Real Estate Development & Investment in TurkeyTürkiye de Gayrimenkul Geliştirme ve Yatırımı

09

GR

I TürkiyeTurkey

2

Turkey Macroeconomic Update

“No sudden stop but slow pain”

January 2009

Dr. Murat Ulgen, Chief Economist

HSBC Turkey

+90 (212) 376 4619 / muratulgen@hsbc.com.tr

3

U.S. home prices continue to fall...

Source: Case-Shiller

“S&P/Case-Shiller” home price index, inflation-adjusted

0

25

50

75

100

125

150

175

200

225

250

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

4

...while bad debt losses keep on rising...

Source: Bloomberg

0

100

200

300

400

500

600

700

800

900

1,000

3Q07 4Q07 1Q08 2Q08 3Q08 4Q08F Total 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08F Total

U.S. EU Asia

USD874.2 bn USD960.3 bn

LossesCapital Raised

5

...bankruptcies/nationalisations led to a ‘financial earthquake’, aftershock still visible...

Source: Reuters

S&P 500 U.S. Major Market Equity Index

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Financial earthquake and ensuing aftershocks

6

...this earthquake unearthed the ‘shadow financial system’

WHAT WILL HAPPEN NOW?

Following developments are expected in the financial industry :

De-leveraging, repayment of debt

“Wall Street leverage model” collapsed

De-risking

Downsizing (budgets, balance sheets)

Increased supervision, regulation, shadow financial system will shrink

Securitisation will continue

SHADOW FINANCIAL SYSTEM:(USUALLY NON-DEPOSITORY INSTITUTIONS):

ASSETS LIABILITIES

LONG-TERM, RISKY, ILLIQUID BUT HIGH-RETURN ASSETS

AND THEIR DERIVATIVES

(SUCH AS MBS, ABS, CREDIT

DERIVATIVES, STRUCTURED

PRODUCTS, ETC)

LEVERAGING: SHORT-TERM LIQUID NON-

DIVERSIFIED/NON-DEPOSIT

BORROWING (MONEY MARKETSAND SHORT-TERM

CREDITS FROM OTHER

INSTITUTIONS)

EQUITY CAPITAL

7

...financial sector problems are spilling over to the real economic activity...

Source: Chicago FED

-3.00

-2.75

-2.50

-2.25

-2.00

-1.75

-1.50

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

Jan-

90

Jul-9

0

Jan-

91

Jul-9

1

Jan-

92

Jul-9

2

Jan-

93

Jul-9

3

Jan-

94

Jul-9

4

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Chicago FED National Activity Index (CFNAI, 3MMA)

8

...expectations of economic growth are revised sharply down...

Source: OECD

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%

8.5%

9.5%

Chi

na

Indi

a

Rus

sia

Pol

and

Bra

zil

Cze

ch R

ep.

Kor

ea

S. A

fric

a

Tur

key

Net

herla

nd

Sw

itzer

land

Mex

ico

Hun

gary

Ger

man

y

U.S

.

Spa

in

Fra

nce

U.K

.

Japa

n Ita

ly

İtaly

a

2008 F 2009 F

9

Policymakers are taking bold, unprecedented steps

Central bank policy rates (%, overnight)

Source: National central banks

0

1

2

3

4

5

6

7

8

9

10

Jan-

00A

pr-0

0Ju

l-00

Oct

-00

Jan-

01A

pr-0

1Ju

l-01

Oct

-01

Jan-

02A

pr-0

2Ju

l-02

Oct

-02

Jan-

03A

pr-0

3Ju

l-03

Oct

-03

Jan-

04A

pr-0

4Ju

l-04

Oct

-04

Jan-

05A

pr-0

5Ju

l-05

Oct

-05

Jan-

06A

pr-0

6Ju

l-06

Oct

-06

Jan-

07A

pr-0

7Ju

l-07

Oct

-07

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09

U.K. U.S. Eurozone

10

FED is expanding its BS: “A monetary policy experiment”

U.S. FED Balance Sheet (USD bn)

Source: Federal Reserve

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Quantitative Easing: FED is printing money and purchasing financial assets in a bid to avert deflation, though financial system is parking it back at FED and thus not lending further to households and/or companies. Classical "liquidity trap"

