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TURKISH ROUT

Asia markets skid on Turkish turmoil; analysts downplay contagion fears

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Asian markets suffered a painful fallout on Monday as Turkey's lira crisis rages on.

Singapore

ASIAN markets suffered a painful fallout on Monday as Turkey's lira crisis rages on.

On Monday, during Asian trading hours, the lira fell nearly 7 per cent - it has lost over 40 per cent so far this year - fuelling extreme volatility in emerging markets assets already overwhelmed by global trade spats, erratic US policies and tightening liquidity amid rising interest rates.

Major Asian markets were awash in red on Monday with Taiwan's key index finishing 2.14 per cent lower, Japan's Nikkei 225 losing nearly 2 per cent, Hong Kong's Hang Seng down 1.7 per cent and China's Shanghai Composite closing 0.3 per cent lower after recovering from a 1.7 per cent fall earlier in the day. The key barometers for Singapore and Malaysia slipped 1.2 per cent while MSCI's index of shares in Asia Pacific was down nearly 1 per cent. European markets also opened Monday weaker.

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The Turkish currency's plunge began in May but has been in free fall since last Friday when it fell by some 16 per cent - it briefly lost 20 per cent that day to a record low after US President Donald Trump doubled tariffs on Turkish metal following Turkey's refusal to release an American pastor detained there for nearly two years.

Asian currencies were also hit by the downdraft with India's rupee dropping to a new record, while the Indonesian rupiah slumped 0.8 percent. The Singapore dollar and Malaysia ringgit slipped while demand for safe haven assets such as the US dollar, Japanese yen and Swiss franc jumped as the risk-off investing mode heightened.

"The perception in financial markets is that its (Turkey's) central bank is constrained by President (Recep Tayyip) Erdogan... from doing what markets think is needed to stabilise the currency and economy," said Manu Bhaskaran, chief executive and founding director of Centennial Asia Advisors. Mr Erdogan has dismissed calls for the country to raise interest rates to try to ease the crisis.

Mr Bhaskaran added: "Investors are also concerned about the direction that the country's domestic politics and foreign policy are taking. So, in this flammable mix, when something like the deterioration in ties between the US and Turkey takes place, investors take fright," he added.

Bruised sentiments aside, experts have brushed off the contagion risk of a crisis in Turkey - a Nato ally that straddles Europe and Asia with a GDP of around US$900 billion - on Asia.

"Asia should not see any contagion effect fundamentally due to the ongoing crisis in Turkey as the region does not have a meaningful exposure to the country," said DBS Group Research in a note, citing data from Bank for International Settlements that of the US$265 billion of exposure to Turkish counterparties reported globally as of March 2018, Asia banks except for Japan did not have any exposure.

"Hence, the impact on Asian credits will be more from perspective of weak EM sentiment rather than fundamentals," it added.

A direct hit on European economies is possible given Turkey's trade linkages to the region - it is Europe's sixth largest trading partner - while Europe's financial sector chiefly Spain and France have notable exposure to the Turkish lira.

But even this is "relatively limited" and "fairly small", opined Bank of Singapore's senior investment strategist James Cheo. He expects the situation in Turkey to "get worse before they get better".

The impact of a strengthening greenback amid rising interest rates and safe-haven play however could hurt emerging markets.

"The lira's dramatic slide against its main rivals was symptomatic of a broader theme in emerging markets. We believe countries that rely heavily on foreign, mostly US dollar-denominated debt will face strong pressure from a strengthening greenback which has been on an upswing since April," said AmBank Research.

Such economies, apart from Turkey, include Argentina, the Philippines, Brazil, Indonesia, Mexico and Malaysia.

AmBank Research added: "The fear of a default is on the cards, especially with the rising interest rates in the US. It has exacerbated the strain on emerging markets, which use local currencies to pay down their dollar-backed debts."

It is no surprise then that on the back of this Turkish crisis, DBS Group Research is advising investors to stick to "stronger Asian economies" with firm external balance sheets and fiscal balances like China and Singapore.