Chart of the Week: Emerging Markets Face Challenges with Dollar Denominated Debt

The eyes of the financial world have been fixed on an unlikely country in recent weeks – Turkey. A 40% depreciation in the Turkish Lira so far this year has many people wondering if their economy is on the brink of financial collapse. The situation in Turkey has been exacerbated by numerous issues including very high inflation, a large current account deficit and a less than ideal geopolitical environment. However, possibly the largest issue is that Turkey has a large portion of debt that is denominated in foreign currencies. The decline in the Turkish Lira has made this debt much more expensive to service, which has led to concerns about the solvency of the country. This has triggered a sharp decline in the price of Turkish assets. While at this point the sharp selloff has been contained to Turkey, there has been some spillover into other emerging markets and there are fears that this may trigger an emerging market crisis like we saw in the late 1990s.


Chart Turkey Aug2018

Our chart of the week shows that while Turkey does have the most foreign currency denominated debt, many of their emerging market counterparts also face the potential for difficulty servicing their debt should their currencies depreciate. The good news is that many of the other emerging markets do not share the issues of high inflation, a large current account deficit and a lack of goodwill on the geopolitical stage. At this point, Turkey seems to be unique in the issues that they are facing, but this is a situation that the team at Allegiant is watching closely.

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