Treasury Today Country Profiles in association with Citi

The dollar rides roughshod in Asia Pacific

Bunch of 100 dollar bills laying on a wooden table

The battered Turkish lira isn’t the region’s only currency under pressure from a resurgent greenback.

The first clear evidence of the imminent global financial crisis became evident on 9th August 2007. Four years later, almost to the day, saw ‘Black Monday’ when ratings agency Standard and Poor’s downgraded United States sovereign debt from a ‘risk free’ AAA to AA+.

Far from being a quiet month, August has regularly been marked by landmark events. Will August 2018 be marked by the third major financial crisis in just over a decade, centred on Asia Pacific? The recent rapid fall of the Turkish lira to fresh lows against the US dollar is now threatening to impact on the region’s other emerging economies.

The currency lost 18% at one stage last week, the biggest intraday decline since 2001, pushing its depreciation since the start of the year to more than 40%. With Turkey’s central bank resisting pressure to raise interest rates, already at 17.5%, the country could follow the recent example of Argentina and look to the International Monetary Fund (IMF) for a financial lifeline.

There are several culprits behind the lira’s rapid decline: the increasing authoritarianism of Turkey’s president Recep Tayyip Erdoğan, foreign currency debt that has surpassed 50% of GDP, the worst current account deficit in the developed world coupled with the highest inflation rate at 16%, and rising borrowing costs.

These developments are partly offset by Turkey’s economic growth rate, which as recently as Q3 of 2017 saw GDP increase by more than 11% and at 7.22% in the most recent quarter, still outpaced China and India.

Currency depreciation has been accompanied by a sharp increase in bond yields and more than US$300bn of dollar-denominated corporate debt – the majority of it unhedged – which is getting steadily more expensive to finance and pushing more businesses towards defaulting. A number of major Turkish corporates, including energy companies, have applied to banks to restructure more than US$20bn of debt, although the Treasury and Finance Ministry insisted as recently as last Friday that the country’s corporates had no foreign exchange liquidity risk.

Hardly the time to pick a quarrel with the US, but Turkey was among the first to retaliate against president Trump’s levies on steel and aluminium imports, imposing tariffs on US$1.8bn of American goods in June. “We cannot and will not allow Turkey to be blamed for America’s economic challenges,” stated economy minister Nihat Zeybekci.

According to Deutsche Bank, five other European banks with a “meaningful presence” in Turkey stand to suffer most from resulting contagion if the crisis isn’t swiftly resolved. It deems Spain’s BBVA to have the biggest exposure, followed by UniCredit, ING, BNP Paribas and HSBC.

Indian corporates look beyond home

Turkey’s economic woes have diverted attention from currency volatility in other major Asian economies. The decline in the Indian rupee, down 9% since the start of the year, is increasing the challenge for the Reserve Bank of India (RBI) of keeping inflation in check and this week the currency touched the INR 70 to one US dollar level. This month began with the RBI raising its repo rate by 0.25% to 6.25%, the first increase since January 2014.

While a weaker currency is pushing up the cost of imported oil, overall it has benefited Indian corporates, whose revenue growth in the second quarter averaged 22% year on year. However, the prospect of higher borrowing costs has seen major Indian corporates and banks resort to the international markets to access cheaper funding.

“It makes sense to raise funds abroad as the cost of funds is lower by 3-4% when compared to local rates,” the CFO of one multinational told India’s Business Standard. “Besides, when a company has to refinance its foreign loans, it makes sense to raise funds abroad.”

Even China, the world’s second-largest economy, has analysts guessing as to the future direction of its currency. Analysts note that the People’s Bank of China (PBOC) appears to be relaxed about a gradual, but continuing depreciation of the renminbi (RMB) and has intervened less than on previous occasions to support the currency and has diverted its attention more to domestic economic issues.

According to a Bank of America Merrill Lynch research note “it appears the PBOC is intensifying its effort to support domestic bonds and credit sentiment by extending the Medium Term Liquidity Facility to banks’ bond buying. The key is that this liquidity is intended to support the domestic economy and not facilitate excessive outflows.”

Currency volatility looks set to continue across Asia over the months ahead. “The dollar is crushing everything in its path at the moment and this is not good for emerging market or global growth,” comments Neil Wilson, Chief Market Analyst at

“However, the fears of contagion can be over-egged and we note that the dangers so far seem confined to countries with large current account deficits and high dollar financing, as well as some corporates, largely banks, with exposure to that debt. Nevertheless, as stimulus is gradually unwound, we are seeing the markets test countries with exposure to dollar debt in a way not seen for some years.”