Turkey and, to a lesser extent, Qatar are among emerging market banking systems that could be exposed to scarce and more expensive liquidity as major central banks tighten monetary policies faster than initially expected, according to S&P Global Ratings. .
Turkey and Qatar were among five emerging markets the global rating agency considers potentially vulnerable to changes in global liquidity conditions.
Changes in global liquidity conditions will go through a direct channel and an indirect channel, with Turkey and Qatar in the direct channel, he said.
The direct channel involves banking systems with significant external debt.
“Turkey and, to a lesser extent, Qatar are in our view the two main banking systems exposed to this risk. The impact could come from lower external debt refinancing rates and a depletion of liquidity reserves,” S&P Global Ratings said.
In the indirect channel are Egypt, Indonesia and Tunisia, with banking systems exposed to other economic agents with large external debt, such as the corporate sector in the case of Indonesia, or the sovereign (Tunisia (not noted), and, to a lesser extent, Egypt.
Turkey’s banking system is highly vulnerable due to negative market sentiment, risk aversion due to falling but still high external debt, standing at $143 billion as of March 31, S&P Global Ratings said.
Risks include refinancing risks due to the normalization of monetary policy by major central banks, very high local inflation and the effects of the Russian-Ukrainian conflict.
In Qatar, there are concerns about the speed and extent of the accumulation of external debt in the banking system. “However, a significant share of non-resident deposits and amounts due to banks abroad are in our view relatively stable and have proven to be so through various crisis episodes.
“A significant portion of these funds relate to longer-term investment interests in Qatar. Reportedly, they also include some deposits of Qatari companies overseas and possibly also companies partly owned by the Qatar Investment Authority.
S&P Global Ratings expects external debt growth to moderate over the next two years as several major infrastructure projects and preparations for the 2022 World Cup are finalized and delivered.
The new central bank rules increased reserve requirements for short-term nonresident deposits and the weight of nonresident deposits in the calculation of the liquidity coverage ratio and the net stable funding ratio. “This radical change is clearly designed to deter banks from using external sources to further expand their balance sheets,” the report notes.
External debt grew by an average of 18% from 2019 to 2021. This growth is expected to slow to around 5% over the next two years. “Finally, higher oil prices should lead to stronger domestic filing growth than we have seen in recent years,” the report said.
(Writing by Imogen Lillywhite; editing by Daniel Luiz)