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Asia braces for impact of Turkey crisis

Japanese banks have largest exposure in Asia

Turkish President Recep Tayyip Erdogan declared that the country would "not fall into the interest-rate trap," despite the fall in value of the lira.   © Reuters

TOKYO -- Asian companies and investors have their eyes fixed on Turkey as the crisis surrounding the country's currency threatens to become a source of global financial turmoil.

The lira dropped by more than 20% over the weekend, and recorded a new low in Asia on Monday of 7.2 lira against the dollar. The decline was triggered by President Tayyip Erdogan's hesitant response to rapidly growing inflation. "As long as I'm alive, we will not fall into the interest-rate trap," said Erdogan, suggesting that he would stop the central bank from hiking interest rates.

The lira's fall spurred a sell-off in other emerging-market currencies, with the Indian rupee stumbling to a record low. The Indonesian rupiah sank to its lowest level since October 2015.

The currency's woes had already made companies nervous. "If we fully reflect the depreciation in our selling price, no customer will be able to pay," said an expat working for a Japanese manufacturer in Turkey. "Some makers may have to stop their lines as they run out of imported parts and materials."

Asian shares came under pressure on Monday. All the major Asian benchmark indexes, except for Vietnam's VN, fell on fears that the situation could worsen. U.S. stocks also dropped, with the S&P 500 and the Dow falling for the fourth session in a row.

Asian companies and banks are not as exposed to Turkey as their European counterparts.

According to data from the Bank for International Settlements, Japan was the most exposed Asian economy. On an ultimate risk basis, Japan's exposure amounted to $10.9 billion for the quarter ending March 2018, a little more than a half the $18 billion figure for the U.S. In contrast, Spain's exposure to Turkey stood at $80.8 billion and France's $35.1 billion.

An official at a Japanese bank said that its exposure to Turkey amounted to a few percent or less of its foreign assets, and did not expect any sizable impact from the crisis.

South Korea was the next Asia-Pacific economy on the list at $1.7 billion, followed by Taiwan at $0.5 billion and Australia at $0.1 billion. China's level of exposure could not be ascertained from the BIS data, but it is expected to be of a similar size to that of Japan.

On July 26, Turkish Finance Minister Berat Albayrak, who is Erdogan's son-in-law, tweeted that the private sector, public institutions and banks would benefit from a $3.6 billion loan package from Beijing.

For Asian companies that operate in Turkey, the situation is cause for significant concern. Due to its geographic location and cheap labor costs, the country has long been considered an ideal gateway to European markets and has attracted increasing investment from Asia.

Japan's largest carmaker, Toyota Motor, opened an assembly plant just east of Istanbul in 1994 that functions as an export base for the region, while Malaysian hospital operator IHH Healthcare regards Turkey as one of its home markets.

Chinese port operator Cosco Shipping Ports in 2015 acquired a stake in the Kumport container terminal as part of a consortium. The investment forms part of Beijing's Belt and Road Initiative.

So far, none of these companies has publicly expressed concern, but investors have reacted quickly.

Toyota fell by 2.1% on the Tokyo Stock Exchange, surpassing the 2.0% fall of the benchmark Nikkei 225 Index.

In Malaysia, IHH Healthcare slid 7% while the benchmark KLCI fell a little over 1%. In Hong Kong, Cosco Shipping Ports dropped 4% and the benchmark Hang Seng Index fell by 1.2%.

The situation is "critical to the country's ability to attract investment from abroad," said Mitsuhito Ono, director of overseas marketing research at the Japan External Trade Organization.

"The Turkish economy has benefited from overseas investment making up for its chronic current-account deficit," he added, suggesting there may be further erosion of the lira.

The focus now turns to the impact the currency's depreciation will have on the global economy.

White House economic adviser Kevin Hassett said on Monday the Trump administration is keeping a close eye on the financial situation in Turkey after the lira's sharp fall.

"We're monitoring it very closely. Treasury Secretary Mnuchin is monitoring it very closely," Hassett, the chairman of the White House Council of Economic Advisers, told MSNBC. "When a country loses it connection to liberal democracy then you don't really know what's going to happen next to the economy and I think there is a lot of uncertainty," he said.

Many Turkish companies have taken out loans in foreign currencies that will become increasingly difficult to pay back, while the banks that extended them will be worried about the impact on their balance sheets.

Takashi Kodama, head of economic research at Daiwa Institute of Research, however, pointed out that the cheaper lira could "boost competitiveness," although any benefit would depend on "the contagion to the European economy remaining minimal."

Akihiro Sano in Istanbul contributed to this article.

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