TURKPULSE No:22 ............................JULY 26^th,  2000

More than half of Turkey’s State Budget goes to domestic debt interest payments due to interest rates that soared to over 100% in recent years. In the first half of this year, the non-interest expenditure totalled TL10.4 quadrillion for all the items in the budget excluding interest payments and only interest payments amounted to TL11.9 quadrillion. The ongoing three-year economic stability program aims at rectifying this pervert structure by reducing these interest rates along with a sharp decline in the inflation and thus relaxing the State Budget. This aim will be achieved in the fourth quarter of the year after very heavy debt servicing in August. The $40 billion that evaporated from the Turkish stock market within the last couple of months for no valid reasons is bound to return to the bourse with handsome interests after August. For the economic fundamentals today and expectations in the near future, especially for the Istanbul Stock Exchange (ISE), see the following article.

(N.B. Because it is difficult to be sure whether there is a dot or a comma in the figures we have also used round figures in parenthesis for the reader’s convenience. At today’s rates $1 billion is TL630 trillion and TL1 quadrillion is equal to nearly $1.6 billion.)

The ISE has been doing poorly for the last couple of months with a daily transaction volume of about TL250-300 trillion ($300-400 million), compared to nearly (or sometimes considerably above) $1 billion volume/day especially when foreign capital moved into ISE at the beginning of the year.

Consequently, the ISE index has fallen from nearly 20,000 to about 13,000, that means from $3 to $2 (add two zeros to the index figure and divide it by 630,000, the parity of the TL to the dollar today). This, for its part, means the stock value of ISE has shrunk by one-third. The total market value of 253 shares quoted in ISE was $129 billion during the up-trend and fell to $90 billion today – a loss of about $40 billion for investors in the market, in particular, or for the national economy, in general.

This annoying outcome seems to be continuing for the remainder of July and throughout August because no foreign investment is coming into Turkey these days and what existed in the past months has, by and large, left the country in recent weeks. Leaving aside the reasons for it, the important question is how durable this downtrend is.

It can be confidently said that August will not be a very bright month for the Turkish stock market, but everything will change drastically in the last quarter of the year. For the reasons of this prediction one has to cast a glance to the highlights of the macro economy of Turkey today.

Contrary to the general rule in a free market economy, the current poor performance of the Istanbul stock market is not indicative of the fundamentals of the Turkish economy that is literally running extremely well, the widening gap in the current expenditure being the main point for concern, but not a serious one. The supplementary Letter of Intent the Treasury presented on June 22^nd to the IMF about the three-year economic stability program sums up the fundamentals as follows:

• The GNP rose by 73.1% in current prices or 4.2% in constant prices in the first quarter and reached TL21, 357.8 trillion (TL21.4 quadrillion) with current prices. It was a remarkable achievement considering that the GNP declined last year.
• The Treasury Cash Flow in the first half had TL3,279 trillion (TL3.3 quadrillion) surplus excluding debt interest payments and TL8,664 trillion (TL8.7 quadrillion) deficit with interest payments, the non-interest expenditures being TL10,426 trillion (TL10.4 quadrillion), interest expenditure TL11,943 trillion (TL11.9 quadrillion) and the revenue TL13,705 trillion (TL13.7 quadrillion).
• As of May 2000 Turkey’s domestic debt stock totalled TL29,840 trillion (nearly TL30 quadrillion). In the first half of the year the total domestic debt servicing was TL23,142 trillion (TL23.1 quadrillion) and the net total domestic borrowing TL17,644 trillion (TL17.6 quadrillion), the latter being 76% of the former. It means in rolling over its domestic debts Turkey managed to borrow less than it repaid in the first half of the year. In July debt servicing totalled TL2,046.9 trillion (TL2 quadrillion), TL939.9 trillion being principal and TL1,107 trillion (TL1.1 quadrillion) interest.
• As of December 31^st, 1999 Turkey’s total external debt stock was $111.2 billion (of which $31.3 billion belonged to private enterprise). With the Treasury’s new standards and efforts, the private sector’s debts were reduced to $25.8 billion and Turkey’s total to $101.8 billion. As of March 31^st, 2000 this total went up to $103.5 billion, the total external debt borrowing being $5.1 billion in the first half.
• The inflation rate for the first half of the year was 17.8% for consumer prices and 18.5% for wholesale prices. One-year inflation rates up to the end of June were 58.6% for consumer prices and 56.8% for wholesale. The pleasing aspect of these figures was that in June the inflation rate fell below 1% both in consumer (0.7%) and wholesale (0.3%) prices for the first time in the last 15 years. This improvement in the decline of the inflation is expected to continue for the rest of the year. When the July figures are published on August 3^rd there may be minus figures in the inflation in July for the first time in Turkey and the same will be the case in the fourth quarter. It is because the biggest expenditure item in the State budget, domestic debt interest payments, is falling sharply as will be further explained below.
• As against this rosy picture of the economy in the first half, foreign trade figures and the balance of payments contain figures of concern. In the January-April 2000 period exports totalled $8,643 million ($8.6 billion) and imports $15,635 million ($15.6 billion), the gap being $6,992 million ($7 billion) compared to $2,960 million ($3 billion) a year before. Consequently, the current expenditure gap in the January-March 2000 period was $2,588 million ($2.6 billion), compared to $1,276 million ($1.3 billion) surplus a year before. Even though it is clearly an alarming development, experts say that this is mostly due to the economic recession last year and growth this year. They underline that in the same periods in 1997 and 1998 these gaps were similar to this year’s.

The key in the great improvement of the economy this year is the Government’s achievement to reduce interest rates, while extending the terms of bonds for domestic borrowings. While combined interest rates were over 100%, going as high as 140% last year for shorter than one-year bonds, they are now ranging around 30-40% for combined interest rates this year.

According to the Treasury’s above report, in the domestic borrowings in June the yearly combined interest rates were 39.82% for 14-month bonds and 49.05% for two-year bonds, while much higher interest rates were paid in previous years for much shorter-term bonds. Insiders say that thanks to this achievement budget expenditure has been relaxed by $20 billion, but this is only a small gain. This drop in interest rates has not so far been very effective because the high interest rates of previous borrowings are still continuing. Until the completion of the big debt servicing in August amounting to TL5.5 quadrillion or nearly $10 billion, these high interest rates of the previous years will be the case.

Consequently, not much improvement is expected in the stock exchange next month unless domestic and foreign investors make these calculations and decide to move into ISE without any loss of time. In fact, there has been an up-trend in ISE towards 14,000 (index) in the last weeks of July upon the release of this information by the Treasury, but still the daily volume is too small for this trend to be reliable and durable before the end of August.

Once the repayments of August are over, the Budget will relax greatly, the new low interest rates will be applied in debt servicing and interest rates will fall below 30%. This, for its part, will channel domestic savings from the bonds market to the stock market. If foreign investors who are closely watching the Turkish economy also follow suit, there may be a boom in the Turkish economy and stock market as from September.

According to the Government’s debt servicing timetable for August, the Treasury will repay TL6 trillion domestic debts on August 9^th, TL70 trillion on August 13^th, TL1.1 quadrillion on August 16^th, TL4.2 quadrillion on August 23^rd and TL80 trillion on August 25^th.

The TL1.1 quadrillion debt servicing on August 16^th and especially the record level of TL4.2 quadrillion repayment a week later will require big borrowings a few days before. But once these ordeals are over the Treasury and Budget will feel as free and light as a bird, according to the Treasury Chief Selcuk Demiralp‘s expectations. It is realistic to expect a similar happy period in ISE after these repayments by August 23^rd. uras@ada.net.tr July 26^th, 2000

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