slower growth seems to be taking its toll on employment. Short run trend formation is continuing to get weaker for consumer credits and longer term formation is not promising either. Commercial credits’ growth trend is virtually flat, and not much should be expected to change in any categories or subcategories of the two. Volatility is the name of the game here and everywhere else it seems, and participants in markets should be well prepared for roller coaster behavior.

•

O/N

Secondary Market

Source: Central Bank of Turkey, Yapi Kredi

•

Domestic & Foreign Bond Portfolios (4W change)
10.0

•

5.0

0.0

-5.0

•
-10.0 12-2006 02-2007 04-2007 05-2007 07-2007 08-2007 10-2007 12-2007 01-2008 Foreign Investors' Bond Portfolio (YTL billion) Locals' Bond Holdings (YTL billlion)

Source: Central Bank of Turkey, Yapi Kredi

•
Stoxx50
4,000 3,800 3,600 3,400 3,200 3,000 24-01 22-02 23-03 23-04 23-05 21-06 20-07 20-08 19-09 18-10 16-11 17-12 17-01 15-02

•

•

Source: Reuters

Cevdet Akçay Chief Economist, Yapi Kredi Bank & Yapi Kredi Yatirim
Tel: +90 212 319 8430 cevdet.akcay@yapikredi.com.tr

Turkey Weekly Macro Comment – 18 February 2008

Yapı Kredi

1.1

General Outlook

Credit, real estate, and labor markets probably have not seen their dips in the US and more irritating news is more than likely to come. This already has been partially priced, but markets still hope for a way out a la divine (central authorities’) intervention and endorse an orderly correction that concurrently generates bottom fishing possibilities with as little collateral damage as possible. Eurozone is the next candidate for a slowdown, or for a below trend growth performance going forward. EM world is still doing fine though, especially in terms of local currency. Global growth estimates are not down in a scary fashion and EM cyclical relative growth performance indeed seems to be improving, not because of higher anticipated growth in that realm but because of discernible reductions in expected growth performances of developed economies. The EM realm is then divided into high beta and low beta currency zones mostly on the basis of growth performances and Turkey is mostly categorized in the former although her possible performance in a benign global outlook is promising to most analysts. Amidst all this mayhem, the sale of retail giant Migros of Koc Group to BC Partners should have created some excitement, but alas. Forget about the sale share price of 21.85 being below market expectation or below EM peer valuation. At a time when the financial system is in clear disarray and funding costs are going above, an acquisition of this magnitude is striking to begin with and suggests that a political crisis or tumultuous periods ahead are states of affairs that are mostly discounted by foreign investors. We tend to agree with them and thus clash with a significant portion of the society who thinks that a political backlash in response to recent AKP policies is inevitable. A giant step towards a solution in Cyprus emerged this weekend when hardliner and Annan Plan refuter Papadopoulos was defeated in the election and failed to be eligible for the runoff election. With hardliners out on both sides, Cyprus should give Turkey much less trouble in the EU regarding the latter’s accession process.

1.2

Macro Data

Current account deficit for year 2007 came out as USD 38.0 billion, corresponding to roughly 7.5% of GDP. FDI inflows were significant at USD 19.8 billion and nondebt financing of the deficit (FDI + equity sales) stood at 66%, very close to the 69% figure in 2006. Equity sales provided inflows in the amount of USD 5.1 billion but fixed income sell-off in the latter part of the year led to outflows of USD 2.4 billion, mitigating the role of portfolio inflows. Official reserve accumulation stood at USD 8.0 billion, quite sizeable in absolute terms and in comparison to the previous year’s USD 6.1 billion. What was in our view most striking is corporate sector borrowing that materialized as USD 27.4 billion, exactly USD 8.0 billion above the previous year’s figure. It should be difficult to replicate that

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Yapı Kredi

Turkey Weekly Macro Comment – 18 February 2008

performance in 2008 and that could prove to be threatening to growth prospects. If credit renewal shrinks and repayment ratio comes down, that would put a twosided squeeze on credit facilities with possible unfavorable repercussions on the production process unless local banking system comes to the rescue. Yet the reason why external borrowing was so heavily resorted to in the first place has been the high cost of borrowing from domestic sources. Thus output growth prospects face a threat from external sources unprecedented in the last five years, and it will be a gut check test for the AKP government..
Table 1. Balance of Payments BrieF Summary 2006 Current Account Balance Foreign Trade Balance Invisibles Revenue Balance Transfers Capital Account Net Errors& Omissions
Source: CBRT, Yapı Kredi

2007 -37,996 -47,498 14,070 -6,794 2,226 38,411 -415

-32,193 -41,324 13,830 -6,607 1,908 32,342 -149

Figure 2. Balance of Payments (*)
40.00 120.0%

20.00

90.0%

-

60.0%

(20.00)

30.0%

(40.00) 01-03 07-03 01-04 07-04 01-05 07-05 01-06 07-06 01-07 07-07

0.0%

Non-debt Creating Financing (1, left scale)

Current Account Deficit (2, left scale)

(1)/(2) (right scale)

Source: CBRT, Yapı Kredi (*)The ratio of 12M non-debt financing (FDI, equity purchases & NEO) to 12M current account deficit

