How will Turkey pay its debt as banks go hawkish

Alarm bells are ringing for developing countries as the global economic environment shifts towrds hawkishness among the big central banks. The Fed’s announcement last week that it will stay on course to normalizing its monetary policy, the ECB’s move to step out of crisis incentives, and the UK and Japanese central banks’ less dovish attitudes have raised the specter of developing countries’ debt reaching $40 trillion. Turkey and China are among developing countries with the fastest increase in debt over the last 10 years.

During the decade following the financial crisis, and the loose monetary policies that resulted, $40 trillion were added to the debts of companies, households and nations. The increase in interest rates due to the normalization of monetary policies will make it harder for these countries to pay back their debts.

Debt ratio increased to 211 percent in 10 years

According to data provided by the Institute of International Finance (IIF,) the comined debt-to-GDP ratio of public, household, corporate and financial institutions in 21 rich countries rose from around 290 percent in 1990s to to 380 percent in 2008 and stayed around there for some time. However, emerging economies have seen a rapid rise in their debt since the crisis.

The total debt of the 26 leading developing countries, including Turkey, climbed from 148 percent in 2008 to 211 percent in September last year. The increase in debt in these 26 countries exceeded 40 percent over the past decade while the increase in debt in China was 70 percent. Turkey, South Korea and Brazil are among countries seeing a sharp rise in debt.

On the other hand, bond issuances of developing countries are growing at a remarkable pace. Government and corporate bond issues in these markets have been over $1 trillion in each of the last two years.

Strengthen ng of the dollar by interest rate hikes is risky

An analysis by the Financial Times shows that developing countries need to wise up to the fact that current financial conditions will not continue forever. Paul Greer, portfolio manager for developing countries at Fidelity International, says that the differences between the US and European interest rate expectations indicate that the value of the dollar has fallen below its valuation in the past six to nine months, that is to say an adjustment in the dollar value can be expected.

A report by the Bank for International Settlements (BIS) also points out that the weak dollar is encouraging investments in developing countries, but a strengthening dollar poses a risk. Those who borrow with local currency in these markets should also be careful, Greer warns, stating that inflation expectations are rising in developing countries.

The ‘monetary expansion’ period that the Fed put into practice in 2008 came to an end last year. The Fed sped up its monetary policy normalization process in 2017. The bank is expected to go for interest rate hikes three times this year.

The Bank of England, which decided to increase its policy rate for the first time in 10 years in 2017, is also expected to raise interest rates sharply. The European Central Bank (ECB,) on the other hand, removed a reference to “raising bond purchases when necessary” from their statement issued at its meeting last week. Thus, the bank boosted the signal of an exit from incentives, which were introduced during the crisis.