Turkey

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S February 26, 2009

important your attention is drawn to the statement on the back cover of this report which
affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E‐mail : rolf.danielsen@seb.se
 
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ÇçïåíìêåK==tÜáäÉ=íÜÉ=ÉÅçåçãóDë=ìåÇÉêäóáåÖ=ëíêÉåÖíÜ=ëÜçìäÇ=ÜÉäé=áí=ïÉ~íÜÉê=íÜÉ=ëÜçÅâ=ÇÉëéáíÉ=~=
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Country Risk Analysis 
dêçïíÜ=ÅçãÉë=íç=~å=~Äêìéí=Ü~äí.
Al lle end of Iasl year, induslriaI
produclion dropped 17.6° and
capacily usage ralio in
manufacluring feII lo ils Iovesl
since 1991. Tlal vas nol onIy d
lo pIunging demand for TurI
producls in Lurope, Russia an
oller main exporl marIels, bul
aIso refIecled veaI domeslic
demand as banIs lad begun lo
appIy slricler Iending crileria.
WliIe consumplion demand
remained aboul fIal in recenl quarlers, inveslmenl demand las conlracled by
eslimaled 3-4° in 2008. Tle onIy siIver Iining lo llis dreary scenario is llal im
grovll las come dovn significanlIy and may even lave lurned negalive lovard
end of lle year, underslooling exporls and impIying a posilive conlribulion from
nel exporls lo GDI. Tle veaIer economy las aIso eased ligll Iabor marIels as seen
in lle unempIoymenl rale rising lo 12° and logeller vill Iover inlernalionaI
commodily and energy prices leIped reduce infIalion pressure. Tle Ialler slou
aid lle cenlraI banI aclieve ils infIalion largel of 7.5° by year end, provided, il does
nol spoiI lle opporlunily by overzeaIous monelary easing. Mosl observers fore
grovll in 2009 lurning negalive around -1.5° and remain anemic in lle medium
lerm.
ue
isl
d

las
an
porl
lle
Id
see
GDP
-4
-2
0
2
4
6
8
10
2004 2006 2008 2010
p
e
r
c
e
n
t
GDP (change) Forecast

dçîÉêåãÉåí=ëíáãìäìë: 2009 being a year of imporlanl IocaI eIeclions, lle
governmenl las vasled no lime and slimuIaled lle economy vill fiscaI and
monelary easing lo counler lle adverse domeslic and exlernaI deveIopmenls. In
2007, lle governmenl Iel go lle slandard bearer of ils nev prudenl poIicies since lle
financiaI crisis in 2001 as il abandoned lle 4°/GDI primary surpIus largel. In 2008,
lle primary surpIus lad aIready slrunI lo Iess llan 3°/GDI, and Ialesl privale
eslimales for 2009 even poinl lo a primary baIance deficil as nev monllIy dala slov
mucl veaIer llan expecled lax revenues since Iale 2008. In addilion, lle
governmenl recenlIy Iauncled a slimuIus pacIage incIuding a 8° boosl lo pubIic
seclor consumplion. In nominaI lerms llal suggesls a deficil of 4°/GDI. WliIe sliII
nol excessive, il couId lrigger a nev round of negalive debl dynamics, vill lle
polenliaI lo damage lle governmenl's lard von repulalion for fiscaI prudence afler
commendabIy laving reduced ils debl lo GDI ralio lo 40° from 76° since 2002.

SEB Merchant Banking Country Risk Analysis February 26, 2009
qÜÉ=ÅÉåíê~ä=Ä~åâ=É~ëÉë=ãçåÉí~êó=éçäáÅáÉëK Iasl faII, as infIalion began lo laper more
llan expecled lle cenlraI banI seized lle opporlunily lo ease monelary poIicy
rapidIy, Iovering inleresl rales by more llan 5 percenlage poinls from 17° pa. in lle
course of a fev quarlers. As a resuIl reaI inleresl rales came dovn from around 5°
lo 2° in reaI lime. Lven llougl lle reduclion in expecled reaI rales is IiIeIy Iess
significanl, lle cenlraI banI's unusuaI proaclive easing slance las lriggered a
domeslic debale.

