Emerging market banking systems are under pressure from tighter international financing conditions ushered in by higher-for-longer rates, S&P Global Ratings has said in a report.

 

‘Where And How External Funding Stress Might Hit Emerging Market Banks’, noted that Tunisia's and Turkiye's banking systems appear most at risk from the restrictive financing environment, while Egypt and Indonesia could also come under pressure. 

 

“We also consider Qatar's banking sector to be exposed, though to a lesser extent,” the report said.

 

Rising costs

"Major central banks' continued monetary policy tightening is resulting in rising costs and weaker liquidity that is especially affecting riskier emerging markets," said S&P Global Ratings credit analyst Mohamed Damak.

 

Banking systems' exposure to international financing pressures can be direct, where banks have significant net external debt, or indirect, due to corporate or sovereign weaknesses linked to net external debt.

 

Banks' exposure to those pressures can be direct, through their own significant net external debt, or indirect, due to corporate or sovereign weaknesses linked to net external debt.

 

Among the five banking systems assessed in the report, Turkiye and Tunisia appear the most at risk.

 

Turkiye vulnerable

“We consider that Turkish banks are particularly vulnerable to negative market sentiment, increased risk aversion, reductions in global liquidity, and higher financing costs. This is due to their high external debts, which we estimate at about $144.2 billion at the end of 2022 based on the assumption that all the sector's foreign currency repurchase transactions are with external counterparties.”

 

Turkish banks' foreign currency liquidity should be sufficient to offset lower roll-over rates. Yet most of those assets are held at the central bank, or invested in government securities, which could result in reduced availability in a highly-stressed scenario. In addition, we consider the potential loss of depositor confidence as a risk to the banking system. 

 

Deposit dollarisation dropped to 42.5% as of February 2023, from 64.6% at the end of 2021, due to the protected local currency deposit scheme and after authorities began forcing banks to convert some dollar deposits into local currency.

 

Turkish banks also remain significantly exposed to risks from the unwinding of economic imbalances that emerged in recent years, including due to a surge in real estate prices and highly accommodative monetary policy amid hyperinflation. That risk has been exacerbated by extremely strong credit growth in the past few years, which was fuelled by state incentives that encouraged lending.

 

External debt build-up in Qatar

A build-up of external debt, mostly in the form of non-resident deposits, has been one of S&P’s main sources of concern for the Qatari banking system over the past few years. However, in early 2022, Qatar Central Bank changed regulations, with the aim of at reducing the use of external debt to grow domestic balance sheets. That, alongside rising interest rates, led to a significant unwinding of non-resident deposits, and has somewhat changed the overall structure of the country's external debt. 

 

Over 2022, non-resident deposits fell by over $20 billion, equal to about one third of their value at the end of 2021, while interbank deposits increased by over 13%, leading to an overall $17 billion decline in net banking system external debt.

 

Egypt's risks

Egypt's exposure to external risks triggered a devaluation of the Egyptian pound (EGP), which has fallen about 50% against the US dollar since early 2022. That has, in turn, led to a spike in inflation and prompted the Central Bank of Egypt to raise rates by a cumulative 1,000 bps since the start of 2022.

 

The devaluation began with the Russian invasion of Ukraine, when Egypt, like many emerging markets, suffered significant investment outflows--a situation not aided by Egypt's reliance on Russia and Ukraine for about 80% of its wheat imports. Egypt turned for new funding to the International Monetary Fund (IMF), which agreed a new package on condition that the country adopt a flexible exchange rate regime to increase its resilience to external shocks and to rebuild external buffers.

 

“We consider that Egypt remains exposed to external pressures at the sovereign level. That could translate into further inflation that eventually effects economic growth, increases the cost of funding, damages borrowers' credit quality, and contributes to increasing social inequalities.”

 

Major hurdles for Tunisia

Tunisian banks continue to navigate significant macroeconomic pressure, at least some of which is still linked to the country's revolution 12 years ago. Those issues, coupled with the Covid-19 pandemic, have weighed on economic activity, resulting in expected economic growth of 1.3% in 2023, according to the IMF, and fiscal and external deficits likely totaling a cumulative 11.3% of GDP. 

 

Tunisia continues to face major hurdles, such as attracting external funding, while internal division between the government and the country's powerful labour unions are reported to have delayed the mobilisation of economic resources.

 

Tunisian authorities and the IMF are in talks aimed at agreeing a programme that will entail important economic reforms. 

 

“In our view, if the country is unable to secure an IMF programme, or at least attract bilateral or multilateral support from other parties, it will likely experience major balance-of-payments, fiscal, and currency instability,” S&P added. -- TradeArabia News Service