US dollar stems external pressure over several countries, including Turkey: Moody’s

ISTANBUL

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The stronger U.S. dollar has stemmed external pressures in some countries from signs of weaker currencies and falling foreign exchange reserves.

In a report published on March 23, Moody’s Investor Service said external pressures in some countries are translating to capital outflows or significantly lower inflows as the U.S. dollar hurts countries with large external funding needs.

It said that countries with large current account deficits such as Turkey and South Africa are more susceptible to external pressures due to difficulty of financing their deficits.

Moody’s Investor Service senior vice president Marie Diron said that the expected hike in the benchmark U.S. federal funds rate and subdued growth prospects in other countries are making investments in these markets less attractive.

The report said countries that have large pending external debt payments such as Turkey, Malaysia and Chile currencies have depreciated, making it more expensive for companies to service foreign currency debt.

“It could also crimp the willingness of foreign creditors to refinance local currency external debt,” it added.

Meanwhile, Moody’s report said commodity exporters such as Malaysia, Chile, Colombia and Peru have also faced external pressures as falling commodity prices weigh on export revenues, lowering current account surpluses as well as increasing deficits.

Turkey’s currency have lost around 10 percent value since the beginning of the year, mainly upon the expected rate hike of the Fed and domestic discussions over the rate hike decisions of the Turkish Central Bank.

Moody’s noted that central banks of Brazil, Colombia and Mexico have preserved foreign exchange rates, allowing the value of their respective currencies to weaken.

Nevertheless, Bank Negara Malaysia and Chile’s central bank has used their reserves to stop larger depreciation of its respective currency.

“The erosion of reserves buffers is credit negative for sovereigns, most particularly in countries where reserves are relatively low in relation to forthcoming external debt repayments.” Diron said.

However, its report pointed out that India and Indonesia’s foreign exchange reserves have risen and their nominal effective exchange rates have not weakened significantly compared to other countries.

“India and Indonesia’s current account balances have improved since 2013 and capital flows have accelerated in anticipation of policy reforms following political transitions in 2014, bucking the general emerging market trend of lower capital inflows,” it added.