mêç~ÅíáîÉ=çê=çîÉê~ÅíáîÉ\ Given lle ligl forex exposure of lle privale seclor and lle
ligll Iiquidily silualion in lle banIing seclor, il las been argued llal lle
lransmission meclanism may nol prove effeclive in lransIaling Iover poIicy rales
inlo reduced domeslic Iending rales. AIso, in a silualion of an overvaIued currency
al lle oulsel rapid monelary easing couId lrigger an unconlroIIed decIine of lle
exclange rale. In llal sense, lle cenlraI banI poIicy seemed risIy and more so in an
increasingIy uncerlain inlernalionaI environmenl. Tle corporale seclor in parlicuIar
las a demanding amorlizalion scleduIe on foreign debl in 2009 and 2010. In
addilion, llere is a near lerm buncling of malurilies on domeslic debl in lle lands
of foreign inveslors.

qÜÉ=ÉñÅÜ~åÖÉ=ê~íÉ=Çêçéë. In Ianuary, lle exclange rale lad deprecialed by around
30° againsl lle US$ since Augusl . WliIe llal vas juslified as a correclion lo lle
previous overvaIualion, furller veaIening of lle exclange rale couId presenl more
probIems for companies' foreign debl service llan il vouId leIp llem in lerms of
improved compeliliveness. NeverlleIess, in Iebruary lle cenlraI banI once again
surprised marIels vill a Iarger llan expecled inleresl rale cul of 150 bsp.

qÜÉ=íê~ÇÉ=Ä~ä~åÅÉ=áãéêçîÉë. Tle
governmenl, in ils defense, can poinl lo
an expecled slarp improvemenl in
TurIey's lrade baIance as lle Iover oiI
price aIone slouId leIp lle deficil in
2009 aImosl laIve vliIe lle deprecialion
slouId leIp conlain imporls and
improve compeliveness in supporl of
exporls. As a resuIl, lle deficil of lle
exlernaI currenl accounl baIance slouId
come dovn from a ligl IeveI of aImosl
6°/GDI lo perlaps 3-4° of GDI in
2009 and slay llere for lle nexl fev
years barring a nev oiI price slocI. Tlal vouId Iessen a major vorry among
inveslors and a Iey negalive raling issue for lle counlry.
Current account deficit
Source: Reuters EcoWin
2000 2002 2004 2006 2008
$
B
i
l
l
.
/
q
u
a
r
t
e
r
-12,5
-10,0
-7,5
-5,0
-2,5
0,0
2,5

KKKÄìí=íÜÉ=Ä~ä~åÅÉ=çÑ=é~óãÉåí=ÅçìäÇ=ëíáää=ïçêëÉåK= Nolvillslanding lle cIear
improvemenl lo lle currenl accounl baIance, observers are sliII concerned aboul
deveIopmenls in lle lolaI baIance of paymenls. In 2009, TurIey needs lo refinance
aboul $50 biII. slorl lerm debl and aboul $54 biII. medium and Iong lerm debl faIIing
due in 2009 on lop of lle currenl accounl deficil. In previous years, a Iarge parl of
lle refinancing of exlernaI debl vas mel by foreign direcl inveslmenls and oller
non-debl crealing capilaI infIovs. Iasl year lley feII slarpIy by $10 biII. lo $14 biII.
crealing expeclalions llal sucl infIovs couId drop furller by $4 biII. in 2009. Tlal
means TurIey couId be Iefl vill lle ambilious lasI of allracling more llan $100 biII.
of nev capilaI in 2009, $35 biII. more llan foreign reserves al end of Ianuary and a
major parl of lle $165 biII. nel inlernalionaI capilaI fIovs lo emerging marIels in
2009 as eslimaled by lle III. (Comparing gross and nel fIovs is of course incorrecl,
bul il is al Ieasl imporlanl lo nole llal lle eslimaled nel fIovs in 2009 viII slrinI 65°
from 2008 according lo lle same source, vlicl cIearIy indicales lle groving
ligllness of inlernalionaI capilaI marIels.) Tlose eslimales vere made before lle
lolaI of lle nev US fiscaI slimuIus pacIage lad passed Congress, a pacIage llal viII
pul more pressure on inlernalionaI capilaI marIels as lle US begin lo issue record
amounls of T-biIIs and bonds probabIy in lle second laIf of 2009, Ieaving even Iess
money for emerging marIels. So far, lovever, even in recenl monlls' bearisl
2

