Turkey Weekly Macro Comment by xzv69079

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									                                                                                                                                                                                                                                          Macro Update


Turkey Weekly Macro Comment
                                                                                                                                                                                                                                                18 December 2007




Bond Rates vs O/N                                                                                                                                                                                          Trying to End the Year on a Happy
                                                                                                                                                                                                           Note
              22

              21
                                                                                                                                                                                                           •        Turkish fighter jets battered PKK camp sites in
              20

              19
                                                                                                                                                                                                           Northern Iraq early Monday morning and reportedly
              18                                                                                                                                                                                           inflicted heavy damage on insurgents’ surroundings. At
              17

              16
                                                                                                                                                                                                           the same time, there seems to be a coordinated effort on
              15                                                                                                                                                                                           the part of the government and the military to come up
                    29-12



                                      09-02



                                                       20-03



                                                                       27-04



                                                                                       05-06



                                                                                                          12-07



                                                                                                                            20-08



                                                                                                                                              27-09



                                                                                                                                                                   07-11



                                                                                                                                                                                           14-12




                                                                                                                                                                                                           with an exhaustive plan that entails measures other than
                                                 O/N                                                                       Secondary Market
                                                                                                                                                                                                           military ones to bring about a long lasting solution to
Source: Reuters                                                                                                                                                                                            the Kurdish problem.

                                                                                                                                                                                                           •        Unemployment rate went up to 9.3% in
Domestic & Foreign Bond Portfolios (4W change)
                                                                                                                                                                                                           September from 9.1% a year ago and from 9.2% in
    10.0
                                                                                                                                                                                                           August. Capacity utilization for November came slightly
     5.0
                                                                                                                                                                                                           lower than anticipated at 82.6% and combined with
                                                                                                                                                                                                           employment data cited above and Q3 GDP data that
     0.0
                                                                                                                                                                                                           came last week, it should ease the Central Bank’s hand in
     -5.0
                                                                                                                                                                                                           starting the year with a rate cut in January as well unless
    -10.0
                                                                                                                                                                                                           external circumstances turn dire enough to rule it out.
            29-12           26-01        23-02        23-03        20-04       18-05            15-06      13-07           10-08      07-09              05-10             02-11            30-11



                                                                                                                                                                                                           •        Current account deficit figure for the month of
                            Foreign Investors' Bond Portfolio (YTL billion)                                                    Locals' Bond Holdings (YTL billlion)




Source: Central Bank of Turkey, Yapi Kredi                                                                                                                                                                 October was announced last week as USD 3 billion and
                                                                                                                                                                                                           12-month rolling figure stands at USD 35.2 billion.
                                                                                                                                                                                                           Portfolio inflows remained weak as expected due to
                                                                                                                                                                                                           global liquidity concerns and FDI inflows are weaker than
Stoxx50
                                                                                                                                                                                                           they were last year. Non-residents remained jittery and
      4,100
                                                                                                                                                                                                           lowered their GDI holdings to YTL 35.7 billion. Total
      4,000

      3,900
                                                                                                                                                                                                           reduction in non-resident holdings stands at YTL 9.2
      3,800                                                                                                                                                                                                billion since July 20, and the share of the same investor
      3,700                                                                                                                                                                                                group now stands at 13.4% from an all time high at
      3,600
                                                                                                                                                                                                           17.1% in mid-July.
      3,500
                             15-01

                                     02-02

                                              22-02

                                                       14-03

                                                               03-04

                                                                       23-04

                                                                               14-05

                                                                                        01-06

                                                                                                  21-06

                                                                                                           11-07

                                                                                                                   31-07

                                                                                                                              20-08

                                                                                                                                      07-09

                                                                                                                                                 28-09

                                                                                                                                                           18-10

                                                                                                                                                                       07-11

                                                                                                                                                                                   27-11

                                                                                                                                                                                                   17-12




                                                                                                                                                                                                           •       The IMF team is back in town for the completion
                                                                                                                                                                                                           of the seventh review, and it is a fairly abrupt and
Source: Reuters                                                                                                                                                                                            unexpected arrival but a most welcome one. A fiscal rule
                                                                                                                                                                                                           is very much in the making we believe, and would be
                                                                                                                                                                                                           most welcome by markets.
 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 December 2007                                                              Yapı Kredi




