Countries at risk if Turkey’s lira crisis becomes EM debt crisis

Pedestrians
walk past an electronic board showing currency exchange rates in
Buenos Aires’ financial district, Argentina, June 29, 2018.
REUTERS/Agustin Marcarian

Pedestrians
walk past an electronic board showing currency exchange rates in
Buenos Aires’ financial district, Argentina, June 29, 2018.
REUTERS/Agustin Marcarian

• The collapse of the Turkish lira and the strong dollar
  have hit emerging market currencies globally.
• If the trend continues, countries may start to have
  trouble paying back dollar-denominated debts.
• Analysts say Argentina, Pakistan, South Africa, and
  Colombia are among those most at risk.

LONDON —
The collapse of the Turkish lira against the dollar is the
focus of global markets but emerging market currencies are
getting hammered across the board and there are concerns that the
issue could spiral from a currency crisis into a debt crisis.

The Indian rupee hit an all-time low against the dollar
overnight, the South African rand has been diving,
Argentina’s
central bank hiked rates by 5% on Monday to arrest the peso’s
decline, and
Indonesia’s government is meeting to discuss emergency measures
to defend the sinking rupiah.

“EM [emerging market] currencies (judged by the Bloomberg EM
currency basket) are now at their lowest nominal value in the
past three years – below the level reached in early 2016 at the
time of the commodity price fall and period of US$ strength,”
analysts Stuart Culverhouse and Hasnain Malik from emerging
market specialist bank Exotix said in a note on Tuesday.

UBS and Credit Suisse have both flagged the danger that Turkey’s
currency crisis could spiral into a debt crisis. If this does
happen, we could see similar issues in other emerging markets.

Many emerging markets loaded up on dollar-denominated debts when
interest rates were low. But a combination of falling local
currencies and a soaring US dollar mean those debts are getting
more expensive to pay off.

Turkey’s foreign currency debts across businesses, banks, and the
government are at 55% of GDP,
according to the Telegraph. The newspaper reports that The
Institute of International Finance “thinks events in Turkey are
just the start of a long and painful hangover for those emerging
markets that drank deepest from this cup.” The report warns that
South Africa, Indonesia, and Columbia are most at risk.

David Jones, chief market strategist at Capital.com, said in an
email: “Given that the memories of the far-reaching effects of
the Greek crisis have not been forgotten, do not be surprised if
we see cautious trading and further US dollar strength in the
days ahead as investors decide that it is better to be safe and
late to any recovery – rather than be too early and very wrong.”

Exotix’s Culverhouse and Malik say that emerging markets are
currently suffering mainly from the “risk off” sentiment rather
than a belief among investors that they share similar
characteristics with Turkey. But the pair refers to a ranking
they made in May showing which countries could be most
at risk if sentiment does shift.

Here’s the ranking:Exotix

The Exotix pair writes: “Most of the others in our sample (except
India) are too small to pose wider systemic risks. But
difficulties could lead to localised, country-specific problems,
especially for those with pre-existing weaknesses.”

Lale Akoner, a market strategist in BNY Mellon’s global
investment strategy group, said on Tuesday: “In our view, Turkey
is mostly the exception and not the rule, and not necessarily
demonstrative of the larger EM complex.

“Nevertheless, what is largely an idiosyncratic risk for Turkey
did feed into the negative sentiment towards EMs in general.”