Monthly Bulletin

ECONOMIC RESEARCH DEPARTMENT

MONTHLY BULLETIN

April 2006

GENERAL OUTLOOK

Turkish Parliament is expected to debate social security reform in the second week of April... Turkish Labour Minister Murat Basesgioglu declared that he hoped parliament's general assembly would start debating the social security reform package in the second week of April. A parliamentary commission approved the reforms aimed at restructuring Turkey's social security system as part of pledges made to the IMF under a three-year standby arrangement. The social security reforms are seen as crucial toTurkey's structural reform drive and had been scheduled for approval in February, after they were delayed from last year. The IMF's review of Turkey's economic programme and the next loan tranche are on hold until the government can show it has made significant progress on pushing them through parliament.

Central Bank Governor is still not nominated... Financial markets have been unnerved by the bank's lack of a permanent governor since March 14 when the five-year term of the previous incumbent expired. Surprisingly, the government had nominated Adnan Buyukdeniz, the general manager of the interest-free finance group Albaraka Turk, but he was vetoed by the President Sezer. The government expects to send the President its new nomination for the post of central bank governor within this week, the government spokesman said.

Turkey-IMF relations; not very bright as before... Turkey must stick to an economic program of fiscal discipline or risk losing the macroeconomic credibility it has earned in recent years, the head of the IMF stated. IMF Managing Director Rodrigo Rato said Turkey's economy was still vulnerable because of its high levels of public debt. Rato said that Turkey needed a very strong primary surplus in order to achieve sustained economic growth.

On the other hand, an IMF official affirmed that the pay rise plan for civil servants was a deviation from the economic programme and was more than the fund had expected. Finance Minister Kemal Unakitan has stated before that the pay increase would create extra budget expenditure of YTL 2 billion. The Parliament passed a law for an extra YTL 40 monthly payment for 1.4 million civil servants. That will rise to YTL 80 later in the year.

The IMF also criticized Turkey's decision to decrease value added tax on textile products and it said was a departure from the country's existing economic program with the Fund. Turkey has declared it was cutting VAT on textile products by more than half following intense pressure from textile manufacturers who say thousands of jobs are at risk because of strong Chinese competition. Turkey's Economy Minister Ali Babacan said that the government would solve problems with the IMF on the tax cut for textiles and the public pay rise plan. On the other

ECONOMIC RESEARCH DEPARTMENT hand, a delegation from the IMF has arrived in Ankara to discuss budgetary issues. The delegation is expected to meet with Turkish officials to discuss recent economic developments in Turkey, including budgetary expenditures.

WB Chief Economist praised Turkey’s economic potential... World Bank Chief Economist Aristomene Varoudakis said that when Turkey reaches the level of joining the European Union, it would have better economic development than many EU member countries, particularly future members Romania and Bulgaria. Furthermore, according to the Head of World Bank’s Mission in Turkey, Andrew Vorkink, the country is one of the countries which has had great economic performance in recent years. Vorkink noted that he expects that this performance will be sustained. Vorkink indicated that Turkey's EU membership bid will encourage Turkey to go on with political, macro economic and structural reforms.

Turkey gets new EIB loan for Europe-Asia tunnel... The European Investment Bank (EIB) granted Turkey a fresh loan of Euro 400 million (USD 477 million) to build an underwater rail tunnel linking Europe and Asia, the Treasury stated. The fresh loan brings EIB support Euro 1.05 billion (USD 1.25 billion) for the project to link the two shores of the Bosphorus that bisects Istanbul, to, according to the Treasury statement. The other sponsor of the project is the Japan Bank for International Cooperation, which has provided loans of about 1 billion dollars (Euro 839 million).

Turkey-EU relations: clouds on the horizon... EU Enlargement Commissioner Olli Rehn stated that the relations between the European Union (EU) and Turkey will face turbulence later this year over Cyprus and it will take deft diplomacy to avoid a “train crash”. The EU has said Turkey, with which it began membership talks last October, must open its ports and airports to traffic from Greek Cyprus this year under an agreement extending its customs union to the 10 new countries that joined the 25-nation bloc in 2004. Turkey has so far refused, linking the issue to an ending of an economic blockade of the Turkish Cypriot State in the Northern part of Cyprus, which the internationally recognized Greek Cypriot administration in Nicosia has prevented Brussels from easing. Rehn said the Commission, the EU's executive arm, had recommended opening the first detailed accession negotiations with Ankara on education, culture, science and research and it was now up to member states to agree a mandate.

Furthermore, Turkey's accession negotiations with the EU are running into obstacles during the early stages of Ankara's membership process because of persisting reservations of some member states such as France and Austria about admitting Turkey into the bloc. Having successfully launched talks on the first chapter on science and research, getting talks going on a second chapter, education and culture, is proving to be more difficult as some EU states struggle to agree on what conditions have to be met by Turkey.