                                1.1      General Outlook
                                Turkish fighter jets battered PKK camp sites in Northern Iraq early Monday
                                morning and reportedly inflicted heavy damage on insurgents’ surroundings. The
                                most important aspect of the operation should be the logistic and intelligence
                                support provided by the US forces. Spokesperson for the US Embassy in Ankara,
                                Ms. Katheryn Schalow, announced that Turkey had not issued any warning calls
                                and that it would not have been necessary either. Ms.Schalow reinstated the
                                resolute US stance favoring the termination of the PKK in the region, and labeled
                                the organization a common enemy of the two countries. This is a label that was
                                first used in the Oval Office meeting between PM Erdogan and President Bush a
                                few weeks ago, and constituted a breakthrough in the US approach towards the
                                insurgent group. The current state of affairs is a simple reflection of the moral
                                upper hand gain by Turkey that we had been addressing lately in our reports and
                                is likely to be strengthened by a few more surprise moves by the Government or by
                                other institutions under the guidance of or with the collaboration of the
                                Government. PM Erdogan’s recent efforts to initiate a discussion by testing
                                difference social groups’ tolerance/will for an amnesty for PKK members is a most
                                important one among such possible moves and could culminate in an amnesty
                                more exhaustive than anticipated. It probably should be to be an effective one
                                anyway.


                                Then came Chief of Staff Buyukanit’s shocking statements (to us to say the least)
                                last week where he confessed - a la the now popular ex-army generals who admit
                                that the Kurdish issue had been mishandled in the past- that the concepts of
                                human rights, peace, and freedom were almost handed over to Kurdish insurgency
                                who with no resistance from the Turkish side and under the auspices of foreign
                                countries abused these notions at Turkey’s cost. We were utterly shocked when ex-
                                army generals uttered similar words a few weeks ago in interviews conducted by
                                journalist for Milliyet, one of the leading dailies in the country, but Gen. Buyukanit
                                is the top army officer in the country at the moment is far from retirement. He
                                hedged himself immediately by indirectly indicting the DTP when he claimed that
                                terrorists were in the Assembly, but we tend to take the previous diagnosis as the
                                overriding one and treat the accusation as the sugar-free coffee that tends to
                                reduce the sugar level coming from the desert. It is probably one of the
                                ingredients of a comprehensive strategy that the Government plans to put into
                                effect soon to bring about a long lasting solution to the PKK problem by
                                strengthening the moral upper hand it acquired in the aftermath of July election.
                                It may very well be that even the Army looks warm to the idea of further
                                extending rights to Kurdish origin citizens of the country, or more accurately,
                                towards the implementation of already extended rights under the AKP
                                Government following the official granting of the date for accession talks in 2004.
                                These rights did not enjoy much usage due mostly to the implicit and sometimes
                                outright objection by the nationalist movement in Turkey which tends to grow
                                exponentially when any issue tangential to PKK is an agenda item. It is thus of
                                utmost importance that the Government has the Army by its side when any policy
                                that tends to dissipate the Kurdish problem is about to be launched and then


2
Yapı Kredi                                                        Turkey Weekly Macro Comment – 18 December 2007




             pursued. We believe that there is a structure that defines these latest efforts and
             rhetoric coming from different agents and that they are not loosely linked or
             independent endeavors.




             1.2        Macro Data
             Unemployment rate went up to 9.3% in September from 9.1% a year ago and
             from 9.2% in August. June and July registered discernibly lower rates at 8.8% and
             labor market seems to be loosening further, implicating reduced potential for
             labor cost and aggregate demand pressure. Labor force participation rate came
             down as well, from 49.1 to 48.9% in the same period of last year. A continuing
             transformation is in the composition of employment; employment in agriculture
             was down by a sizeable 1.1 percentage points and the reduction in this ratio has
             totaled more than 7 percentage points since 2002. Employment in industry was
             down by a mere 0.2 percentage points while those in construction and services
             increased by 0.2 and 1.0 percentage points, respectively.


