Turkish firms ‘most at risk’ in stress scenario

LONDON

Stress scenario formulated by rating agency Fitch has revealed the lack of foreign exchange hedging by the Turkish companies. HÜRRİYET photo

Turkish companies are the most exposed among EMEA emerging markets to a scenario of slowing growth, rising interest rates and a persistently weak local currency, according to a Fitch Ratings emerging-market FX stress analysis.

Foreign-currency - typically U.S. dollar - debt can be an effective hedge against exchange-rate risks for companies with significant dollar receipts, but can also create risk when used by companies with mostly local-currency revenues.

This is the case for many Turkish corporates, which are lured by headline lower interest rates for dollar borrowing and by the depth of overseas capital markets, the statement released by the Fitch yesterday said.

In an emerging-markets stress scenario U.S. dollar bond investors may not be willing to refinance maturing debt. This would leave corporates either having to rely on shorter-dated dollar bank lending, or to convert devalued local currency to meet dollar repayments.

In its  stress case Fitch modelled the impact of a 15 percent currency depreciation in 2014 and 2015, combined with a halving of issuer-specific corporate growth forecasts and a 250bp increase in average interest rates on local-currency debt, as well as higher rates on foreign-currency debt that needs refinancing.

Under this scenario, aggregate leverage for Fitch-rated Turkish corporates rose by around 1.5x, while fixed-charge coverage ratios halved. These risks are largely already reflected in our ratings, as many of these companies are in the ‘B’ rating category.

Russians strongest

Meanwhile, Russian corporates, particularly those operating in the natural resources sector, are among the best placed to cope with an emerging-markets slowdown, thanks to better natural hedging of foreign exchange risks.

Companies with no foreign-currency receipts tend to stick to rouble-denominated debt. Natural resources exporters, which do have significant U.S. dollar revenues, would have virtually no change in leverage in our stress scenario.

The scenario does not specifically consider the potential impact of increased Russian isolation because of the Crimea conflict, but we would expect state-supported banks to assist with the refinancing of short-term dollar debt in that situation.