Although India is much less vulnerable relative to other EMs in terms of external debt and current account deficit, but if the crisis continues further, it could hurt economic recovery to some extent, Edelweiss Securities said in a report.
The Turkish lira (TRY) has plunged by about 25 percent in a week or 45 percent on a year-to-date basis, thanks to a heady mix of high foreign debt, rising current account deficit (CAD), and deteriorating political situation.
Although India is less vulnerable relative to other EMs in terms of external debt and current account deficit, but if the crisis continues further, it could hurt economic recovery to some extent, Edelweiss Securities said in a report.
Currently, the economy is improving, which is largely a reflection of normalisation after disruptions. Hereon, the recovery will essentially depend on exports trend (i.e. global growth) and domestic interest rates/liquidity.
“If the global situation deteriorates, not only would exports slow down, but domestic liquidity, too, may dry up as the RBI drains liquidity to support the rupee (Q1FY19 intervention USD15 billion). This, in turn, would hurt corporate deleveraging and weigh on recovery,” said the report.
One crucial factor which could have played part in making Turkey vulnerable was the upward pressure on global interest rates in 2018 owing to an aggressive Fed and US fiscal stimulus.
How this situation evolves hereon hinges on Turkey’s policy response. But, in our view, it would be a mistake to see this as only a country-specific phenomenon; there is a larger dynamic at play, warns Edelweiss.
The report further highlighted that credit cycles in several emerging markets (EMs) remain weak and domestic debt is high, and thus they are incapable of chasing Fed rates higher.
This dynamic shows up in the pressure on EM BoP, which tightens liquidity and potentially hurts growth.
“India, while much less vulnerable to CAD/debt dynamics, may face the brunt of weaker global growth and tightening domestic liquidity. In such a scenario, we think a softer monetary stance by the Fed would limit the damage (a la January 2016),” the report added.
TRY crisis – a Heady mix of Fed tightening, high debt, and bad politics
The Turkish lira has slid 25% in a week and 45% in 2018. Edelweiss attributes this to: a) Global factors: In 2018, the Fed has turned more aggressive; this along with US fiscal push is putting upward pressure on US rates. However, unlike 2003, EM debt is high and credit cycles are weak and thus softer rates regimes are needed. This is affecting flows and exchange rates in EMs.
b) Turkey-specific factors: High CAD (>5% of GDP) as well as foreign debt (>50%) make Turkey most vulnerable in the EM space while imprudent domestic politics is adding fuel to fire. This is leading to heightened capital flight.(The above article is compiled from inputs by Edelweiss Securities report)