DUBAI (S&P Global Ratings): Turkey's and Tunisia's banking systems appear the most at risk to scarcer and more expensive global liquidity, S&P Global Ratings said in an analysis.
Major central banks are tightening monetary policy faster than initially expected, which will likely tighten and raise the cost of debt on global capital markets. Some emerging markets banking systems are exposed to this phenomena either directly through their own substantial net external debt or indirectly through exposure to corporates or sovereigns.
The report titled, "Which Emerging Market Banking Systems Are Most Exposed To External Funding Stress And Why," looks at banking systems in five emerging markets that we consider as potentially vulnerable to the changes in global liquidity conditions: Egypt, Indonesia, Qatar, Tunisia, and Turkey.
In our view, the change in global liquidity conditions can flow through these banking systems through two main channels:
A direct channel. This involves banking systems with significant external debt. Turkey and, to a lesser extent, Qatar are the two main banking systems exposed to this risk, in our view. The impact could come from lower rollover rates of external debt and a depletion of liquidity buffers.
An indirect channel. This includes banking systems exposed to other economic agents with significant external debt, such as the corporate sector (Indonesia) or the sovereign (Tunisia (unrated), and, to a lesser extent, Egypt). The impact could come from lower rollover rates for international capital market debt for the corporates or difficulty in refinancing debt for sovereigns that either would push them to increase their leverage with the local banking system or depreciate their currencies, resulting in economic pressure in those countries.
Our findings show that Turkey and Tunisia are the countries most vulnerable to changing global liquidity conditions. In Turkey, the impact could be direct and through lower rollover rates for banking system external debt. Although the banking system appears to have sufficient foreign currency-denominated assets, a large portion is placed with the central bank or the government, which could reduce their usability in a worst-case scenario.
In the case of Tunisia, the risk is tied more to the political transition of the country and its potential impact on discussions with the International Monetary Fund (IMF). In the absence of a smooth transition and financial support from multilaterals, we are of the view that the government could come under severe strain, which could have negative ramifications for the overall economy and banking system.
This report does not constitute a rating action.