SEB Merchant Banking Country Risk Analysis February 26, 2009
cIimale of inlernalionaI finance TurIey las nol experienced major difficuIlies in
meeling ils exlernaI paymenl obIigalions. WliIe il is nol quile cIear, lov lle
ongoing lrade deficil and maluring debl lave been financed since Iale 2008,
suspicion are rising llal slorl lerm -- or lol -- money, may be pIaying an increasing
roIe, perlaps supporled by money Ieaving Russia or lle UIraine. Tlal vouId mean
reduced quaIily of baIance of paymenl financing.

mçäáíáÅ~ä=ÇÉîÉäçéãÉåíëW=Çê~ã~=çê=ãÉäçÇê~ã~\ IoIIoving a year of poIilicaI soap-
opera, al Ieasl as seen from afar, lle slarIIy opposing poIilicaI forces of TurIey since
lle presenl IsIamic AKI parly came lo pover in 2002, are once again pil againsl eacl
oller llis lime in a ballIe for IocaI governmenl represenlalion. AKI las presenled
lle oulcome as a referendum over ils overaII poIicy slance and is aiming for al Ieasl
preserving ils Ialesl parIiamenlary eIeclions resuIl of 46° of lle voles. WliIe mosl
inveslors vouId be lappy lo see lle AKI conlinue undislurbed, some observers,
incIuding many domeslic, IooI vill vorry al lle prospecls of a good eIeclion resuIl
for AKI fearing llis may slrengllen lle IsIamic lard-Iiners villin lle parly.

^í=ÅêçëëJêç~Çë\ Iasl year AKI lad lo figll off allacIs from lle opposilion llrougl
lle conslilulionaI courl foIIoving lle so-caIIed lurban case vlere AKI
(unsuccessfuIIy) lad advocaled vomen's rigll lo vear lle lead-scarf associaled
vill IsIamic lradilions in pubIic inslilulions, incIuding universilies. AIllougl AKI
von llal courl ballIe, lard feeIings and a Iusl for revenge couId sliII be breving.
Some observers see llal in lle recenl escaIalion of lle LrgeneIon-case in vlicl lle
governmenl apparenlIy las slarled a lunl for exlremisl opponenls vlo are being
clarged vill allempls lo iIIegaIIy overllrov lle governmenl. SlouId AKI inlerprel
lle eIeclion resuIl as an approvaI of ils IsIamic agenda, poIilicaI lensions are IiIeIy lo
increase slarpIy and lle air vouId become rife vill coup-rumors. Il may be said
llal al llese eIeclions TurIey are al cross-roads, vlere il musl cloose, in somevlal
simpIified lerms, belveen lle veslernized AlalurI-slale as embraced by a Iarge parl
of lle urban middIe cIass, or a counlry of more lradilionaI IsIamic vaIues supporled
by al Ieasl a equaIIy Iarge parl of lle ruraI popuIalion.

br=ãÉãÄÉêëÜáé=Ñáå~ääó=ëÜÉäîÉÇ\ In lle same vein some observers foresee lle
negolialions vill lle LU over TurIey's Iongslanding quesl for memberslip
evenluaIIy being side-Iined if nol finaIIy abandoned. In 2009, TurIey viII lave lo
soIve ils compIicaled reIalionslip lo lle GreeI laIf of Cyprus lo conlinue serious
memberslip negolialions. Tle GreeI parl of Cyprus is LU member bul TurIey las
nol fuIIy accepled ils sovereignly. Willoul a resoIulion, reaI negolialions risI lolaI
coIIapse. Ior a groving number of observers llal oulcome vouId nol come enlireIy
unexpecled. Over severaI years TurIey las graduaIIy delacled from lle LU in
lerms of lrade and economic reIalions. Al lle same lime lle LU is nov beginning lo
slov sucl probIems vis-a-vis ils nev members in Laslern Lurope llal il may soon
Iose ils aIIure lo llose sliII oulside. A TurIey villoul ils former LU aspiralions may
appear as a nev “animaI¨ bul barring any dramalic evenls ve prefer lo pIay dovn
lle maller regarding TurIey's credilvorlliness.