11

Will these measures work out? The total size of monetary/fiscal stimulus and recap efforts across the globe

will reach about USD8.0-10.0 trillion

It is encouraging to see swift and forceful policy action by policymakers unlike in Japan’s deflation/recession experience in 1990’s

However, recession is global this time around. HSBC expects global GDP growth at -0.1% this year, first contraction since World War II

And the sheer size of these measures in shrinking capital markets may bring up ‘indigestion problem’ and crowding out of EM

In the end, we need to see both consumer and business confidence to recover. 1H09 will be very critical in that respect

12

...money market spasm is healing gradually

Source: Bloomberg

TED spread: spread between 3-month interbank rate and 3-month U.S. T-bill rates

LIBOR-OIS spread: spread between 3-month LIBOR rate and overnight swap rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Aug

-06

Sep

-06

Oct

-06

Nov

-06

Dec

-06

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

TED spread Libor-OIS spread

13

3

4

5

6

7

8

9

10

11

Jan-

90

Nov

-90

Sep

-91

Jul-9

2

May

-93

Mar

-94

Jan-

95

Nov

-95

Sep

-96

Jul-9

7

May

-98

Mar

-99

Jan-

00

Nov

-00

Sep

-01

Jul-0

2

May

-03

Mar

-04

Jan-

05

Nov

-05

Sep

-06

Jul-0

7

May

-08

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4Spread (right)30-year Treasury30-year Mortgage

...however credit markers are still tight (household)

U.S. long-term mortgage rates and long-term Treasury borrowing rate (%)

Source: Federal Reserve

US Treasuries are seen as safe haven and also price deflation

14

... credit markets are still tight (cont’d, corporates)

ITRAXX and ITRAXX CROSS-OVER INDEXES (in basis points)

Source: Reuters

ITRAXX: 5-year borrowing cost of high-(investment) grade corporates in Europe

ITRAXX CROSSOVER: 5-year borrowing cost of low-grade corporates in Europe

0

25

50

75

100

125

150

175

200

225

250

Jul-0

6A

ug-0

6S

ep-0

6O

ct-0

6N

ov-0

6N

ov-0

6D

ec-0

6Ja

n-07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

Jul-0

8Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

High grade (left) Low grade

15

As credit crunch deepens, U.S. is loosening both monetary and fiscal policies, though its own credit risk is rising

Source: Bloomberg

U.S. 10-year CDS spread (credit default swap spread as insurance against credit risk, in basis points)

16

How will Turkey be affected?...

Turkish economy’s chronic problem is lack of capital

Capital is getting scarce and expensive globally

We will also face difficulties in finding capital

Thus, we will not be able to grow as in the past for a while

Economic agents will have to downsize their budgets/balance sheets

Savings will be key

17

Why do we need external capital?

Source: State Planning Office (1987-series, HSBC)

Savings Gap = (Savings – Investment) / National Income

-13

-11

-9

-7

-5

-3

-1

1

3

5

7

9

2002 2003 2004 2005 2006 2007 2008F 2009F

Public Private Total

18

How did we bridge the gap? External borrowing

Source: Tressury Undersecretary

Turkey’s total external debt stock and its breakdown (USD mn)

2001 2002 2003 2004 2005 2006 2007 3Q08TOTAL 113,592 129,532 144,098 160,927 169,060 205,727 247,418 289,318%of GDP 57.7% 56.2% 47.3% 41.2% 35.1% 39.1% 37.8% 39.6%SHORT TERM 16,403 16,424 23,013 32,215 37,756 40,969 41,747 56,309

PUBLIC SECTOR 1,019 915 1,341 1,840 2,133 1,750 2,163 3,139CBRT 752 1,655 2,860 3,287 2,763 2,563 2,282 1,980PRIVATE SECTOR 14,632 13,854 18,812 27,088 32,860 36,656 37,302 51,190

FINANCIAL INSTITUTIONS 6,978 5,429 8,351 13,118 16,665 18,984 15,087 23,604NON-FINANCIAL INSTITUTIONS 7,654 8,425 10,461 13,970 16,195 17,672 22,215 27,586