Greece's National Bank acquired Turkey’s Finansbank... National Bank of Greece (NBG) agreed to pay Euro 2.3 billion for a 46% stake in Turkish Finansbank with plans to increase its stake in future. National Bank Chief Executive Takis Arapoglou told analysts during a conference call he was optimistic on the deal. National is also present in Romania, Serbia, Macedonia, Bulgaria and Albania. National's Chief Financial Officer Anthimos Thomopoulos told analysts that NBG would support Finansbank's growth in

ECONOMIC RESEARCH DEPARTMENT the local and regional market, expecting to see a boost from NBG's experience in mortgage lending in a market which has just started to grow rapidly.

OMV to buy 34% stake in Turkish Petrol Ofisi... Austria's oil company OMV AG stated it concluded a deal with Turkey's Dogan Yayin Holding to acquire a 34% stake in Turkey's Petrol Ofisi. Petrol Ofisi is Turkey's leading petroleum distribution and marketing company. After the sale, Dogan Holding's stake in Petrol Ofisi will be reduced to 52.7% from 86.7%. Dogan Holding and OMV will jointly control the company's business activities, with both companies operating as equal partners, OMV said. OMV declared it is paying USD 1.054 billion for its stake in Petrol Ofisi, which will be financed through cash flow and existing credit facilities. The agreement is subject to the approval of the relevant authorities, which is expected in the second half of 2006. OMV is planning to further expand its leading position in East Europe.

New public offering for Turkish Airlines... Turkey's Privatisation Administration (OIB), which controls Turkish Airlines (THY) state stake, stated in March it had decided to make a public offering of a further 25% of the company within a year. The airline has long been scheduled for sale under the country's privatisation programme. OIB now controls 75.18% of the company and the remaining 24.82% is traded on the Istanbul Stock Exchange after a public offering at the end of 2004. The upcoming offering will include the option of an additional sale. THY is expecting to maintain strong growth this year, boosted by a buoyant tourism sector and growing domestic demand and has said it will expand its fleet to 100 planes from 82 last year.

TAV-Taisei consortium wins Doha airport tender... Turkey's airport construction firm Tepe Akfen Ventures (TAV) submitted the winning bid along with Japanese partner Taisei to construct a new terminal in the Middle East's largest airport in the Qatari capital of Doha. The TAV-Taisei consortium submitted a bid of USD 805 million, beating out Enka Holding, British competitor John Laing and others among a pool of 18 companies.

AN OVERVIEW OF ECONOMIC DEVELOPMENTS

Strong economic growth continued in 2005… The Turkish economy grew much faster than GROWTH RATES (%) expected in 2005. The GDP grew by 9.5% in 16 the last quarter of 2005, while GNP growth 14 12 10 reached 10.2%. Consequently annual growth 8 6 amounted to 7.4% for GDP and 7.6% for 4 2 GNP. The growth levels exceeded 0 -2 considerably the government targets and our -4 -6 expectations. There were upward revisions -8 -10 for all quarters in both GNP and GDP figures. -12 -14 3 3 3 3 3 3 00 1 01 1 02 1 03 1 04 1 1 05 On the production side, agricultural growth GDP GNP which was generally expected to be negative in 2005 was a surprise. Although this sector contracted by 0.1% in the last quarter, the annual growth for the whole year reached 5.6%.

ECONOMIC RESEARCH DEPARTMENT

The growth rates in the industry and services sector were the main determinants of the overall annual growth. Industrial production grew remarkably by 10.1% in the last quarter of 2005 with the help of the robust 9.5% growth in manufacturing. The services sector again exhibited a vivid growth in the last quarter surpassing 10%, indicating the strong construction and transportation activities. Although the construction sector growth slightly declined in the last quarter, this sector was the star of 2005 with a 21.5% annual growth. Trade activities also positively contributed to the fast increase in the services sector.

National Growth Figures

(% change with respect to the same period of 2005 2005 2005 2005 2005 the previous year) QI QII QIII QIV annual Production Agriculture 4.3 8.2 7.5 -0.1 5.6 Industry 6.6 3.9 5.7 10.1 6.5 Manufacturing 6.6 3.2 5.5 9.5 6.1 Services 6.0 4.8 7.5 10.6 7.3 Trade 7.0 5.0 7.5 9.9 7.4 Transportation and Communication 6.8 4.7 8.0 15.2 8.8 Construction 20.6 25.4 25.6 14.8 21.5 Expenditures Private consumption 4.1 3.9 10.4 16.7 8.8 Public consumption 4.4 4.0 3.2 0.0 2.4 Private investment 8.8 18.4 29.0 41.6 23.6 Public investment 30.7 30.2 38.2 17.1 25.9 GDP 6.6 5.5 7.7 9.5 7.4 GNP 7.5 4.7 8.0 10.2 7.6

On the expenditure side, the buoyant domestic demand continued in the fourth quarter with a 16.7% growth in private consumption expenditures. This brought the annual growth for the above category to 8.8% and made a major contribution of 5.6 percentage points to overall growth. Launching of the negotiations with the EU, falling interest rates and a relatively stable economic environment can be some factors triggering this rise. On the other hand, public sector consumption expenditures stagnated in the last quarter of 2005 with zero growth indicating that the government was tight in its expenditures. The annual growth in this item was still a moderate 2.4%.

