Ukraine War bills for Emerging Markets

Developed Country stocks have yet to agree on what kind of threat the Ukraine War poses. DJ30 and S&P500, which started the Thursday session with the biggest daily losses of the year, closed the night on a positive note. Asian stocks are also mostly bearish, despite Brent breaking over $100/barrel this morning.

However, according to Bloomberg, Emerging Markets (GOP, Countries = EM) including Turkey suffered heavy losses. Although Turkey followed a nuanced policy that emphasized neutrality in the Ukraine War, it got its share from the earthquake. Yesterday, the CDS premium, which determines our external borrowing costs, rose to 626 points. At 07:00 CEST, USD/TL is at 14.18. Allegedly, the CBRT and public banks are intervening through the back door, but they have not yet been able to ensure exchange rate stability.

If the Ukraine War will last a long time, or if it will leave long-lasting negative effects, a difficult period begins for the GOP and Turkey, which will also affect the economic performance.

Over the past week, GOP shares have lost an average of 6% in dollar terms. The data indicates that hot money is being withdrawn from the GOP. In addition to the energy rally triggered by the Ukraine War, the Fed’s statement that it will not give up on monetary tightening; and the unending cash problems of the construction-real estate sector in China are also negative developments in terms of the GOP.

As of Thursday, since the start of the war, GOU’s external borrowing spreads (interest premiums) increased by 37 basis points to 450 basis points. CDS’s are increasing not only in Turkey but also in all developing countries. Renewing debt will be very expensive for developing countries and their institutions, whose debt/GDP ratios have reached historical peaks.

“We are increasing the cash ratio in the portfolio,” said Lu Yu, fund manager of Allianz Global Investors. “I wish we knew how long this uncertainty would last! It is not easy to take new risks before the Ukraine crisis is resolved”.

“We expect the volatility and selling pressures to continue,” said Jeff Grills, director of the GOU EGMK desk at Aegon Asset Management. “New sanction statements are constantly coming from the West”. “It is a serious market risk for Putin to carry the war all over Ukraine”.

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