Dollar’s appreciation reinforces default risks in EM - NBF

According to National Bank of Canada analysts, the appreciation of the US dollar makes harder for USD borrowers to pay for its debt, particularly in Turkey and Argentina. 

Key Quotes:

“The dollar’s appreciation this year is concerning in the sense that it can lead to a vicious cycle by making it harder for borrowers to service USD-denominated debt, reinforcing default risks and hence leading to more capital outflows from emerging markets. According to the Bank of International Settlements, USDdenominated debt to non-bank borrowers in emerging markets amounted to US$3.7 trillion at the end of 2017 or 11% of GDP.”

“The problem is more serious in places such as Turkey where USD-denominated debt hit a record US$195 billion at the end of 2017, or a stunning 23% of GDP. With the Turkish Lira plunging more than 60% against the USD this year, defaults and hence a recession in Turkey are becoming increasingly likely. Ditto for Argentina whose peso has also plunged versus the USD this year.”

“Other emerging economies such as Mexico and Indonesia also have high USD-denominated debt, although better current account balances and foreign currency reserves (than say Turkey and Argentina) have so far helped limit the wrath of foreign investors.”