fjc=ÅçìäÇ=ÄÉ=ãçêÉ=áãéçêí~åíK= In a conlexl of mounling poIilicaI uncerlainlies al
lome and a financiaI crisis abroad, TurIey musl convince inveslors il las nol
abandoned prudenl poIicies. WliIe il slouId come as IillIe surprise llal lle
governmenl las visled lo relain fiscaI fIexibiIily alead of up-coming eIeclions, il
vouId IiIeIy be a big disappoinlmenl lo many if lle allilude of fiscaI Iargesse
survived poIIing day. Tle besl vay for lle governmenl lo quicIIy dispeI llose fears
vouId be lo enler a nev precaulionary IMI program vill cIear Iimils on fiscaI and
monelary poIicies.

-´-

qìêâÉó=áë=~=Åçìåíêó=ïáíÜ=~=äçåÖ=Üáëíçêó=çÑ=éçäáíáÅ~ä=íìêÄìäÉåÅÉI=ïÜáÅÜ=çå=ëçãÉ=
çÅÅ~ëáçåë=Ü~ë=Ääçïå=ìé=ÉîÉå=çîÉê=~éé~êÉåí=íêáîá~äáíáÉëK=eçïÉîÉêI=ëáåÅÉ=ëÉîÉê~ä=óÉ~êë=
íÜÉ=ÉÅçåçãó=Ü~ë=ëíêÉåÖíÜÉåÉÇ=ÅçåëáÇÉê~Ääó=~åÇ=ã~åó=Ü~îÉ=ÅçãÉ=íç=ÄÉäáÉîÉ=íÜ~í=~=
ÅçåíáåìÉÇ=éêÉÅ~êáçìë=éçäáíáÅ~ä=ëáíì~íáçå=áë=ãìÅÜ=äÉëë=äáâÉäó=íç=íêáÖÖÉê=íÜÉ=Ñáå~åÅá~ä=
3

