SAMPLE MARKET MONITOR
MONTHLY MARKET ANALYSES:
3 December 2001Turkey
Despite the overall emerging market pressure due to Argentina’s crisis, Istanbul ended a volatile month on an upswing with the market advancing 6 percent on the final day after ratings agency Standard & Poor’s revised the country’s credit outlook to stable from negative, reaffirming the B- long-term and C short-term grade. The agency said “the risk of events leading to a downgrade is now balanced by improved prospects for continued implementation in 2002 of appropriate financial policies and structural reforms in the context of a new three-year IMF standby agreement.” In the announcement, the agency said that ratings are constrained by high political and program implementation risks, a high public debt burden and banking sector weakness. Many analysts expect an actual upgrade following completion of a new deal with the IMF.
The news came just two days after the IMF approved a USD 3 billion loan payment under the county’s current program, and following news that the IMF is prepared to add USD 10 billion to its current loan package to help the country meet its domestic debt burden next year. Most analysts say that S&P’s shift was simply the agency catching up with market perceptions as default fears have significantly declined in recent weeks. By the close of the month the stock market had narrowed its losses in dollar terms to 42 percent, as measured by the S&P/IFCI Price Index, and in local terms the bourse advanced 18 percent through the month. At the same time, the benchmark global bond due 2030 traded at 92 percent of face value, up from 77.12 percent in mid-October when it touched its lowest level this quarter, while the yield on the most actively traded local bond due in June 2002 closed the month at about 76 percent. Earlier, the government successfully tapped the international bond market for the second time in two months, selling USD 500 million in five year bonds in an oversubscribed offer. The bond had a spread of 737 basis points over US Treasuries and a coupon of 11.375 percent, with 80 percent sold in the US and Europe and only 20 percent in Turkey.
As a new IMF mission prepared to travel to Ankara to begin talks on fresh funds early in December, the government announced it planned a series of new economic measures to jump-start the economy. The package, which is to be submitted to parliament within days, will include a new law to prevent further job losses in the manufacturing sector and will extend by one year investment incentives due to expire at end-December. In addition, Economy Minister Dervis and Finance Minister Oral said the government would set up an asset management company to assist in restructuring the debts of firms hit by the crisis. The asset management firm will not get any public funds, and it is expected that one of the 19 banks seized during the crisis will be used to help process the new loan system.
While some recovery is evident, the worst recession since 1945 continues. Gross national product fell 8.3 percent in the first nine months of the year compared to the same period a year ago, while GDP slumped 6.4 percent. Industrial output in September fell 9.2 percent compared the same month a year ago, for a 7.5 percent decline over 2000. However, the September figure may be misleading since in September 2000 a strong year-on-year performance was recorded due to the downturn the previous year following the devastating earthquake in the industrial center of Izmit. The annual consumer price index increased 66.5 percent in October, while wholesale prices rose an annual 81.4 percent. Government efforts to raise fresh cash through asset sales were not well received. Officials tried to sell part of a huge fleet of official vehicles but said that the civil servants who used them were reluctant to give them up, and few buyers evident. At the same time, at an auction of more than 400 pieces of real estate formerly owned by some of the failed banks now in receivership, only 188 were sold with many bids coming in below the minimums set. The sale raised only TRL 7.4 trillion (USD 4.9 million), against a value estimated at TRL 66 trillion for all the lots and buildings.
Meanwhile, investors are also worried on the diplomatic front. Disputes with the EU over the divided island of Cyprus and creation of a European Union rapid action force continue as Ankara insists it will not accept a solution on uniting Cyprus in line with the “wishes of Greek Cypriots and the EU.” In addition, as the government prepares for a visit from US Secretary of State Colin Powell investors worry about possible military operations in Iraq and the impact on the domestic economy.
However, sentiment has broadly rebounded in recent weeks, and the completion of a fresh IMF deal – which will make Turkey the largest borrower – is expected to further help the markets. The impact of the international war against terrorism is a key uncertainty, as even perennial political risk seems lower than usual as the coalition government appears committed to its current course to pull the country out of the crisis.
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