GROWTH RATES OF THE COMPONENTS OF GDP The increase in private investment ON THE EXPENDITURE SIDE (Quarterly, %) expenditures was again remarkable in the last

75 quarter of the year and amounted to 41.6%, 65 55 bringing the total growth in this item to 45 35 23.6% and making a significant contribution 25 15 to the overall GDP growth with 4.6 points. 5 -5 On the other hand, public investment -15 -25 expenditures slowed down compared to the -35 -45 previous quarters, however this did not -55

3 3 3 3 3 3 3 prevent the yearly growth to reach to 25.9%. 99 1 00 1 01 1 02 1 1 03 04 1 05 1 Private Consumption Public Consumption Private Investment Public Investment

ECONOMIC RESEARCH DEPARTMENT

As a result, the GDP in dollar terms reached USD 361.5 billion and per-capita GDP rose to USD 5,016 in 2005.

We are expecting again a strong growth in 2006, albeit with some slow-down and keeping our GDP growth forecast for 2006 at 5.5%.

No surprise in inflation data in March…

In March, the consumer price index (CPI) ANNUAL INFLATION RATES (%) rose by 0.27%, while the producer price index 20 (PPI) increased by 0.25%. The rise in the CPI 18 16 turned out to be higher than our expectation 14 mainly due to the fact that the cut in the VAT 12 10 rates in the textile sector has not been fully 8 6 reflected in prices. The PPI inflation, on the 4 other hand, is more or less in line with our 2 0 expectation. In sum, the annual inflation in 4 7 4 7 10 10

04 1 terms of CPI remained almost unchanged at 2005 1 2005 1 2006 PPI CPI 8.16% as of March, while the annual PPI * 1994=100 based indices for 2004 and before; 2003=100 based indices for 2005. inflation declined to 4.21%, from 5.26% in February. As a result, the CPI inflation as of the end of the first quarter of the year remained above the 7.4% performance criteria set in the context of the IMF-supported economic program. The current inflation level does not require any measures to be taken by the Central Bank, as it remained in the (+/-) 1% band around the 7.4% target.

There was a decline in the inflation in some services sectors in March. If this decline is permanent, this could be a very positive development in terms of inflation. However, one month is not enough for such conclusions. Therefore, we maintain our year-end CPI inflation estimate of 5.5% for 2006 year-end, higher than the official target of 5%.

SELECTED INFLATION FIGURES March 2006 March 2006 (monthly % change) (annual % change) CONSUMER PRICES (CPI) 0.27 8.16 Food and non-alcoholic beverages 1.30 7.94 Alcoholic beverages and tobacco 0.15 31.25 Clothing and footwear -2.92 -2.37 Housing, water, electricity, gas and other 0.60 10.76 Transport 0.14 8.58 PRODUCER PRICES (PPI) 0.25 4.21 Agriculture -0.36 3.50 Manufacturing Industry 0.48 4.12 Mining -2.28 15.78 Electricity, gas, water 0.16 4.14

ECONOMIC RESEARCH DEPARTMENT

Industrial production declined in January… Industrial production fell by 4.5% in January 2006 compared to the same month of the previous year. Although we expected a slowdown in the industrial production, a decrease was surprising for us. This was the first monthly decline in the industrial production since July 2005 and the lowest production index since February 2004. The seasonally adjusted figures indicate a sharp decline, reaching the lowest level since almost two years. The production growth for December 2005 was also revised to 7.5% from 8.6%, causing the yearly average growth of 2005 to fall to 5.4%. The unexpected decline in the industrial production in January can be attributed to a long religious holiday at that month and severe weather conditions causing negative effects to transportation and production in different sectors of the economy.

INDUSTRIAL PRODUCTION (seasonally adjusted) 140 135 130 125 120 115 110 105 100 95 90 85

5 9 5 9 5 9 5 9 5 9 5 9 5 9

1999 1 2000 1 2001 1 2002 1 2003 1 2004 1 2005 1 2006 1 industrial production 3 per. Mov. Avg. (industrial production)

Although there was a decline in industrial production, we believe that this was a temporary situation and we do not expect this trend to continue in the next months of the year. Thus, we do not change our view that industrial production growth will be robust in 2006.

Growth rate of exports is not encouraging in the first two months of 2006 … In February, both the export and import MONTHLY FOREIGN TRADE figures were below our projections (which (USD BILLION) were USD 6 billion and USD 9.9 billion, 13.5 respectively). Exports grew by 2.2% with 11.5 respect to the same period of 2005 and 9.5 amounted to USD 5.8 billion, while imports 7.5 rose by 16.1%, amounting to USD 9.7 billion. 5.5 This corresponded to an export to import ratio

3.5 of 59.7%, which is slightly lower than the

1.5 previous three months. Although the data in 4 7 4 7 4 7 4 7 4 7 4 7 10 10 10 10 10 10 the first two months of the year generally 2000 1 2000 1 2001 1 2002 1 2003 1 2004 1 2005 1 2006 Exports Imports exhibit some volatility and caution is needed to interpret whether there have been changes in trends, we can say that the growth performance of exports in the first two months is quite poor. On the other hand, despite some moderation in import growth compared to last year, the growth rates recorded in the two months are quite robust. Therefore, we should wait for March figures to obtain a more concrete view.

