Country Report Turkey April 2011

Economic performance: Financial market volatility continues in March

Turkish financial markets have remained quite volatile, reflecting the effects of domestic and external factors. The lira, which has depreciated following the Central Bank's shift in monetary policy in November, fluctuated around TL1.60US$1 and TL2.20:EUR1 in the first half of March compared with strong points of TL1.39:US$1 and TL1.94:EUR1 in early November 2010, when the lira was very strong by historical standards. Concerns about Turkey's large foreign trade deficit, rising oil prices related to developments in the Arab world and heavy dependence on short-term capital flows to meet external financing requirements are likely to keep the lira under pressure in the coming months.

After hovering at around 64,000-65,000 points for several weeks, the main Istanbul Stock Exchange share price index plummeted in late February to close as low as 58,664 on March 2nd. At 64,214 on March 15th, it was still well below the peak of 71,548 recorded on November 9th 2010. Turkish share price movements often correspond closely to global economic prospects and the performance of major markets. In recent months, however, investors have been concerned that reserve requirement hikes will lead to substantially lower bank profits. There were also concerns that listed banks would have to pay heavy fines following a Competition Board enquiry into an alleged gentlemen's agreement over the premiums to be offered to large employers in return for payroll business. In the event, the fines imposed were lower than expected. More recent comments by Central Bank governor Durmus Yilmaz and BRSA chairman, Tevfik Bilgin, that credit growth had slowed were taken as an indication that the Central Bank would not rush to raise reserve requirements further, helping to lift banking stocks.

The yield on the most-traded government bond maturing in November 2012, which serves as the benchmark, rose from about 8.3% in the third week of February 2011 to test 9% in the first week of March before retreating to 8.8-8.9% on March 11th. The benchmark bond yield fell below 7% in early January, as the Central Bank reduced its main policy rate. More recently, however, the continuing weakness of the lira and higher oil prices have raised concerns about upward inflationary pressures, making further Central Bank rate cuts unlikely. The rise in secondary market bond yields has been reflected in interest rates on fresh government borrowing. At its most recent auction for 21-month bonds on March 8th, the Treasury agreed to pay an average yield of 9% compared with 8.1% on February 1st and 7% on January 10th.

Balance of payments
(US$ m unless otherwise indicated)
Current-account balance-41,959-13,991-48,561-3,062-5,860
 Foreign trade balance (fob-fob)-53,021-24,850-56,354-2,809-5,888
 Services balance17,31116,74914,245272338
 Incomes balance-8,362-8,189-7,816-617-575
 Current transfers balance2,1132,2991,36492265
Capital account excluding reserves36,1999,03657,3442,0233,072
Change in reserve assetsa1,057-111-12,799-744-863
Net errors & omissions4,7035,0664,0161,7833,651
a Negative indicates an increase.
Source: Central Bank of Turkey.

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