Moody’s sees ‘very high’ foreign exchange risk for banks in Ukraine, Turkey

LONDON, Dec 5 (Reuters) – Banks in countries such as
Ukraine and Turkey face a “very high” risk from restrictions on
capital flows, weak international reserves and a high level of
foreign currency debt, Moody’s Investors Service said in a
report on Monday.

Belarus, El Salvador, Nigeria, Kyrgyzstan and Tajikistan
complete the list of countries also exposed to high levels of
dollar deposits, according to the report that covers 39 banking
systems in emerging market economies where foreign exchange
deposits are 10% or more of total deposits.

“High dollarization causes multiple problems when the local
currency drops sharply in value,” according to the report headed
by Moody’s vice-president and senior credit officer Eugene
Tarzimanov. “The banks become vulnerable to an increase in
defaults on foreign currency loans granted to unhedged borrowers
which hurts the banks’ profitability, while their liquidity and
capital can also come under pressure.”

Local currencies across emerging markets have weakened
against the U.S. dollar this year as the U.S. Federal Reserve
lifted rates amid rising inflation. MSCI’s index of emerging
market currencies is on course for its sharpest
drop since 2015.

Currencies in Ghana, Argentina and Egypt have fallen the
most this year, the credit agency said. El Salvador uses the
U.S. dollar as legal tender.

Macroeconomic vulnerabilities in Armenia, Georgia, Kenya and
Uganda could also affect banks. “Altogether 20 banking systems
face high or very high foreign-currency risk,” the report added.

Moody’s sees that international reserves in most emerging
market economies have fallen since Russia’s invasion of Ukraine,
as governments fund current account deficits and defend their
currencies against the U.S. dollar.

Foreign exchange risk is at the lowest in emerging markets
such as Chile, Ivory Coast and Indonesia.
(Reporting by Jorgelina do Rosario, editing by Karin Strohecker
and Susan Fenton)