LONG TERM 97,189 113,108 121,085 128,712 131,304 164,758 205,671 233,009PUBLIC SECTOR 46,110 63,619 69,503 73,828 68,278 69,832 71,288 75,605CBRT 23,599 20,348 21,513 18,123 12,662 13,115 13,519 12,359PRIVATE SECTOR 27,480 29,142 30,069 36,761 50,364 81,811 120,864 145,045

FINANCIAL INSTITUTIONS 4,789 4,854 5,349 8,625 16,026 28,984 42,837 46,399NON-FINANCIAL INSTITUTIONS 22,691 24,288 24,720 28,136 34,338 52,827 78,027 98,646

TOTAL FINANCIAL INSTITUTIONS 11,767 10,283 13,700 21,743 32,691 47,968 57,924 70,003TOTAL NON-FINANCIAL INSTITUTIONS 30,345 32,713 35,181 42,106 50,533 70,499 100,242 126,232

19

...now external private capital will dwindle...

Source: CBRT

Capital account and non-financial corporates net change in FX asset/liabilities (USD mn)

-6,500

-5,000

-3,500

-2,000

-500

1,000

2,500

4,000

5,500

7,000

8,500

10,000

Jan-

00A

pr-0

0

Jul-0

0O

ct-0

0

Jan-

01

Apr

-01

Jul-0

1

Oct

-01

Jan-

02

Apr

-02

Jul-0

2

Oct

-02

Jan-

03A

pr-0

3

Jul-0

3O

ct-0

3

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5O

ct-0

5

Jan-

06A

pr-0

6

Jul-0

6O

ct-0

6

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8O

ct-0

8

Net other investments, non-financial corporates

Capital & Financial Account

20

USD bn EquityFixed

IncomeDeposits

Non-resident Portfolio/Potential

FX Demand2002 3.5 3.6 0.1 7.12003 8.7 5.2 0.2 14.12004 15.4 13.7 0.5 29.62005 33.8 20.4 0.8 55.02006 34.9 26.0 0.9 61.8

Dec-2007 69.9 31.8 1.4 103.1Jan-2008 57.2 32.3 1.6 91.1Feb-2008 57.5 31.7 1.4 90.6Mar-2008 48.1 28.4 1.5 78.0Apr-2008 50.8 26.4 1.5 78.7May-2008 51.5 27.8 1.6 80.9Jun-2008 44.5 31.7 1.3 77.5Jul-2008 56.1 31.4 1.4 88.9

Aug-2008 51.7 30.3 1.4 83.4Sep-2008 45.5 28.6 1.4 75.5Oct-2008 28.6 18.5 1.4 48.5Nov-2008 25.4 17.6 1.4 44.4Dec-2009 27.1 19.5 1.3 47.9

...'hot money' portfolio smaller but still fairly large

Source: CBRT

Turkish Lira (TRY) portfolio stock of non-resident investors

as of 19-December-2008

FX supply will decline

FX demand will rise

This will likely continue to exert (non-linear, intermittent) pressure on Turkish Lira

21

Non-public non-bank FX posy has tipped into negative territoryUSD mn 2003 2004 2005 2006 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08ASSETS 30,980 38,659 45,701 63,426 65,860 67,977 72,723 77,864 80,832 85,811

Deposits 19,958 24,565 30,890 45,452 45,815 47,189 51,205 54,834 55,377 58,307Local Banks 8,573 10,598 12,636 18,756 18,990 20,921 22,414 24,402 24,051 26,092

Foreign Banks 11,385 13,967 18,254 26,696 26,825 26,268 28,791 30,432 31,326 32,215Securities 920 1,306 1,035 933 1,001 862 807 830 898 851

Treasury Securities 808 1,175 790 632 633 574 592 573 622 547 Issued Locally 271 379 96 83 89 63 66 61 106 48 Issued Abroad 536 797 693 549 543 511 525 512 516 499 Portfolio Investment Abroad 112 131 245 301 368 288 215 257 276 304Export Receivables 5,158 7,005 6,721 9,584 10,073 10,720 10,935 12,009 14,154 15,493Outward Direct Investment 4,945 5,783 7,056 7,457 8,971 9,205 9,776 10,191 10,403 11,160LIABILITIES 50,759 59,006 72,383 100,047 108,373 117,164 128,499 138,843 154,584 167,257

