The report notes that the strengthening US dollar “has created external pressures in some countries, as reflected in weakened currencies and declining foreign exchange reserves.”
The report cites countries like Turkey and South Africa, which it says are vulnerable to weaker capital flows, because they have large current account deficits and could find it more difficult to finance their deficits.
According to Moody’s, the report titled “US Dollar Strength Hurts Countries with Large External Financing Needs”, is an update to the market and does not constitute a rating action.
A Senior Vice President at Moody’s and co-author of the report, Marie Diron, was quoted as saying, “The strengthening of the US dollar, the anticipated rise in US interest rates and subdued growth prospects for some countries are making investment in these markets less attractive.”
“As a result, we’ve seen sharp currency depreciations in some countries and big falls in foreign exchange reserves in others,” she said.
The report indicates that the current pressure on several emerging markets is on a similar scale to mid-2013 when financial markets adjusted to the possibility of tighter US monetary policy, noting that, the impact, however, has not been uniformly severe.
It also identifies that falling commodity prices weigh on export revenues and result in smaller current account surpluses or larger deficits for commodity exporters such as Chile, Colombia, Malaysia and Peru.
And countries with large pending external debt payments such as Turkey, Malaysia and Chile, the report says, are exposed to marked exchange rate depreciation, “because it increases the cost of servicing foreign currency debt and, potentially, local currency external debt.”
The situation does not affect all countries, however. According to the report, not all countries are as exposed to current pressures as in 2013.
“In India and Indonesia, for example, foreign exchange reserves have risen and exchange rates have not changed significantly. In both cases, current account balances have improved since 2013 and capital inflows increased in anticipation of economic and fiscal reforms following political transitions in 2014, bucking the general emerging market trend of lower capital inflows,” it says.
By Emmanuel K. Dogbevi