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Banks of Kyrgyzstan exposed to high currency risk due to dollarization

Sharp exchange rate fluctuations create high currency risks for banks in some emerging markets. Report by Moody’s Investors Service says.

In total, the report covers 39 emerging market banking systems. Deposits in foreign currency amount to 10 percent or more of the total volume of deposits in them.

It is noted that banks in such countries face «very high» risk due to restrictions on capital flows, weak international reserves and high levels of foreign currency debt.

Kyrgyzstan, along with Ukraine, Turkey, Belarus, Tajikistan, El Salvador and Nigeria, is included in the list of states with a high level of dollar deposits.

«High dollarization causes multiple problems when the local currency drops sharply in value. The banks become vulnerable to an increase in defaults on foreign currency loans granted to unhedged borrowers which hurts the banks’ profitability, while their liquidity and capital can also come under pressure,» Moody’s Vice President and Senior Credit Officer Eugene Tarzimanov said.

It is also noted that the local currencies across emerging markets have weakened against the U.S. dollar this year as the U.S. Federal Reserve lifted rates amid rising inflation.

MSCI’s index of emerging market currencies is on course for its sharpest drop since 2015.

Currencies in Ghana, Argentina and Egypt have fallen the most this year, the credit agency said. El Salvador uses the U.S. dollar as legal tender. Macroeconomic vulnerabilities in Armenia, Georgia, Kenya and Uganda could also affect banks.

«Altogether 20 banking systems face high or very high foreign-currency risk,» the report added.

Moody’s sees that international reserves in most emerging market economies have fallen since Russia’s invasion of Ukraine, as governments fund current account deficits and defend their currencies against the U.S. dollar.

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