SEB Merchant Banking Country Risk Analysis February 26, 2009
ÅêáëÉë=çÑ=íÜÉ=é~ëíK=tÜáäÉ=íÜÉêÉ=áë=ãìÅÜ=íç=íÜ~í=~êÖìãÉåíI=áí=áë=~äëç=åçíÉÇ=íÜ~í=íÜÉ=
ÇÉíÉêáçê~íáçå=çÑ=íÜÉ=ÉñíÉêå~ä=éçëáíáçå=ïáíÜ=êÉÅçêÇ=ÅìêêÉåí=~ÅÅçìåí=ÇÉÑáÅáíë=áå=êÉÅÉåí=
óÉ~êëI=~äíÜçìÖÜ=íÜçëÉ=~êÉ=ëÉí=íç=ÇÉÅäáåÉ=ëÜ~êéäó=áå=íÜÉ=ÑìíìêÉI=Ü~ë=äÉÑí=íÜÉ=Åçìåíêó=~åÇ=
áíë=éêáî~íÉ=Åçêéçê~íÉ=ëÉÅíçê=áå=~=ëáíì~íáçå=çÑ=Ü~îáåÖ=íç=êÉÑáå~åÅÉ=ä~êÖÉ=~ååì~ä=
~ãçêíáò~íáçå=~åÇ=êçää=çîÉê=ëÜçêí=íÉêã=ÇÉÄíK==qÜ~í=ï~ë=É~ëó=áå=íÜÉ=Ü~ééó=Ç~óë=çÑ=
ÅÜÉ~é=ãçåÉó=Äìí=ã~ó=íÜáë=óÉ~ê=ÄÉÅçãÉ=~=ÅÜ~ääÉåÖáåÖ=ÉåÇÉ~îçêK==cçê=íÜ~í=êÉ~ëçå=~åÇ=
ÄÉÅ~ìëÉ=çÑ=íÜÉ=ÇÉíÉêáçê~íáçå=çÑ=íÜÉ=ÑáëÅ~ä=Ä~ä~åÅÉ=áå=OMMVI=~äÄÉáí=ëíáää=åçí=Çê~ã~íáÅI=
çåÉ=ê~íáåÖ=~ÖÉåÅó=Ü~ë=éìí=qìêâÉó=çå=åÉÖ~íáîÉ=çìíäççâ=áå=áíë=__=ê~íáåÖK==tÉ=í~âÉ=åçíÉ=
çÑ=íÜ~í=àìÇÖãÉåí=áå=é~êíáÅìä~ê=áÑ=íÜÉ=ÖçîÉêåãÉåí=ÇÉä~óë=íÜÉ=ëáÖåáåÖ=çÑ=~=åÉï=fjc=
~ÖêÉÉãÉåí=ÑçääçïáåÖ=ìéJÅçãáåÖ=å~íáçåïáÇÉ=ãìåáÅáé~äáíó=ÉäÉÅíáçåëI=~åÇ=áÑ=íÜÉ=
ÉäÉÅíáçå=êÉëìäí=ÖáîÉë=êáëÉ=íç=ÅçåÅÉêåë=êÉÖ~êÇáåÖ=éçäáíáÅ~ä=ëí~Äáäáíó=~ë=Éñéä~áåÉÇ=~ÄçîÉK==
hÉó=ÑáÖìêÉë OMMV
IopuIalion (miIIions) 77
GDI/capila ($) 8059
GDI (clange) -1,5°
InfIalion 7,3°
Curr.Acc. baIance/GDI -2,3°
Reserves/imporls (monlls) 5
Budgel baIance/GDI -4,6°
Governmenl debl/GDI 43°
Graph: The pentagon shows Turkey's risk profile as
relatively strong on resilience, but weaker on liquidity. Its
Achilles heel is event risk related to a sudden drying up of
international liquidity needed to roll over its large and
short foreign debt.
bñíÉêå~ä=ê~íáåÖëW
Iilcl: BB-/neg
S&I: BB-/neg
mÉÉêëW
AIgeria
Romania
Indonesia
0
2
4
6
8
10
12
Resilience
Liquidity
Information
Absence of event
risk
Macro balance
Turkey Average EM
Indonesia
How to read the chart?
Moving out from the center
reduces risk.

 
 
Latest developments: Election results (March 30, 2009)

In the early hours following Election Day, it appears that AKP has won a
predicted victory, but a less resounding so than in the 2004 (local) or 2007
(general) elections. According to some analysts this is likely to temper the more
radical elements of the party and urge it to seek back to the center of Turkish
politics. If correct, that would represent the preferred outcome for investors,
ensuring less confrontational politics on Islamic issues and consequently less
political noise at least for the near future. In that case we predict that the rating
agencies will stop short of executing their down-grade warnings, unless the
economic and financial problems should intensify.
0%
20%
40%
60%
80%
100%
2004 Local 2007 General 2009 Local
Election results
DTP/
others
SP
MHP
CHP
AKP

