Suddenly, money is flying out of emerging economies. Central banks have gone from trying to weaken their currencies to propping these up. The problems look particularly acute in Turkey and South Korea, where the private sector is reliant on short-term external debt.
But, Poland’s government and Hungary’s home owners are other kinds of victims. Turkey risks going from an overheating economy to a crisis-ridden one. While its banks’ short-term external debt amounted to $63 billion in July, Turkey’s total short-term debt was $132 billion, about 20 per cent of the GDP. The current account deficit, which may approach 10 per cent of GDP — the International Monetary Fund has warned — as Turkey grew too fast but cut interest rates, now presents a huge financing difficulty.
Turkey may face rapid lira depreciation, bank funding problems, higher inflation and sharp economic downturn. South Korea’s banks, too, may face funding problems. Its Financial Supervisory Service says banks rolled over a record 157 per cent of their short-term external borrowing in August, suggesting they were increasing their debt – already reported at a high $130 billion, at the end of Q2. The nine per cent plunge in the won’s dollar value in September will make these external borrowings more onerous.
In Poland, the zloty’s fall makes government finances a concern. About 27 per cent of Poland’s government debt is external and a weaker zloty risks pushing overall debt above 55 per cent of the GDP, at which the government is legally bound to balance the budget. A tough budget aims to cut the fiscal deficit from about 5.6 per cent of GDP this year to 2.9 per cent in 2012 and keeps debt at 53 per cent of GDP. But, it assumes four per cent growth, despite austerity and is vulnerable to further zloty weakness. Hungary’s debt problem is with home-owners. Two-thirds of mortgages are denominated in Swiss francs. Two bold moves this month have eased the pain.
But, the relief may be temporary. The Swiss central bank intervened to weaken the Swiss franc. And, the Hungarian government passed a law forcing the banks that had lent in foreign currency to absorb 25 per cent of the currency loss. But, banks are calling that decision expropriation and appealing to the EU. Troublingly, after years of effort, Hungary remains caught in a currency trap. Other emerging economies are just beginning to see the jaws close.
