S&P Global said on Monday that tightening global financing conditions are putting pressures on banking systems in emerging markets, with banks in Turkey and Tunisia being the most vulnerable.
In a report titled “Where And How External Funding Stress Might Hit Emerging Market Banks”, the agency said it expected Turkish banks to retain their access to external financing, but with a moderate decline in loan extension rates as long as the government controls the balance of payments risks.
“We see that Turkish banks are strongly vulnerable to negative market sentiment, increased risk aversion, declining global liquidity, and rising funding costs,” the agency’s analysts said in a note.
Banks in Turkey also remain highly vulnerable to the economic imbalances accumulated in recent years, such as the jump in real estate prices and ultra-loose monetary policy amid hyperinflation.
The agency also added that the decline of the Turkish lira is affecting the creditworthiness of Turkish companies.
Mohammed Damak, a credit analyst at Standard & Poor’s, said: “Continued tightening of monetary policy by central banks leads to higher costs and weak liquidity, which particularly affects riskier emerging markets.”
The vulnerability of banking systems to international financing pressures can be direct, as banks have large net external debt, or indirect, due to corporate or sovereign vulnerabilities associated with net external debt.
Qatar’s external debt buildup
The accumulation of external debt, mostly in the form of non-resident deposits, has been one of Standard & Poor’s main sources of concern for the Qatari banking system over the past few years.
However, in early 2022, the Qatar Central Bank changed legislation, with the aim of limiting the use of external debt to grow domestic balance sheets. This, coupled with higher interest rates, led to a significant dismantling of non-resident deposits and somewhat changed the overall structure of the country’s external debt.
During 2022, non-resident deposits decreased by more than $20 billion, equivalent to about a third of their value at the end of 2021, while interbank deposits increased by more than 13 percent, resulting in a total decrease of $17 billion in the banking system’s net external debt.
Egypt’s exposure to external risks has led to a devaluation of the Egyptian pound, which has fallen by about 50 percent against the dollar since early 2022. This, in turn, has led to higher inflation and prompted the Central Bank of Egypt to raise rates by 1,000 cumulative basis points since the beginning of 2022.
The devaluation began with the Russian-Ukrainian war, when Egypt, like many emerging markets, suffered from large investment outflows — a situation not helped by Egypt’s dependence on Russia and Ukraine for about 80 percent of its wheat imports. Egypt resorted to new financing for the International Monetary Fund, which approved a new package on the condition that the country adopts a flexible exchange rate regime to increase its resilience to external shocks and rebuild external barriers.
“We consider that Egypt is still subject to external pressures at the sovereign level. This could translate into more inflation that ultimately affects economic growth, increases the cost of financing, hurts borrowers’ credit quality, and contributes to increasing social inequality,” S&P said.
Major obstacles for Tunisia
Tunisian banks continue to face significant macroeconomic pressures, at least some of which are still linked to the country’s revolution 12 years ago. These problems, coupled with the Covid pandemic, have affected economic activity, leading to projected economic growth of 1.3 percent in 2023, according to the International Monetary Fund, and fiscal and external deficits are likely to reach 11.3 percent of GDP.
Tunisia still faces significant obstacles, such as attracting external funding, while the internal division between the government and the country’s powerful labor unions has reportedly delayed the mobilization of economic resources.
Tunisian authorities and the International Monetary Fund are in talks aimed at agreeing on a program that includes important economic reforms.
“In our view, if a country is unable to secure the IMF program, or at least attract bilateral or multilateral support from other parties, it is likely to suffer significant balance-of-payment, financial, and currency instability,” Standard & Poor’s said.
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