             Figure 1. Unemployment (*)

                    12.8                                                                                  6.90


                                                                                                          6.80
                    12.4

                                                                                                          6.70

                    12.0
                                                                                                          6.60


                    11.6                                                                                  6.50
                           12-05    03-06       06-06     09-06      12-06    03-07     06-07     09-07

                                            Urban (left scale)                  Rural (right scale)

             Source: TurkStat, Yapı Kredi

             (*)12M average figures, %



             Capacity utilization for November came slightly lower than anticipated at 82.6%
             and combined with employment data cited above and Q3 GDP data that came last
             week, it should ease the Central Bank’s hand in starting the year with a rate cut in
             January as well unless external circumstances turn dire enough to rule it out.
             Expectations part of the survey that produces capacity utilization numbers sails in
             negative territory, i.e. production and domestic sales are expected to come down
             in December, in a month that entails the Feast of Sacrifice, a religious holiday and
             the traditional new-year shopping. If those reductions indeed materialize, then it
             should vindicate an uninterrupted rate cut policy even further, but we expect the
             cuts to come to an end in February with an undetermined pause period to follow.
             We also rule out 25 bps cuts until rate cut strategy is reinitiated.




                                                                                                                 3
Turkey Weekly Macro Comment – 18 December 2007                                                                                                                               Yapı Kredi




                                Current account deficit figure for the month of October was announced last week
                                as USD 3 billion and 12-month rolling figure stands at USD 35.2 billion, slightly
                                higher than the USD 34.4 billion pertaining to the same period of last year.
                                Portfolio inflows remained weak as expected due to global liquidity concerns and
                                FDI inflows are weaker than they were last year. Long-term corporate borrowing
                                seems to have picked up the slack, and non-debt financing picture has gotten
                                slightly worse than it has been last year. We have always emphasized that the
                                current account does not reflect a flow problem at the moment and probably will
                                not for the upcoming period but that the borrowing incurred so far in the last five
                                years could trigger a stock problem if a decent rate of return is not generated by
                                the private sector. That in turn reflects the importance of supply side structural
                                reforms, the dire need for which we have been talking about quite for some time.


                                Figure 2. Current Account Financing (*)
                                              40.00                                                                                                                  120.0%


                                              30.00
                                                                                                                                                                     100.0%

                                              20.00

                                                                                                                                                                     80.0%
                                              10.00


                                                -                                                                                                                    60.0%


                                             (10.00)
                                                                                                                                                                     40.0%

                                             (20.00)

                                                                                                                                                                     20.0%
                                             (30.00)


                                             (40.00)                                                                                                                 0.0%
                                                    01-03    07-03     01-04      07-04       01-05     07-05      01-06      07-06         01-07        07-07

                                                Non-debt Creating Financing (1, left scale)       Current Account Deficit (2, left scale)           (1)/(2) (right scale)

                                Source: CBRT, Yapı Kredi

                                (*)The ratio of non-debt financing (equity, T-bill, Eurobonds, FDI) to current acoount deficit, 12M rolling




                                1.3        Weekly Data
                                Nothing much interesting on the weekly data front, just the continuation of the
                                trends we have been observing for some time, some more recent than others. Take
                                consumer credits to begin with. Housing loans are up by a respectable YTL 214
                                million, auto loans registered their third consecutive increase but by a mere YTL 18
                                million, and commercial credits displayed one of their spooky weekly increases this
                                time by YTL 3.7 billion. Commercial credits are likely to see some downward
                                revision and then remain relatively flat for a while, a pattern that was displayed so
                                many times in the past.




4
Yapı Kredi                                                                         Turkey Weekly Macro Comment – 18 December 2007




             Figure 3. Consumer Credit Volume (*)

                    1.0%



                    0.5%



                    0.0%



                    -0.5%



                    -1.0%
                         01-09       16-10       30-11      14-01         28-02    14-04      29-05          13-07       27-08     11-10         25-11


                                    Consumer Credits (total)                               Housing                               Car loans

             Source: Central Bank of Turkey, Yapı Kredi

             (*)Weekly % change of 6W moving average




             Figure 4. Consumer Credit Volume (*)

                        1.0%



                        0.5%



                        0.0%



                        -0.5%



                        -1.0%
                            01-09        16-10     30-11         14-01    28-02    14-04     29-05      13-07          27-08     11-10     25-11