 
4

SEB Merchant Banking Country Risk Analysis February 26, 2009
Key data: 2004 2005 2006 2007 2008 2009 2010 2011
GDP (mill. US$) 392374 483820 529201 660826 757463 61800 725361 798577
GDP/capita (US$) 5448 6630 7159 8825 9989 8059 9335 10158
GDP (change) 9,4% 8,4% 6,9% 4,6% 1,9% -1,5% 1,2% 3,0%
Investments/GDP 22% 24% 26% 26% 24% 21% 21% 22%
Budget balance/GDP -5,4% -1,5% -0,7% -1,7% -1,8% -4,6% -3,5% -3,4%
Govt debt/GDP 61% 54% 47% 42% 39% 43% 42% 42%
CPI inflation (%) 8,6% 8,2% 9,6% 8,8% 10,4% 7,3% 6,1% 4,8%
Money demand (%) 31,0% 24,4% 21,8% 9,6% 13,3% 8,0% 4,5% 6,8%
Stock prices 19904 29362 39861 48275 37582 28859
Interest rates 20,5% 14,4% 16,4% 17,0% 15,8% 11,0% 12,1% 12,6%
Exch. Rate ($) 1,42 1,34 1,43 1,30 1,30 1,67 1,55 1,54
Trade/GDP (%) 41% 39% 43% 42% 44% 42% 41% 43%
Oil price (Brent) $38 $54 $65 $73 $98 $45 $59 $67
Millions US $
Export of goods 68 535 78 365 93 611 115 364 140 793 117 671 136 039 157 031
Imports of goods 91 271 111 366 134 573 162 041 193 663 143 816 168 479 196 409
Other: 8 305 10 913 8 911 8 458 11 454 11 621 12 344 13 905
Current account -14 431 -22 088 -32 051 -38 219 -41 416 -14 524 -20 096 -25 474
(% of GDP) -3,7% -4,6% -6,1% -5,8% -5,5% -2,3% -2,7% -3,1%
FDI 2 005 8 967 19 261 19 940 15 133 13 312 12 244 10 796
Loan repayments -25 640 -32 535 -31 012 -36 793 -44 431 -49 950 -51 019 -52 098
Net other capital flows 41 392 53 944 59 921 66 438 76 804 41 085 64 566 72 571
Balance of payments 3 327 8 289 16 119 11 366 6 090 -10 077 5 696 5 795
Reserves 34 265 42 553 58 672 70 038 76 128 66 050 71 746 77 541
Total debt 154 460 166 063 193 334 235 088 286 247 301 697 311 582 321 765
o/w short term debt 28 567 35 150 40 359 41 995 52 444 56 616 56 825 56 983
Sources: Oxford Economics and SEB estimates
Rating history
Fitch (eoy) B+ B+ B B BB- BB-
Moody's (eoy) B1 B1 B2 B1 Ba3 Ba3
S&P (eoy) B+ BB- B+ B+ BB- BB-
Type of government: Parliamentary Democracy
Next elections Legislative: 2012; Presidential: 2014
Municipality elections in March 2009
Other:
Latest PC deal 1980/fully repaid
Latest IMF arrangements 2005 (SBA), Completed
E x te r n a l tr a d e
Im p o r ts
E xp o r t s
Im p o r ts O IL
S o u rc e : R e u te r s E c o W i n
0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8
U
S
D

(
b
i
l
l
i
o
n
s
)
0
1 0
2 0
3 0
4 0
5 0
6 0 Rea l ef fec ti ve and sp o t eu r/ T . L i r a
E xch a n g e r at es
Lo c al I nd i c es , CB RT CP I R ea l E f f ec ti ve E xc ha n ge Ra te In d ex, A vera g e, TRY S p o t Ra t es , E U R/T RY , Cl ose
S o u rc e : R e u te rs E c o W i n
20 0 4 20 0 5 20 0 6 2 007 20 0 8
E
U
R
/
t
r
y
1 ,5
1 ,6
1 ,7
1 ,8
1 ,9
2 ,0
2 ,1
2 ,2
1 3 0
1 4 0
1 5 0
1 6 0
1 7 0
1 8 0
1 9 0
2 0 0
R E E
T R Y/E U
R
St ripped Spr ead
Turkey EMBI Globa
Source: R euters E c oWin
2006 2007 2008
B
a
s
i
s

P
o
i
n
t
s
100
200
300
400
500
600
700
800
900
Emer gi
Tur k
I nterest rates
Go ve rnme nt B e n ch ma rks , Bid, 5 Y ea r, Y ie ld, Clos e , T
In te rba nk Rate s, T R LIBOR , 3 Mo n th , Fixin g, T RY
Polic y Rate s , Ce n tra l Ba n k O/N L en d ing R ate
Sou rc e: R e uters EcoWin
2006 2007 2008
5
10
15
20
25


5