Ukraine and Turkey are two of the “vulnerable three" countries most at risk to US tightening along with Argentina, Fitch said in a note on May 16.
High debt, high inflation and low growth have put all three countries’ economies in peril, the ratings agency said a note to clients.
“If easy financial conditions tighten more sharply than expected, emerging markets (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,” she said.
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% in Turkey, more than three times the emerging-market average. Ukraine's inflation is 13.1% and Argentina's 25.6%.
Ukraine is dependent on the capital markets to meet its debt obligations in the next few years. It needs to raise some $5bn-$8bn a year to meet obligations from debt that was restructured by former finance minister Natalie Jaresko. Ukraine issued $3bn of Eurobonds to enthusiastic investors in 2017, but it will find it more difficult to follow through this year, say analysts.
Turkey is in a similar position and its currency has been battered in the last few weeks after the central bank failed to hike rates enough to assure markets it has inflation under control.
Moreover, corporate debt in Turkey continues to rise. Turkey’s central bank said on May 11 that the foreign loans of companies grew $by 5.5bn to $226.8bn in the first quarter, with $69.1bn 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% 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.
And Argentina has seen its currency lose a quarter of its value forcing the central bank to hike rates to 40% this month.
Both Turkey and Ukraine are also vulnerable thanks to the low level of reserves with which to fight off speculative attacks on their currency. Turkey has $30bn in reserves and Ukraine a mere $18bn. Argentina had about $57bn in reserves as of March.