Budget figures for the month of January announced by the Ministry of Finance were as expected following the Treasury’s cash basis accounts announced a week earlier. Primary surplus stood at YTL 3.8 billion with all budget items improving in real terms, meaning reductions for the expenditure side. Picture below displays the percentage real change in three-month rolling figures of revenues, non-interest expenditures, and primary balance. There seems to be a marked improvement in primary surplus dynamics as the below picture which depicts the YoY change in three-month rolling figures displays. We mentioned the “fiscal rule” possibility in our earlier Weeklies, and that would clearly be excellent signaling on the part of the AKP government, but a prospective party spoiler was the topic of a rumor last

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Turkey Weekly Macro Comment – 18 February 2008

Yapı Kredi

week, an extra budgetary fund which we thought we had buried legally in 2003. We can only hope that it is a rumor and nothing else.
Figure 2. Budget Performance (*)
80.0%

40.0%

0.0%

-40.0%

-80.0% Mar-07 Revenues Jun-07 Sep-07 Non-Interest Expenditures Dec-07 Primary Balance

Source: Ministry of Finance, Yapı Kredi (*) YoY real % change of 3M rolling figures (calculated by using the average YoY inflation)

Unemployment rate for the last quarter of 2007 was up to 10.1% from 9.6% in the same period of last year. Both rural and urban rates were up and slower growth seems to be taking its toll on employment. Labor force participation is lower as well and those who dropped out of the labor force amounted to an amazing one million workers. The situation could exacerbate going forward and pose a threat to the AKP government if global outlook does not turn positive soon enough. From a period of riding on the wave to one of sailing with no wind is the transition that the AKP government is subjected to and that process will have an impact on employment conditions as well.

Figure 3. Unemployment (*)
12.8 6.9 6.8 6.7 12.0 6.6 11.6 12-2005 07-2006 Urban (left scale)
Source: TurkStat, Yapı Kredi (*)12M MA of urban & rural unemployment rates

12.4

6.5 02-2007 09-2007 Rural (right scale)

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Turkey Weekly Macro Comment – 18 February 2008

1.3

Weekly Data

Fairly dull weeks on the credit side, the week of 08/02 for consumer credits and the week of 01/02 for commercial ones. Short run trend formation is continuing to get weaker for consumer credits and longer term formation is not promising either as the YoY %increase in 12-week moving average figures depict. Commercial credits’ growth trend is virtually flat, and not much should be expected to change in any categories or subcategories of the two.

Figure 4. Consumer Credit Volume (*)
1.5% 1.3% 1.1% 0.9% 0.7% 0.5% 05-2007 06-2007 07-2007 07-2007 08-2007 09-2007 09-2007 10-2007 11-2007 11-2007 12-2007 01-2008 02-2008 0.6% 0.4% 0.2% 0.0% -0.2% -0.4%

Housing (left scale)

Other (left scale)

Car loans (right scale)

Source: Central Bank of Turkey, Yapı Kredi (*)Weekly % change of 12W moving average

Figure 5. Consumer Credit Volume (*)
400% 320% 240% 160% 80% 0% 03-2006 06-2006 09-2006 12-2006 03-2007 06-2007 09-2007 12-2007 80% 60% 40% 20% 0% -20%

Housing (left scale)

Car loans (right scale)

Other (right scale)

Source: Central Bank of Turkey, Yapı Kredi (*)YoY % change of 12W moving average

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Turkey Weekly Macro Comment – 18 February 2008

Yapı Kredi

Figure 6. Consumer & Commercial Credit Volume (*)
75.0%

50.0%

25.0%

0.0% Dec-06 Mar-07 May-07 Jul-07 Nov-07 Sep-07 Jan-08

Consumer Credits

Commercial Credits

Source: Central Bank of Turkey, Yapı Kredi (*)YoY % change of 12W moving average

1.4

Markets

Volatility is the name of the game here and everywhere else it seems. Just as we were talking about the possibility of 39,000 levels for ISE-100, we ended up at 45,000 levels and the same is true for the exchange rates. When YTL/USD exchange rate surged towards 1.24 levels albeit with low volume, some believed that was it and that the inevitable upward move had been initiated. We are now at 1.19 levels with no parity impact from the USD/€ parity which has been virtually intact in the period in question. We believe that there is more disturbing data potential from the US credit, labor, and real estate markets and that these will have adverse effects on the EM world hence on Turkey as well. EM FX resilience is likely t o continue for some time with medium term course very much in question, and YTL is considered to be among the high beta subsection of the group though we believe it is less so than believed. Only time will tell.

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Turkey Weekly Macro Comment – 18 February 2008

1.5

Appendix

Currency Performances
Figure 3. Turkey, South Africa, Latin America (*)
0.95

1.00

1.05 1.10

1.15

1.20 31-12 05-01 10-01 15-01 20-01 25-01 30-01 04-02 09-02 14-02

TR

BR

AR

ZAR

Source: Reuters, Yapı Kredi

Figure 4. Turkey, Eastern Europe (*)
0.95

1.00

1.05

1.10 31-12 05-01 10-01 15-01 20-01 25-01 30-01 04-02 09-02 14-02

TR

HU

PL

RU

Source: Reuters, Yapı Kredi

(*) Currency performances are calculated against a basket consisting of 0,5 USD+0,5 EUR to neutralize movements of the USD/EUR rate. The basket values are indexed to obtain a 31 December 2007 value of 1.0 for each. Y axes in the graphs are inversed. Hence downward move of the curve means depreciation of the currency

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Turkey Weekly Macro Comment – 18 February 2008

Yapı Kredi

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