These are the countries most at risk if Turkey's lira crash spirals into a debt crisis
- 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:
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."