Turkey, Argentina, Ukraine are ‘vulnerable three’: Fitch

Turkey, Argentina and Ukraine are the developing countries most at risk from tightening financial conditions across the globe, Fitch Ratings reported.

Debt levels have quadrupled in a decade, making emerging markets vulnerable during a new era of rising U.S. interest rates, Fitch said, according to Bloomberg.

“If easy financial conditions tighten more sharply than expected, EM debt would come under pressure,” said Monica Insoll, the head of the credit market research team at Fitch. “If investor appetite for EM risk reverses, issuers may face refinancing challenges even in their home markets, while capital outflows could put pressure on exchange rates or foreign exchange reserves.”

Outstanding debt of developing nations has surged to $19 trillion from $5 trillion 10 years ago, the ratings agency said in a report. Borrowers will be under pressure from higher external borrowing costs, a rising dollar and slower capital inflows, it said.

Turkey’s central bank said on Friday that the foreign loans of companies grew $5.5 billion to $226.8 billion in the first quarter, with $69.1 billion of that debt coming due over the following 12 months. The increase comes despite government measures to restrict such borrowing. The lira has slumped more than 15 percent against the dollar this year, making the loans more expensive to repay. Several Turkish corporates, including Yildiz Holding, the maker of Godiva chocolates, have applied to banks to refinance billions of dollars in loans.

In Argentina, where the peso has lost more than 25 percent against the dollar in 2017, companies such as Telecom Argentina and cement maker Holcim are particularly exposed due to their large foreign debt stock, Moody’s warned on Monday. Foreign debt is Ukraine’s biggest problem, Prime Minister Volodymyr Groysman said on April 20. Its currency has gained against the dollar this year.

Fitch also saw risks in higher-rated Qatar, the United Arab Emirates, Peru and Kazakhstan due to their reliance on external debt. That could lead to weaker currencies and a fall in foreign exchange reserves, it said.

Turkey has a little over $30 billion in net usable foreign exchange reserves, making it particularly vulnerable. Argentina had about $57 billion in reserves as of March.

Unlike Ukraine and Argentina, Turkey isn't making use of IMF loans to steady its economy -- its last of 19 IMF standby accords ended in 2008. Ukraine is applying a $17.5 billion programme, while Argentina has pledged fiscal measures as part of a planned rescue package with the fund. 

The three countries have the highest inflation rates in emerging markets, which render their currencies particularly exposed to changes in global sentiment. Inflation is 10.9 percent in Turkey, more than three times the emerging-market average. Ukraine's inflation is 13.1 percent and Argentina's 25.6 percent.