DBS: How the crisis in Turkey could affect Asian credit

World currencies

Market concerns may be building that the currency crisis in Turkey could spur contagion across emerging markets, but Asia should be “fundamentally insulated,” DBS said in a note on Monday.

The Turkish lira dropped to as low as 7.2149 against the dollar in early Asia trade on Monday as the U.S. imposed economic sanctions related to a dispute over Ankara’s detainment of a pastor. The lira is down over 30 percent in August. The U.S. dollar was fetching 6.7901 lira at 4:23 P.M. SGT on Monday.

Asia should not see any contagion effect fundamentally due to the ongoing crisis in Turkey as the region does not have a meaningful exposure to the country,” the DBS note said.

It noted that data from the Bank for International Settlements (BIS) showed that of around US$265 billion of exposure to Turkish counterparties reported globally as of March, Asian banks didn’t have any exposure, with the exception of Japan’s around US$14 billion exposure. 

“Our understanding is that corporates, in general, also have negligible Turkish exposure. Hence, the impact on Asian credits will be more from perspective of weak emerging market sentiment rather than fundamentals. We would see any meaningful correction in bond prices on the back of the Turkey developments alone as a buying opportunity,” DBS said.

But it added that it was sticking with its July call to exit or reduce exposure to Turkey.

“Given the extent of the situation, we fail to see how the crisis can be resolved without external support, a situation that is complicated by the fact that an IMF support package would be difficult given Turkey’s current political situation. Hence, we see a near-term solution to the ongoing issues as challenging,” it said.

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