Cash Loans 44,204 49,603 61,348 88,275 95,930 103,846 114,292 124,250 138,905 148,673 On-shore Loans 18,158 20,457 26,429 34,804 36,430 38,575 43,368 46,305 51,666 51,829 Banks 12,664 14,245 20,796 24,744 26,048 27,694 31,103 32,787 39,424 39,510 FX Loans 12,664 14,245 15,397 17,370 17,587 18,192 20,078 20,782 24,145 23,891 Short Term 0 0 0 0 12,051 12,622 14,112 14,419 16,949 17,064 Long Term 0 0 0 0 5,536 5,571 5,966 6,364 7,196 6,827 FX-linked Loans 0 0 5,399 7,374 8,461 9,502 11,025 12,005 15,279 15,619 Non-bank Financial Institutions 0 0 0 4,869 5,305 6,125 7,287 8,220 8,706 8,742 Factoring Companies 0 0 0 143 180 222 277 270 386 555 Consumer Finance Companies 0 0 0 400 421 456 518 383 421 456 Leasing Companies 0 0 0 4,326 4,704 5,447 6,492 7,567 7,899 7,731 Non-performing Loans transferred to SDIF 5,494 6,213 5,633 5,191 5,077 4,756 4,978 5,298 3,536 3,576 Off-shore Loans 26,046 29,146 34,919 53,471 59,500 65,271 70,924 77,945 87,239 96,844 Short Term 1,595 1,446 1,188 1,383 1,302 1,939 2,183 1,626 1,761 2,163 Long Term 24,451 27,700 33,731 52,088 58,198 63,332 68,741 76,319 85,478 94,681 Time to maturity less than one year 0 0 0 0 0 0 0 0 21,708 24,989 Time to maturity more than one year 0 0 0 0 0 0 0 0 63,770 69,692Import Payables 6,555 9,403 11,035 11,772 12,443 13,318 14,207 14,593 15,679 18,584 Short Term 6,297 9,088 10,674 11,354 12,035 12,890 13,712 14,085 15,145 17,970 Long Term 258 315 361 418 408 428 495 508 534 614 Time to maturity less than one year 0 0 0 0 0 0 0 0 193 207 Time to maturity more one year 0 0 0 0 0 0 0 0 341 407

Net FX Position -19,778 -20,347 -26,682 -36,621 -42,513 -49,187 -55,777 -60,979 -73,752 -81,446

Net FX Position / GDP -6.5% -5.2% -5.5% -7.0% -7.2% -8.3% -8.5% -9.3% -10.5% -10.9%

Net FX Position / Exports -41.8% -32.2% -36.3% -42.8% -44.1% -48.3% -52.0% -56.9% -62.9% -64.4%

Short Term Assets 70,453 74,651Short Term Liabilities 71,785 79,023Short Term Net FX Position -1,332 -4,372

Local Retail Net FX Position 39,755 46,283 43,027 51,978 56,120 60,599 63,529 64,931 63,986 68,149

Assets 39,755 46,283 44,145 53,146 57,363 62,087 65,390 67,104 66,245 70,744

Liabilities (FX-linked consumer loans) n.a. n.a. 1,118 1,168 1,243 1,488 1,861 2,173 2,259 2,595

Overall Local Market FX Position 19,977 25,936 16,345 15,357 13,607 11,412 7,752 3,952 -9,766 -13,297

22

Hard times ahead for leveraged sectors

Source: CBRT

Sector and maturity breakdown of external debt

July 2008 (USD mn)1 - 12

MONTHS13 - 24

MONTHS25 - 36

MONTHS37 - 60

MONTHS61 - 120

MONTHSMORE THAN 120 MONTHS

Average Maturity (in years) 0.5 1.5 2.5 4.0 7.5 10.0

TOTAL 39,912 22,877 17,575 29,216 27,374 3,481 140,435 100.0% 3.2FINANCIAL SECTOR 14,810 6,311 5,285 10,567 8,278 559 45,810 32.6% 3.1

BANKS 7,310 4,180 4,404 8,731 8,024 559 33,208 23.6% 3.7NONBANK FINANCIAL CORPORATIONS 7,500 2,131 881 1,836 254 0 12,602 9.0% 1.5

NONFINANCIAL CORPORATIONS 25,102 16,566 12,290 18,649 19,096 2,922 94,625 67.4% 3.3AGRICULTURE 97 52 36 45 32 0 262 0.2% 2.4

