A weaker exchange rate is credit negative for countries with large pending external debt payments, such as Turkey, Malaysia and Chile because it raises the cost of repaying and refinancing foreign currency debt and suggests shrinking foreign reserves to meet external obligations that are difficult to refinance, said Moody’s on March 23 in a report titled “US Dollar Strength Hurts Countries with Large External Financing Needs”.
In recent weeks, the strengthening US dollar has prompted a sharp currency depreciation and/or a significant decline in the foreign exchange reserves of a number of countries, said Moody’s, adding that to the extent that these fluctuations reflect capital outflows or significantly lower external inflows, they are credit negative for countries with large external funding needs. Countries with sizable current account deficits, such as Turkey (Baa3 negative), are vulnerable to weaker external net inflows, because this would point to potential difficulty in financing deficits, underlined Moody’s. The rating agency also noted that reserve buffers are very low in Turkey.
Foreign exchange pressure is similar in magnitude to the 2013 Taper Tantrum in mid-2013, when financial markets first adjusted to the possibility of a less accommodative US monetary policy, said Moody’s in the report.
Here are the other highlights from the report:
* Countries with large current account deficits are exposed, including Turkey
* These countries are vulnerable to further negative changes in portfolio flows and foreign direct investment and associated exchange rate pressure
* Higher external debt repayments are an additional risk for some countries, Turkey is particularly exposed with an EVI at 176% in 2015 (External Vulnerability Index (EVI), the ratio of each country’s repayments of external debt -both in foreign and domestic currency- over the next year to reserves)
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