                                          Consumer Credits (total)                           Housing                             Car loans


             Source: Central Bank of Turkey, Yapı Kredi

             (*) Weekly % change of 8W moving average




             Figure 5. Commercial Credit Volume (*)
                                 1.00%



                                 0.80%


                                 0.60%


                                 0.40%


                                 0.20%



                                 0.00%


                                 -0.20%
                                       01-09   11-10     20-11    30-12    08-02   20-03   29-04     08-06     18-07     27-08   06-10   15-11




             Source: Central Bank of Turkey, Yapı Kredi

             (*) Weekly % change of 8W moving average




                                                                                                                                                         5
Turkey Weekly Macro Comment – 18 December 2007                                                                                                        Yapı Kredi




                                GDI portfolios registered hardly any change trend-wise. Non-residents remained
                                jittery and lowered their holdings to YTL 35.7 billion according to data dated
                                30/11/2007, down another YTL 1.1 billion from a week ago. Total reduction in non-
                                resident holdings stands at YTL 9.2 billion since July 20, and the share of the same
                                investor group now stands at 13.4% from an all time high at 17.1% in mid-July.
                                Non-bank sector and mutual funds are fairly timid but increasing their share
                                though almost imperceptibly. Banks are squeezed in; they would love to reduce
                                their GDI holdings to the extent that there are motivated buyers out there so that
                                they can switch into loans in a more aggressive fashion, yet such buyers of GDI are
                                sometimes tough to come by and this may be one of those times. And all this
                                despite the fact that the market expects further rate cuts from the Central Bank.
                                We may be moving into an expectation zone where the credibility of cuts could be
                                tested and/or inflation targets will not be taken very seriously.



                                Figure 6. Shares in Bond Stock


                                                                Banks                                                     Non-bank sector


                                   58.0%                                                           27.0%

                                   57.0%                                                           26.0%

                                   56.0%                                                           25.0%

                                   55.0%                                                           24.0%

                                   54.0%                                                           23.0%
                                      12-2006    02-2007       05-2007         08-2007   11-2007      12-2006   02-2007       05-2007       08-2007   11-2007




                                                           Foreign investors                                                  Funds


                                    18.0%                                                          4.5%

                                    17.0%
                                                                                                   4.0%
                                    16.0%
                                    15.0%                                                          3.5%
                                    14.0%
                                    13.0%                                                          3.0%
                                       12-2006   02-2007        05-2007        08-2007   11-2007      12-2006   02-2007       05-2007       08-2007   11-2007




                                Source: CBRT, Yapi Kredi




                                1.4         Markets
                                It is a short week here due to the religious holiday but a last minute development
                                indeed turned it into a crucial short week. The IMF team is back in town for the
                                completion of the seventh review, and it is a fairly abrupt arrival as the invitation
                                from the Turkish side was not expected to take place this early. It is by all means a
                                positive development, and we indeed expect some sort of fiscal rule to be
                                discussed and maybe even to be designed during these talks. When the Fund
                                leaves for good in May 2008, the best signal that the Turkish economy
                                administration can emit is a fiscal rule to be announced prior to the completion of
                                the program. Another possible trigger could be the announcement of revised GDP
                                figures after the holiday and before the end of the year. Imagine beginning the


6
Yapı Kredi                                          Turkey Weekly Macro Comment – 18 December 2007




             new-year with a current account deficit ratio of 5.8% instead of 7.3%, and a
             budget deficit ratio around 1%. Announcement of a fiscal rule, revised GDP
             figures, 2 more chapters to be opened with the EU this week and more to come,
             global concerns easing somewhat, and Turkey is bound for re-rating we believe.
             Turkish markets are fully at the mercy of global markets, and these local triggers
             are likely to have a bigger impact if global outlook is not gloomy. If not, then they
             are likely to be mostly or fully ignored, maybe to be reconsidered again when
             global jitters dissipate. Last week of the year could thus be interesting but this one
             is over tomorrow at noon. Hence, watch the world and act accordingly for the
             remainder of the week.




                                                                                                 7
Turkey Weekly Macro Comment – 18 December 2007                                                                                                Yapı Kredi




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