Turkish Corporates Most Vulnerable in EMEA Stress Scenario, says Fitch

Turkish corporates are the most exposed among Europe, the Middles East and Africa (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 foreign exchange (EMFX) stress analysis.

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 FX risks, according to the credit ratings agency (CRA).

Foreign currency – typically US dollar (USD) – 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.

In an emerging-markets stress scenario USD 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 Fitch’s stress case the CRA modelled the impact of a 15% currency depreciation in 2014 and 2015, combined with a halving of issuer-specific corporate growth forecasts and a 250 basis points (bp) 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 the CRA’s ratings, as many of these companies are in the B rating category.

Russian companies have a much more measured approach to foreign currency debt. Companies with no foreign currency receipts tend to stick to rouble (RUB)-denominated debt. Natural resources exporters, which do have significant USD 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 Fitch said that it would expect state-supported banks to assist with the refinancing of short-term dollar debt in that situation.

Fitch’s report, entitled
‘Scenario: EMEA Emerging-Market Stress and Devaluation Risk’
, includes entity-specific analysis on the foreign- and local-currency split of companies’ activities and capital structures. Covering 86 entities, it includes corporates in Kazakhstan, South Africa and Ukraine. The report is available from www.fitchratings.com.

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