In an unexpected move on March 14th, Turkey's central bank cut interest rates by one and three percent for the overnight lending rate and the overnight borrowing rate respectively. The Istanbul Stock Exchange (ISE) rallied after losses of almost 10% early in the week, but concerns over US military action in Iraq again brought caution, as did worries about Turkey's reform progress towards Europe. The sale of a stake in the fuel retailer Petrol Ofisi has also drawn funds from the markets. Meanwhile the team conducting the IMF review in Turkey has come up against some fierce criticism of its programme. But it has appeared satisfied with Ankara's progress, which will include a Eurobond offering this week within the framework of Turkey's 2002 IMF-backed foreign borrowing programme.
The central bank last lowered interest rates on February 20th, citing low January inflation data. On March 12th the Joint Board of Public Banks announced that in line with that cut it would also cut interest rates as of April 1st. Rates on Turkish Lira and foreign currency accounts would fall to 70% and 9% respectively from 75% and 12%. The March 14th announcement from the central bank came as a surprise, the bank had said earlier in the month that it would not adjust rates based on past data. Its overnight borrowing rate was cut to 55% from 59%, and its overnight lending rate to 61% from 62%. The weekly borrowing rate was cut from 59% to 55%.
A statement from the bank said that lower than expected February inflation figures- 1.8% for consumer prices (CPI) rather than the 3.4% forecast by analysts- had reinforced the bank's confidence that the recent stability of the lira was helping to control inflation. It also warned, however, that a rise in oil prices- Turkey imports almost all of its fuel- could destabilise efforts to bring consumer price inflation down to 35% by the end of the year.
The bank also conducted a poll in the first week of March, which saw analysts in financial and manufacturing sectors predict a March CPI rate of 2.6%, only just above the 2.3% rate foreign analysts estimate would be required to meet the end of year rate. The poll also indicated that Turks expect that end of year rate to be just under 44%- better than the current 73% but below IMF and government hopes. In a statement released alongside the poll results on March 12th the bank also said that it would conduct such polls in every first and third week of the month, in an effort to increase its transparency in its efforts to bring down inflation.
The reaction of the Istanbul Stock Exchange's 100 index gave an indication of investor concerns. Immediately following the news of the interest rate cuts, the index rose around 3%, but by the end of the day had registered a 0.2% rise as concerns over Iraq and the EU came to the fore again. The yields on bonds also fell on the interest rate news, helping to reduce the cost of maintaining Turkey's debt load.
Turkey's concern over US military strikes against Iraq has been under discussion for several months, with the Turkish stance occasionally vacillating as it has tried to support the US in its campaign against terrorism. However, with US vice-president Dick Cheney due in Ankara on March 19th to garner Turkish support for action Prime Minister Bulent Ecevit on March 10th expressed caution. He called the uncertainty over exact US plans a "kind of nightmare" hanging over Turkey, as it deters investment and unsettles the markets. Although he did not say that he opposed any action, he did highlight the economic consequences for Turkey of a full-scale strike, and that he would say as much to Cheney in their meeting. Cheney's reply that an attack against Iraq was not imminent appears to have satisfied Ankara for the moment.
Turkish stocks have also been battered in the past week- losing almost 10% in the first three days of the week- by the government's sale of 15% of the fuel distributor Petrol Ofisi (POAS), which added to selling as investors sought solace in the bidding. Preliminary bidding for a 15% stake took place between February 27th and March 6th, with final bids collected in the three days from March 13th. The Privatisation Administration is overseeing the process, and its head, Ugur Bayar, said on March 8th that a total of 7.5m shares were to be offered to the public, but demand was for 16.3m shares.
The state currently has a 42.3% stake in the company, but hoped that this sale will raise $360m helping it attain a sell-off revenue target of $1.5bn for 2002. On March 12th the Privatisation Minister Yilmaz Karakoyunlu said that around $1.1bn to $1.2bn of this would be realised in the first half of the year, and would include the sale of a 17% stake in the refiner Tupras in April. This should raise around $600m he added. However, the sale of some of POAS did not go entirely as planned, with the 8.25m shares eventually sold only raising $183.3m. Around 21% of this came from foreign investors.
All the same the sale pleased the IMF team that has just finished reviewing Turkey's implementation of conditions set by the IMF for its most recent $16bn loan. To help meet the target of $2.5bn of foreign borrowing this year Turkey will offer a new Eurobond, maturing in 2998 and largely targeting local investors. The premium is likely to be around 5.5 percentage points above US Treasuries, but analysts say that foreign investors will watch closely to see how popular it proves at home as an indication of domestic confidence in the reform programme. In February Turkey increased its 2006 bond by $250m.
After meetings with a number of ministers and other officials during the course of its two-week stay the IMF team appeared satisfied, although it had a frosty reception from labour unions. Bayram Meral, the head of Turkey's largest labour union Turk-Is, said on March 14th that he had given the members of the IMF delegation "a good lesson" during his meeting with them. Unions are generally against the IMF-backed economic restructuring programme that the Turkish government is undertaking as it cuts public spending and has cost thousands of jobs. Shortly before leaving Turkey the IMF team outlined steps that Ankara still had to take before the board would approve the next tranche of the loan, one of which was cutting redundant employees at State Economic Enterprises.