Agriculture, Hunting and Forestry 94 51 35 43 30 0 253 0.2% 2.4Fishing 3 1 1 2 2 0 9 0.0% 3.2

TOTAL INDUSTRY 10,318 8,148 5,869 7,947 7,321 163 39,766 28.3% 3.0Mining and Quarrying 571 530 457 1,090 1,164 4 3,816 2.7% 4.0Manufacturing 8,882 6,445 3,928 5,306 4,699 98 29,358 20.9% 2.8 Food, beverage and tobacco products 1,824 2,218 623 962 230 0 5,857 4.2% 1.9 Textiles and wearing apparel 1,157 671 483 695 406 1 3,413 2.4% 2.5 Leather and leather products 72 15 6 3 2 0 98 0.1% 1.0 Wood and wood products 131 177 167 98 41 0 614 0.4% 2.4 Paper, paper products, printing and publishing 369 278 197 208 118 20 1,190 0.8% 2.5 Coal, refined petroleum products and nuclear fuel products 30 27 12 23 98 0 190 0.1% 4.8 Chemical products 732 337 320 234 361 0 1,984 1.4% 2.7 Rubber and plastic products 373 243 152 200 42 0 1,010 0.7% 2.0 Nonmetallic mineral products 380 216 235 468 438 0 1,737 1.2% 3.6 Metal products 1,603 945 842 1,308 1,385 53 6,136 4.4% 3.3 Mechanical products 581 388 408 188 68 0 1,633 1.2% 1.9 Office machinery and computers 636 170 158 432 585 9 1,990 1.4% 3.6 Motor vehicles 880 689 280 405 700 15 2,969 2.1% 3.1 Furniture products and other not alocated 114 71 45 82 225 0 537 0.4% 4.3Electricity, gas and water supply 865 1,173 1,484 1,551 1,458 61 6,592 4.7% 3.6

SERVICES 14,687 8,366 6,385 10,657 11,743 2,759 54,597 38.9% 3.6Construction 2,436 1,281 1,019 920 1,563 237 7,456 5.3% 3.1Wholeshale and retail trade, personal and household goods 3,625 1,342 885 1,203 1,345 123 8,523 6.1% 2.6Hotels and Restaurants 830 632 375 767 611 9 3,224 2.3% 3.1Transports, Storage and Communication 2,044 1,350 1,463 3,492 5,676 1,323 15,348 10.9% 5.0Financial Intermediation 128 101 15 24 48 0 316 0.2% 2.2Real Estate, Renting and Business Services 4,810 3,072 2,084 3,217 1,786 996 15,965 11.4% 3.0Public Administration and Defence; Compulsory Social Security 12 9 74 24 11 0 130 0.1% 2.9Education 39 40 33 42 14 0 168 0.1% 2.6Health and Social Work 163 129 117 198 289 23 919 0.7% 4.1Other community, social and personal service activities 598 410 320 770 400 48 2,546 1.8% 3.2Activities of households 2 0 0 0 0 0 2 0.0% 0.5

(*) Loans received from parent companies and trade credits are excluded.

Average Maturity

(year)TOTAL

% of TOTAL

23

-13%

-11%

-8%

-6%

-3%

-1%

2%

5%

7%

10%

12%

15%

17%

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

GDP Manufacturing Output

Economic activity weakening at an asthonishing pace

Source: TURKSTAT, HSBC

GDP (real, %, YoY) and manufacturing sector output (%, YoY, 4Q08 forecast)

Correlation: %89.9

24

Dramatic deterioration in confidence

Source: CBRT, TURKSTAT, CNBC-e

Confidence indexes (sub-100 level reflects pessimism)

40

55

70

85

100

115

130D

ec-0

3

Mar

-04

Jun-

04

Sep

-04

Dec

-04

Mar

-05

Jun-

05

Sep

-05

Dec

-05

Mar

-06

Jun-

06

Sep

-06

Dec

-06

Mar

-07

Jun-

07

Sep

-07

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Consumer (CBRT) Consumer (CNBC-e) Real Sector

25

Dramatic deterioration in confidence (cont’d)

Source: CBRT

Real sector confidence index (manufacturing,expectations for orders next three-months, sub-100 level reflects pessimism)