ECONOMIC RESEARCH DEPARTMENT

FOREIGN TRADE FIGURES (USD Million) Feb. Feb. % Jan.-Feb. Jan.-Feb. % 2005 2006 change 2005 2006 change (I) (II) (II)/(I) (III) (IV) (IV)/(III) Exports 5 652 5 774 2.2 10 649 10 750 1.0 Imports 8 323 9 666 16.1 15 536 17 774 14.4 Foreign Trade Balance - 2 672 - 3 891 45.7 - 4 887 - 7 024 43.7 Exports/Imports (%) 67.9 59.7 - 68.5 60.5 -

Consequently, in the January-February period, exports amounted to USD 10.8 billion and imports were recorded at USD 17.8 billion, resulting in a trade deficit of USD 7 billion.

These figures do not necessitate a revision in our 2006-end projections for exports and imports, which are USD 81.5 billion and USD 130 billion, respectively.

The current account deficit was USD 2.5 billion in January 2006… January current account deficit of USD 2.5 billion was just in line with our expectation. The deficit was as usual determined by the deficit in the trade balance (including shuttle trade), which was recorded as USD 2.6 billion due to the stagnation in exports. The services income weakened in January with respect to the same period in 2005 because of a slowdown in tourism revenues due to bird-flu cases and bad weather, while the long religious holidays triggered tourism expenditures to rise significantly by 27%. As a result, the net tourism revenues declined in January compared to the same period last year. Current transfers, on the other hand, rose by 29%, contributing positively to the current account balance.

BALANCE OF PAYMENT DEVELOPMENTS (USD MILLION) January 2005 January 2006 Current Account -1,464 -2,488 Balance on Goods -1,578 -2,613 Balance on Services 453 338

Balance on Investment Income -428 -328 Current Transfers 89 115 Financial Account 4,667 4,121 Direct Investments 142 532 Portfolio Investments 3,068 2,069 Other Investments 1,457 1,520 Central Bank -37 -51 General Government -133 -148 Banks 983 -3,280 Other Sectors 644 4,999 Net Errors and Omissions -951 472 Reserve Assets* -2,252 -2,105 Official Reserves* -2,090 -1,948 Use of IMF Credit and Loans -162 -157 * A negative sign indicates an increase in reserves.

As in 2005, the financial flows more than offset the current account deficit in January. Total net capital inflows amounted to USD 4.1 billion, mostly in the form of portfolio investments and net credits obtained by the real sector. Although portfolio investments amounting to USD 2.1 billion were below last years’ January figure due to lower inflows to financial markets, the

ECONOMIC RESEARCH DEPARTMENT magnitudes are still noteworthy: USD 0.5 billion worth of equities and USD 0.3 billion worth of GDIs were purchased by non-residents, while Treasury successfully sold 30-years bond issue of USD 1.5 billion in the international markets.

Meanwhile, there was a USD 5 billion inflow through corporate sector mainly in the form of long-term loans. The net long-term loans of the corporate sector reflected the tendency of the firms to borrow from abroad at favorable conditions. Moreover, Turkey’s first month performance of FDIs in 2006 seems promising with a net inflow of USD 0.5 billion. However, the details show that USD 0.3 billion is the inflow from residents’ reduction of their investments abroad and USD 0.1 billion is from the property purchases of foreigners. In this sense, the inflows from non-residents were limited in January but are expected to increase in the coming months.

Consequently, the substantial capital inflows and the USD 0.5 billion balance on net errors and omissions led to a rise in the reserve assets by USD 2.1 billion. With the repayments to IMF in this period, the accumulation in the Central Bank’s reserves amounted to USD 1.9 billion.

For 2006, we project the current account deficit as USD 26 billion, corresponding to 6.5% of the estimated GDP.

The foreign debt stock reached USD 170 billion in 2005…

The foreign debt stock rose by USD 3.2 FOREIGN DEBT STOCK (USD BILLION) 180 billion during the last quarter of 2005 to 160 amount to USD 170.1 billion level as of the 140 end of the year. The foreign debt stock was 120 standing at the USD 162.2 billion at the end 100 80 of the previous year, which implies USD 7.8 60 billion of increase in 2005. The rise in the 40 foreign debt stock in 2005 stemmed solely 20 from the rise in private sector’s debt stock, 0 whereas the public sector’s debt stock 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Medium and Long Term Private Medium and Long Term Public Short Term declined considerably. More precisely, the

* As of the third quarter of 2005 private sector’s foreign debt stock surged by USD 19.9 billion in 2005, of which USD 6.2 billion was short-term debt and USD 13.7 billion was long-term debt. The foreign debt stock of the public sector, on the other hand, fell by USD 12.1 billion during the period under consideration.

