The lira’s depreciation would exacerbate Turkey’s inflationary dilemma while also risking aggravating currency mismatches on bank sheets. Furthermore, rising external borrowing prices will make it more difficult for Turkish borrowers to roll over their external obligations (which are denominated mainly in foreign currencies).
Examining Turkey’s gross external finance demand, which is the total of the current account deficit and short-term foreign debt, or, in other words, the capital inflows necessary over the next year, is one approach to demonstrate the gravity of the concerns. Calculated as a proportion of central banks’ FX reserves, and provide an indication of the extent to which the central bank can assist distressed borrowers.
Foreign exchange reserves in Turkey barely meet around two-thirds of the country’s short-term external finance needs. And this is based on gross FX reserves; net reserves are far smaller.
However, the probability of substantial balance-of-payments stresses appears to be far lower for most other important emerging markets. Argentina and Hungary may be the most concerned, but even in those countries, foreign exchange reserves will more than satisfy external finance needs for the next year.
According to SARB rate indicators, the South African rand is weakening as a result of the Turkey contagion.
South Africa’s rand sank on Thursday, weighed down by contagion from a dramatic collapse in the Turkish lira and signs from the home central bank that interest rate hikes will likely be slower than markets had anticipated.
At 1517 GMT, the rand ZAR=D3 was trading at 15.7050 per dollar, down about 1.4 percent from its previous close.
The South African Reserve Bank increased its main lending rate by 25 basis points to 3.75 percent ZAREPO=ECI, which would ordinarily help the rand, but some traders were focused on the gradual rate path that the monetary policy committee appeared to favor.
“The rate of policy tightening will most likely be much slower than the market had anticipated,” said Kieran Siney, co-head of financial markets at ETM Analytics.
According to Razia Khan of Standard Chartered, the rand was dropping in sync with the lira TRY=, which fell more than 3% after Turkey’s central bank defied inflation of 20% by cutting interest rates by another 100 basis points.
Johannesburg-listed equities fell, with the All-Share index.JALSH down 0.11 percent to 70,867 points.
Investec INLJ.J, a financial services business, was an outlier, jumping 1.9 percent after reporting a more than twofold increase in earnings and announcing a 15 percent interest in asset manager NinetyOne N91.L will be distributed to shareholders.
The government’s 2030 bond yield ZAR2030= fell 1 basis point to 9.455 percent, indicating a slightly higher price.