30

40

50

60

70

80

90

100

110

120

130

140

Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Total Orders Export Orders

26

Both supply and demand of loans decreasing

Source: CBRT

Banking sector loan volume (real, YoY)

-60%

-45%

-30%

-15%

0%

15%

30%

45%

60%

75%

90%

105%

120%

135%

Jun-

01

Oct

-01

Feb

-02

Jun-

02

Oct

-02

Feb

-03

Jun-

03

Oct

-03

Feb

-04

Jun-

04

Oct

-04

Feb

-05

Jun-

05

Oct

-05

Feb

-06

Jun-

06

Oct

-06

Feb

-07

Jun-

07

Oct

-07

Feb

-08

Jun-

08

Oct

-08

Total Loans Consumer Loans & Personal Credit Cards

27

Inflation risks are more balanced

Source: TURKSTAT, CBRT

Breakdown of consumer inflation (%, YoY)

5

6

7

8

9

10

11

12

13

14

Jun-

05

Aug

-05

Oct

-05

Dec

-05

Feb

-06

Apr

-06

Jun-

06

Aug

-06

Oct

-06

Dec

-06

Feb

-07

Apr

-07

Jun-

07

Aug

-07

Oct

-07

Dec

-07

Feb

-08

Apr

-08

Jun-

08

Aug

-08

Oct

-08

Dec

-08

Tradables Non-tradables CPI-Headline

28

In sum, growth will be the biggest victim

Turkish economy will likely see very weak growth, even real contractions in some quarters

Gains on disinflation with weak aggregate demand and collapsing commodity prices might be limited due to FX pass-through

External deficit will narrow with poor growth outlook, lower commodity bill and weaker TRY, although the decline will be slower as a ratio of GDP

Workforce participation rate may fall, despite that unemployment will likely rise and unrecorded activity may also pick up

Turkey has strengthened her public and banking sector balance sheets. After this crises corporate sector will restructure itself and borrow more in TRY

All in all, we are hostage to global outlook, but there are some factors mitigating risks...

29

What are the mitigating factors?1. Strong public finances and low public debt

Source: Treasury Undersecretary, TURKSTAT

35

40

45

50

55

60

65

70

75

80

2001 2002 2003 2004 2005 2006 2007 2008F

-4

-2

0

2

4

6

8

10

12

14

16

EU-defined public debt stock/GDP PSBR/GDP (right)

30

What are the mitigating factors?2. Households are not leveraged

Source: CBRT

0

10

20

30

40

50

60

70

80S

pain

Por

tuga

l

EU

25

Gre

ece

Italy

Hun

gary

Pol

and

Cze

chR

ep.

Tur

key

Household Debt excl. mortgages/GDP (%) Household Debt/GDP (%)

31

What are the mitigating factors?3. Banking sector is on a sound footing

Source: BRSA

Capital adequacy ratio (CAR)

24.2%

30.9%28.8%

24.2%22.0%

18.8%16.8%

0%

5%

10%

15%

20%

25%

30%

35%

2002 2003 2004 2005 2006 2007 Oct-08

International standard: %8

BRSA's requirement: %12

32

Source: Bloomberg

What are the mitigating factors?4. Commodity prices on a free fall

450

550

650

750

850

950

1,050

1,150

1,250

Oct

-07

Nov

-07

Nov

-07

Dec

-07

Jan-

08Ja

n-08

Feb

-08

Feb

-08

Mar

-08

Apr

-08

Apr

-08

May

-08

May

-08

Jun-

08Ju

n-08

Jul-0

8Ju

l-08

Aug

-08

Sep

-08

Sep

-08

Oct

-08

Oct

-08

Nov

-08

Nov

-08

Dec

-08

Jan-

09

30

50

70

90

110

130

150

Wheat ($/bushel, left) WTI Crude ($/barrel)

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

Oct

-07

Nov

-07

Dec

-07

Dec

-07

Jan-

08Ja

n-08

Feb

-08

Feb

-08

Mar

-08

Apr

-08

Apr

-08

May

-08

May

-08

Jun-

08Ju

n-08

Jul-0

8A

ug-0

8A

ug-0

8S

ep-0

8S

ep-0

8O

ct-0

8O

ct-0

8N

ov-0

8D

ec-0

8D

ec-0

8Ja

n-09

120

160

200

240

280

320

360

400

440

Aluminium ($/tons, left) Copper ($/lbs)

33

Conclusion?...