ECONOMIC RESEARCH DEPARTMENT

Although the foreign debt stock increased in nominal terms in 2005, it continued to decline as a ratio to the GDP. In fact, the foreign debt stock to GDP ratio fell to 46.8% in 2005, compared to 53.6% in 2004. This ratio was as high as 78.2% in 2001. The decline in public sector’s debt stock during this period is even more impressive. The public sector’s foreign debt stock as a ratio to the GDP fell down to 22.9% in 2005, from 31.5% in 2004. As a result, the public sectors total debt stock (including the Central Bank) fell to the 75.5% of the GDP in 2005, compared to 83.9% a year ago. The public sector’s total debt stock as a ratio to the GDP was 127.5% in 2001, which indicates 52 percentage points decline in 4 years.

FOREIGN DEBT STOCK (USD billion) 2004 year-end 2005 Q III 2005 Year-end Foreign debt stock 162.2 166.8 170.1 Short-term 32.6 38.4 38.2 CBRT 3.3 2.9 2.8 Commercial banks 14.5 17.9 17.8 Others 14.8 17.7 17.7 Long-term 129.7 128.4 131.9 Public sector 73.8 68.9 67.7 General government 70.1 66.0 65.1 Other public sector 0.9 0.4 0.4 State owned enterprises 2.8 2.5 2.3 CBRT 18.1 13.4 12.7 Private sector 37.7 46.1 51.5 Financial 8.3 13.5 15.2 Non-financial 29.4 32.6 36.3

The primary surplus was YTL 8.5 billion during the first two months of the year…

The Ministry of Finance recently announced the general budget revenues for 2004 and 2005 in accordance with the central administration, which enables us to compare at last major revenue items. During the first two months of the year, revenues of the central administration amounted to YTL 26.4 billion, which is 16.5% of the total amount targeted for the year as a whole. A large part of the total revenues were recorded as general budget revenues and they can be compared with the previous year. In fact, general budget revenues surged by 21% in real terms during the first two months of 2006 when compared with the same period of last year. The rise emanated mainly from the surge in non-tax revenues, as well as the VAT, income tax and import tax revenues. All these revenue items registered considerably high real increases, suggesting that the revenue side of the budget was quite strong during the first two months of the year. However, the reduction in the corporate tax rate and the VAT rate on textiles are expected to affect tax revenues negatively in the coming months.

On the expenditures side, YTL 17.9 billion of non-interest and YTL 9 billion of interest expenditures were registered during the first two months of the year, as a result of which total expenditures were YTL 26.9 billion, namely 15.4% of the total amount allocated for the whole year. Among non-interest expenditures, the highest expenditure categories during the period under consideration were personnel expenses and current transfers, which include transfers to social security institutions and transfers to the agricultural sector. Transfers by the Treasury, a large part of which consists of transfers to social security institutions already reached 22% of the total amount allocated in the 2006 budget, while agricultural transfers during the first two months of the year amounted to the 33.6% of the budgeted amount. Although we are at the

ECONOMIC RESEARCH DEPARTMENT beginning of the year, these figures suggest that yearly allocations in these two transfer items could be surpassed. Meanwhile, interest expenditures in February were quite high due to heavy redemptions this month, as a result of which interest payments during the first two months of the year reached almost 20% of the amount budgeted for the whole year. However, we do not see any problems in terms of interest expenditures and we think that budget limits in this category are more than enough.

SELECTED ITEMS FROM CENTRAL ADMINISTRATION BUDGET Jan-Feb 2006 2006 budget target Feb. 2006/ year-end target REVENUES 26,426 160,326 16.5 Tax Revenues 21,313 132,199 16.1 Non-Tax Revenues 4,695 21,372 22.0 Other 418 6,755 6.2 EXPENDITURES 26,915 174,322 15.4 Non-interest expenditures 17,891 128,062 14.0 I. Personnel expenditures 6,191 36,021 17.2 II. Purchases of goods and services 1,388 17,721 7.8 III. Current transfers 8,150 49,108 16.6 Duty losses 714 5,319 13.4 Transfers by the Treasury* 4,873 22,074 22.1 Agricultural transfers 1,345 4,000 33.6 Other 1,218 17,715 6.9 IV. Capital expenditures 646 12,452 5.2 V. Other expenditures 1,515 12,760 11.9 Interest expenditures 9,024 46,260 19.5 Domestic debt 7,386 38,900 19.0 Foreign debt 1,576 6,800 23.2 Primary balance 8,535 32,264 26.5 Budget Balance -489 -13,996 3.5 * A large part of this item consists of transfers to social security institutions.

As a result, the primary surplus was as high as YTL 8.5 billion during the first two months of the year, while the budget surplus in January turned out to a deficit of YTL 0.5 billion during the January-February period. It is worth noting that the primary surplus during the first two months of the year was as high as 26.5% of the year-end target, while the primary surplus during the same period of 2005 was around 19% of the year-end realization.

