Turkey’s banking system is the most vulnerable emerging market to FED tapering, Standard & Poor’s said on Wednesday in a report titled “Which emerging market banking systems could suffer most from Fed tapering?”

S&P looked at seven countries, namely Brazil, Chile, India, Indonesia, Peru, South Africa, and Turkey, to assess how the FED’s tapering could affect banking systems in emerging markets. Of the seven banking systems examined, Turkey’s and to a lesser extent South Africa’s banking systems appear most vulnerable, S&P concluded.

The Turkish banking system appears the most vulnerable to a deterioration of credit losses because of the proportion of loans in foreign currency to corporates (around one-third of total loans at year-end 2013), S&P said. The rating agency expects credit losses to increase to around 1.5% to 2% in 2014 and 2015 for the large banks it rates, with average nonperforming loans rising to around 4% to 5%, compared with 2.8% on March 31.

One effect of the FED’s tapering announcement was to trigger a reduction in private capital inflows to some of these countries, resulting in currency depreciation, particularly in Turkey, S&P said, adding that it expects the rate hike in Turkey to further depress already weak economic performance and job market prospects. S&P’s base-case scenario projects Turkish GDP growth of around 2% in 2014 and 2015. Turkey displays the largest current account deficits and external financing needs, S&P noted.

S&P expects gross external financing needs as a percentage of the sum of current account receipts plus usable foreign exchange reserves to reach 128% for Turkey in 2014. However, lower economic growth and local currency depreciation should reduce current account deficits in 2014, according to the rating agency. S&P also noted that Turkey has relied on external debt issuance to finance its current account deficit over the past three years, which increases its vulnerability to debt rollover risk.

Underpinning the sharp increase in domestic credit as a percentage of GDP in Turkey is strong domestic consumption financed by bank loans, which supported economic growth in the past but increased external imbalances, S&P said.