This is the first crisis of globalisation, risk will be re-priced, risk/capital rather than return will be more critical

EM will have tough time, capital is repatriating back to homeland. In addition, fiscal/monetary/bailout spending of developed countries will ‘crowd out’ EM

Turkey definitely has to raise domestic savings and rely less of external capital

Thus, there will be a period of weak economic performance

To ease the pain, we have to invigorate external anchors (economic & political). Private sector should definitely benefit from the impending IMF agreement

Structural reforms should enable higher domestic savings, productivity and competitiveness

Pension-, R&D-, Labour-market-, Energy-, etc. were all right steps. Structural reforms should continue unabated, tax-reform, tackling unrecorded activity, preserving capital and profitability of the financial sector are all very important

34

Disclaimer

 * Legal entities as at 23 November 2005HSBC Bank Middle East Limited, Dubai; HSBC Research (Malaysia) Sdn. Bhd, Kuala Lumpur; The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; HSBC Securities (Asia) Limited, Taipei Branch; HSBC Securities (Canada) Inc, Toronto; HSBC Securities (France), Paris; HSBC Trinkaus & Burkhardt KGaA, Dusseldorf; HSBC Securities and Capital Markets (India) Private Limited, Mumbai; HSBC Securities (Japan) Limited, Tokyo; HSBC Securities Egypt S.A.E., Cairo; HSBC Investment Bank Asia Limited, Beijing Representative Office; HSBC Securities Polska S.A., Warsaw; The Hongkong and Shanghai Banking Corporation Limited Singapore branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC Stockbroking (Australia) Pty Limited.

 Issuer of reportHSBC Yatirim Portföy Yönetimi A.S.Büyükdere Caddesi No:122 / D Kat:9 Esentepe/Şişli, Istanbul, Turkey

Tel: +90 212 376 4600Fax: +90 212 376 49 13www.hsbc.com.tr

This document has been issued by HSBC Portfoy Yonetimi A.S. (ISTR) for the information of its customers only. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate.HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Department of HSBC only and are subject to change without notice.The information, comments and recommendations involved here are not within the scope of investment consultancy. Investment consultancy services are only provided within the framework of the investment consultancy agreement as agreed between brokerage companies, portfolio management companies, banks not accepting deposits, and the customer. The conclusions arrived at here are based upon the preferred calculation method and/or the personal opinions of the individuals responsible for the comments and recommendations, so they may not be appropriate for your financial situation and risk and return preferences. Therefore, any investment decision made only on the basis of the information involved here may not lead to the optimum results.HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or any other committee of those companies. The information and opinions contained within the research reports are based upon rates of taxation applicable at the time of publication but which are subject to change from time to time. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. It may be distributed in the United States solely to "major US institutional investors" (as defined in Rule 15a-6 of the US Securities Exchange Act of 1934 (as amended)); such recipients should note that any transactions effected on their behalf will be undertaken through HSBC Securities (USA) Inc. in the United States. Note, however, that HSBC Securities (USA) Inc. is not distributing this report, has not contributed to or participated in its preparation, and does not take responsibility for its contents. In Canada, this publication may be distributed by HSBC Securities (Canada) Inc for the information of its customers only. All inquiries by such recipients must be directed to HSBC Securities (Canada) Inc. In Australia, this publication may be distributed by HSBC Stockbroking (Australia) Pty Limited. In Malaysia, this publication may be distributed by HSBC Research (Malaysia) Sdn Bhd. In Japan, this publication may be distributed by HSBC Securities (Japan) Limited. It may not be reproduced or further distributed in whole or in part for any purpose.This communication is only intended for investment professionals within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. Persons who do not have professional experience in matters relating to investments should not rely on it. HSBC Portfoy Yonetimi A.S. is regulated and authorised by the Capital Markets Board, Takasbank (Turkish Custodian Bank) and is a member of Turkish Institutional Investment Managers’ Association © Copyright. HSBC 2006, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC. (March 2005)

Real Estate Development & Investment in TurkeyTürkiye de Gayrimenkul Geliştirme ve Yatırımı

09

GR

I TürkiyeTurkey