FINANCIAL MARKETS

International uncertainties and delayed CB governor appointment increased tension and volatility in the financial markets in March… Following two months of relative stability in the financial markets at the beginning of 2006, the interest rates and foreign exchange rates fell to record low levels at the beginning of March. The rally in the domestic markets was mainly due to the general investment appetite of the foreign investors in the emerging economies and the expectations regarding FED’s interest rate policy. The view that the interest rate increases would come to an end soon in 2006 was gaining more support at the beginning of the year and the end of tight monetary policy was perceived as a factor which would encourage further capital inflows to the emerging markets.

ECONOMIC RESEARCH DEPARTMENT

INTEREST RATES IN THE SECONDARY However, the declining yields in the relatively GDI MARKET* (compounded annually) risky developing economies rendered the 22% financial markets more fragile and susceptible

20% to changes in economic agents’ expectations,

18% as well as any political or economic news. In March, Turkish financial markets were quite 16% volatile and tense due to both domestic and 14% international uncertainties. In fact, given the 12% rapid fall in the yields, changes in the

25.01.05 10.02.05 28.02.05 16.03.05 01.04.05 19.04.05 05.05.05 24.05.05 09.06.05 27.06.05 13.07.05 29.07.05 16.08.05 02.09.05 20.09.05 06.10.05 24.10.05 11.11.05 29.11.05 15.12.05 02.01.06 24.01.06 09.02.06 27.02.06 15.03.06 31.03.06 expectations about the international economy * Interest rate of the most active bond: Aug.9, 2006 bond during Jan.25-Feb.8,2005; Sept.27,2006 bond during Feb.9-Apr.19, 2005; Nov.8, 2006 bond during Apr.20-May 24, 2005; Jan.24, 2007 bond during May and more specifically the FED’s monetary 25-July 26, 2005; March 7, 2007 bond during July 27-Sept.27, 2005; May 9, 2007 bond during Sept.28- Nov.15, 2005; June 27, 2007 bond during Nov.16, 2005-Jan.17, 2006 and Sep.5, 2007 bond afterwards. policy, as well as the uncertainties about the appointment of CB’s governor were quickly transformed into profit-taking sales in the domestic markets. Two major developments contributed to the shift in the expectations about the international economy: One was the European Central Bank’s (ECB) rate increases in its two consecutive meetings in two months, while the other was the announcement of the Japanese Central Bank (BOJ) that it would end its loose monetary policy. These developments along with the increasing expectations that FED will continue rate increases upon relatively strong demand indicators were interpreted as a start of general rate hike period in the developed economies and disturbed the optimistic air in the emerging markets on the whole.

Apart from these, the appointment of the CB’s governor became a puzzle for the domestic market players from the very beginning of the process, which added to the tensions in the financial markets. There were many speculations on several names before President Necdet Ahmet Sezer vetoed the proposed Adnan Buyukdeniz and his two vice-presidents towards the end of the month. Even it was questioned in the meantime whether there would be a change in the monetary policy of the CB, which had acquired significant credibility in the last four years. Until then, there were enough uncertainties about the appointments due to news and announcements in the media and this veto did not relieve the markets but verified that the delay in the appointment process continued. These developments in fact contributed to the increase in the FX rates and interest rates, as the market players perceived these complications as a threat to the credibility of the CB, which face a hard task of disinflation in a year which is more difficult compared to previous years. In addition to this, at the end of the month, the IMF Director Rodrigo de Rato reacted negatively to the VAT reduction on textiles and increase in the wages of the public servants, which also added to the tension in the markets.

To sum up shortly, the interest rate of the most active bond (September 5, 2007) in early March fell as low as 13.2%, before the aforementioned developments led the rates rise steadily to over 14% at the end of the month. The Sep. 5, 2007 bond ended the month at 13.96%. In the foreign exchange market, the basket rate (composed of 1 USD+0.77 Euro) rose by 3.7% in nominal terms, while depreciation of the YTL against euro was sharper. In this respect, YTL/euro increased by 4.8% in March, becoming 1.633 and YTL/dollar rose by 2.7% to reach 1.348. Highest YTL/euro and YTL/dollar was recorded on March 29th, as 1.636 and 1.363, respectively.

ECONOMIC RESEARCH DEPARTMENT

FOREIGN EXCHANGE RATES (1) (2) (3) (2)/(1) (2)/(1) (3)/(2) (3)/(2) 30.12.05 28.02.06 31.03.06 % real % % real % change change *** change change *** YTL / USD* 1.3483 1.3123 1.3482 -2.7 -3.6 2.7 2.5 YTL / Euro * 1.5952 1.5585 1.6332 -2.3 -3.2 4.8 4.5 FX basket ** 2.5766 2.5123 2.6058 -2.5 -3.4 3.7 3.4 Euro/USD rate 1.1831 1.1876 1.2114 0.4 2.0 * Central Bank’s selling rate; ** 1 USD + 0.77 euro; *** The real change has been calculated using the CPI.

