As Turkey’s lira crisis has deepened over the last few weeks, businesspeople and investors around Asia have asked themselves whether Turkey’s troubles could spread by contagion and infect the region.
For the most part the answer they come up with is that what is going on in Turkey is “idiosyncratic” – caused by a set of conditions unique to that country. The chance that they will spread to Asia is small.
Unfortunately, they are asking the wrong question. They should not be wondering whether Turkey could be the cause of economic trouble in the wider world. Instead they should be asking whether the lira crisis is the result of a broader problem, which just happens to have shown up in Turkey first.
In short, is Turkey a canary in the coal mine, succumbing early to an asphyxiation that will go on to choke other developing countries? Ask the question this way, and the answer is: yes, it may well be.
The general perception is that blame for the collapse in the lira, which has lost 35 per cent of its value against the US dollar since the beginning of the year, can be laid squarely at the door of Turkish President Recep Tayyip Erdogan.
Not only has Erdogan stubbornly refused to let the central bank raise interest rates to cool double-digit inflation and restore confidence in the currency. He has also got into a political quarrel with US President Donald Trump that has seen Washington double its import tariffs on Turkish steel and aluminium. The combination has badly damaged international confidence in Turkish policymaking, and precipitated the latest slide in the lira.
A number of other currencies have also been rocked by the storm including, in Asia, the Indonesian rupiah and the Indian rupee, which last week touched its weakest-ever level at 70 rupees to the US dollar.
But observers in the region are mostly untroubled. Erdogan’s unorthodox economics and combative politics might have hurt the lira, but surely there is no rational reason they should affect currencies 10,000km away in Southeast Asia?
This may be a short-sighted attitude. Sure, Erdogan’s approach hasn’t helped the lira. But while Turkey may be an extreme case, its economic situation is by no means unique.
In the years following the 2008 financial crisis, Turkey emerged as an investors’ darling. With US interest rates at zero, the Federal Reserve printing money to support America’s ailing economy, and the US dollar weak, Turkey found it easy and cheap to borrow large amounts of US dollars to fund ambitious domestic investment programmes. Growth duly took off, topping 7 per cent, and foreign institutions queued up to lend to Turkish companies.
Today Turkish borrowers owe some US$450 billion in foreign currency debt, up from less than US$100 billion in the early 2000s. Crucially, much of that debt is short-term, with US$180 billion set to mature over the next 12 months.
Add to that Turkey’s net import bill, much of it for oil and gas, and over the next 12 months Turkey needs to make foreign currency payments of around US$230 billion. The country’s usable foreign exchange reserves are a shade over US$40 billion.
In the past, with US dollars cheap and plentiful, Turkey would have had little trouble borrowing more to service its foreign currency debt obligations. But lately US dollars have become less abundant in global markets, and more expensive.
For one thing, the US is no longer holding interest rates at zero, having raised short term rates seven times since the end of 2015. Meanwhile, over the last year, the Fed has begun to shrink its balance sheet, withdrawing some US$230 billion of the liquidity generated by its successive rounds of post-crisis money-printing.
At the same time, since early 2016, the price of oil has doubled from US$35 a barrel to US$70. Given that the world burns around 100 million barrels of oil a day, that means oil-users have had to find an additional US$350 billion to finance their standard 100-day inventory.
And finally, investors have decided that Trump’s tax cuts are set to boost US growth, while his trade war will damage overseas economies more than America’s. As a result, they have bid up the US dollar in the foreign exchange market.
In short, US dollars have become scarcer and more expensive. That’s proving a big problem for Turkey, which badly needs US currency to service its foreign debts. But Turkey is not the only emerging economy to have borrowed heavily in US dollars during the years when they were cheap.
According to the Bank for International Settlements, companies in emerging markets around the world have accumulated more than US$3 trillion in US dollar debt.
Many of those companies are Asian. The figures vary depending on exactly how you measure them. But borrowers in emerging Asia currently owe around
US$1.25 trillion in foreign currency debts to international banks, and have issued around US$750 billion in foreign currency bonds. And of that US$2 trillion in debt, roughly a quarter, or US$500 billion, is set to mature by the end of next year.
In other words, Asian borrowers are going to have to find an awful lot of US dollars from somewhere. And if the strength of the US currency persists, they are going to have to pay a hefty premium to do so.
That won’t be a problem for everyone. Chinese companies may have issued US$450 billion in foreign currency – largely US dollar – bonds. But the People’s Bank of China is sitting on US$3.1 trillion in foreign exchange reserves.
But borrowers in other countries will struggle to obtain the funds they need from abroad. Judging by the shape of their external balances and the size of their debts, Indonesia, Malaysia, the Philippines and India all look vulnerable to some extent.
Granted, none of them are going to see a crunch of Turkish proportions. But if the US dollar remains strong and in relatively short supply, then several countries around Asia could find themselves facing a combination of local currency weakness, elevated domestic interest rates and squeezed economic growth easily painful enough to make them regret having borrowed quite so freely in US dollars when the going was good. ■
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years