Treasury held a buy-back auction in March, in addition to four YTL-denominated auctions… The Treasury held a buy-back auction in March for the foreign exchange indexed bonds issued in a swap operation in 2001 which would mature on June 14, 2006. Having announced that the maximum purchase would be YTL 1 billion, Treasury bought back bonds worth of net YTL 805.7 million through a price of YTL 118,913 per bond.

Apart from this, in March the Treasury auctioned a 91-day reference bill, a five-year FRN paying semi-annual coupons, a 539-day government bond and a five-year fixed coupon bond with semiannual payments, all YTL-denominated. Total net borrowing amounted to YTL 7.5 billion, which was YTL 1.9 billion less than the total YTL 9.5 billion of redemption. This reduced significantly the rollover ratio with respect to the previous four months. The rollover ratio, which was 84.2% in February declined to 79.7% in March. Moreover, the average interest rate in the two discounted YTL-denominated auctions fell to 13.9% from the previous month’s average of 14%. Meanwhile, the average maturity declined to 820 days (26 months) in March from 924 days (30 months) in the previous month.

TREASURY’S DOMESTIC BORROWING IN MARCH 2006 Date Redemption Maturity Interest Total Bids Borrowing Borrowing Total Date (days) rate (Nominal) (Nominal) 1 (Net) 1 Borrowing (ca, %) (Net) 2 13.03.06 14.06.06 91 14.3 YTL 2.6 bn YTL 1.0 bn YTL 0.95 bn YTL 0.95 bn 13.03.06 12.01.11 1785 (3) 15.1 YTL 2.2 bn YTL 1.0 bn YTL 1.03 bn YTL 1.54 bn 14.03.06 05.09.07 539 13.8 YTL 3.8 bn YTL 3.2 bn YTL 2.62 bn YTL 4.52 bn 28.03.06 19.01.11 1757 (4) 13.7 YTL 0.9 bn YTL 0.3 bn YTL 0.34 bn YTL 0.53 bn 1 Sales in the auctions, excluding the sales to public institutions and primary dealers at uncompetitive bids and option sales. 2 Total sales including the sales to public institutions and primary dealers at uncompetitive bids and option sales. 3 Floating rate coupon bond auction with coupon payments every 6 months. 4 Fixed coupon bond auction with coupon payments every 6 months.

The Treasury plans to borrow YTL 9.3 billion from the market in April … According to the domestic borrowing strategy for April, the Treasury has YTL 13.6 billion of domestic debt redemption, of which YTL 12.1 billion of redemptions consists of the payments to the market. Of the total sum, the Treasury will be paying YTL 1.7 billion of FX-linked debt in April. Including the foreign debt payments of YTL 2.1 billion, Treasury’s total financing requirement amounts to YTL 15.7 billion.

ECONOMIC RESEARCH DEPARTMENT

TREASURY’S DOMESTIC DEBT REDEMPTIONS IN APRIL 2006 (YTL million) Date Payments to Payments to state Payments to the Total the market enterprises (1) CBRT 05.04.06 3,602 112 - 3,714 12.04.06 6,358 1,290 - 7,648 19.04.06 447 32 - 479 26.04.06 1,735 14 - 1,749 Total 12,142 1,448 - 13,590 (1) Sales to the public institutions through uncompetitive bids at the price formed in the auction.

To finance its debt redemptions, the Treasury plans to borrow YTL 9.3 billion from the market through auctions and to raise the remaining YTL 6.4 billion from other sources, mainly through its cash account. Due to the payments of agricultural product support and the amount of additional payments to civil servants accrued in the first quarter to be paid in April, cash based primary surplus is projected only YTL 0.5 billion, a much lower figure compared to the previous months.

TREASURY’S BORROWING REQUIREMENT IN APRIL 2006 (YTL billion) Payments 15.7 Domestic Debt Service 13.6 Principal 10.1 Interest 3.5 Foreign Debt Service 2.1 Principal 1.7 Interest 0.3 Financing 15.7 Borrowing from the markets via auctions 9.3 Other financing 6.4 Primary Surplus 0.5 Sales to public institutions 1.4 Foreign Borrowing 0.0 Treasury’s Cash Balance (*) 4.5 (*) In case of external borrowing, privatization proceeds or/and cash transfer from Saving Depository Insurance Fund (SDIF) to Treasury, use of cash account is subject to change.

In April, the Treasury plans to auction five GDIs: Two of them are discounted GDI auctions, one of them a fixed coupon, the other two are YTL and FX denominated FRN auctions. It is worth to note that the Treasury will hold a 2-year YTL-denominated discounted GDI auction for the first time. In its previous bulletins, the Treasury had announced that it would issue benchmark bonds in April, July and October. We find it a very positive development that the Treasury attempts to sell a longer term instrument as a benchmark GDI through this two-year bond.

BORROWING PROGRAM FOR APRIL 2006 Maturity Instrument type Auction date Value date Maturity date 12 months (378 days) YTL, discounted (reference) 04.04.2006 05.04.2006 18.04.2007 5 years (1736 days) (r-o)* YTL, FRN 10.04.2006 12.04.2006 12.01.2011 24 months (728 days) YTL, discounted 11.04.2006 12.04.2006 09.04.2008 5 years (1736 days) (r-o) YTL, fixed coupon 18.04.2006 19.04.2006 19.01.2011 3 years (1092 days) FX denominated, FRN 25.04.2006 26.04.2006 22.04.2009 (*) (r-o) is re-open.

ECONOMIC RESEARCH DEPARTMENT

As in March, interest rates may be volatile in April as well… March CPI inflation was better than market’s expectations and it is quite possible that the number of market players who wait for a rate cut in April will increase following the March figures. This may lead to moderate decline in the bond and bill rates, which have hovered around 13.8% in the first days of April. Nonetheless, we do not expect that the interest rates in the secondary market will fall below 13.5% level, if the uncertainties in the international economy as well as the delay in the appointment of the CB’s governor continue.

As mentioned before, changes in the expectations about the international economy and more specifically the FED’s monetary policy, as well as the domestic uncertainties can quickly turn into reactionary sales in the domestic markets, since the room for profit for the investors have been narrowing with the declining interest rates at home, along with the increasing interest rates in the developed economies. However, in March, the responses were quite controlled and the most active bond’s rate did not pass over 14%. This reflects that no significant changes in the investors’medium term outlook have taken place and the mood in the financial markets is still relatively optimistic, albeit fragile. Therefore, in April, news regarding FED’s interest policy will be as influential as in the previous month on the path of interest rates and exchange rates.

As for the CB’s decision short-term interest rates, our view is that the CB may wait for another month, holding its rates constant. The domestic demand indicators at the beginning of 2006 seem quite strong, which should be carefully watched. Moreover, if the uncertainties regarding the appointment of the new CB governor continues and the possibility of further capital outflows due to change in foreign investors’ expectations lead to tension in the markets, the CB may be more hesitant to reduce interest rates in an uncertain environment. The IMF’s reaction, on the other hand, also adds to the uncertainties, leading to perceptions that the structural reform process has been delayed or very slow progressing. However, since we do not know yet the new members of the Monetary Policy Committee (MPC), we should note that there is still a chance of a rate cut in the April MPC meeting.

Consequently, we expect some moderate volatility in April. Any positive developments regarding the issues cited above may lead to decline in the interest rates. However, in the absence of such positive news, we expect the interest rate to remain in the 13.5%-14% band.

ECONOMIC RESEARCH DEPARTMENT

MAIN ECONOMIC INDICATORS (April 5, 2006)

GROWTH: GNP 2005 – 4th Quarter 10.2% GDP 2005 – 4th Quarter 9.5% GNP 2005 7.6% GDP 2005 7.4% PRICES: Consumer Prices March 2006, Annual 8.16 % Consumer Prices March 2006, Monthly 0.27% Producer Prices March 2006, Annual 4.21% Producer Prices March 2006, Monthly 0.25% EXTERNAL BALANCE: Exports (Shuttle trade excluded) January-February 2006 USD 10.7 billion Imports January-February 2006 USD 15.5 billion Trade Balance January-February 2006 USD -4.8 billion Current Account Balance January 2006 USD –2.5 billion Foreign Debt Stock 2005 USD 170.1 billion CENTRAL BANK AND MONETARY AGGREGATES: CBRT Foreign Exchange Reserves 24.03.2006 USD 58.1 billion Total Gross Reserves 10.03.2006 USD 80.9 billion Total YTL Deposits 30.12.2005 – 17.03.2006, % change 2.6% Deposit Money Banks Domestic Credit Stock 30.12.2005 – 17.03.2006, % change 3.6.% M1 30.12.2005 – 17.03.2006, % change -6.1% M2 30.12.2005 – 17.03.2006, % change 3.9% M2Y 30.12.2005 – 17.03.2006, % change 4.0% PUBLIC FINANCE: Consolidated Budget Balance January-February 2006 YTL -0.5 billion Primary Balance January –February 2006 YTL 8.5 billion Domestic Debt Stock January-February 2006 YTL 246.4 billion FOREIGN EXCHANGE: Devaluation Rate (TL/$) March 2006 (Monthly) 2.7% March 2006 (Over year-end) 0.0% Devaluation Rate (TL/EURO) March 2006 (Monthly) 4.8% March 2006 (Over year-end) 2.4% ISE: ISE Composite Index 30.12.2005-31.03.2006, % change 7.9%

NOTE: This document is prepared by the Economic Research Department of Yapi Kredi Bank A.S by using official data. No responsibility is assumed for the accuracy of the information given in the document although utmost care has been taken in their compilation and processing.

Economic Research Department: Fax: 90.212.339.61.30 Phone: E-mail: Ahmet Cimenoglu, Chief Economist 90.212 – 339 71 28 [email protected] Suzi Apalaci, Senior Economist 90.212 – 339 71 25 [email protected] Veyis Fertekligil, Senior Economist 90.212 – 339 71 22 [email protected] Yelda Yucel, Senior Economist 90.212 – 339 71 23 [email protected]