Turkish Lira sell-off fuels fear of contagion on MENA assets: report

The sharp sell-off in the Turkish Lira is likely to set off a wave of selling across the Middle East and North Africa (MENA) regional assets, reviving the specter of contagion effects, MUFG Bank, said in a recent report.

"Whilst we expect the spillovers will not be of the scale of the global financial crisis of 2008-09, a selloff in multi-asset investment classes in the MENA region in some scale and scope could arise should the turbulence in Turkey escalate," the report noted.

Earlier this month, U.S. President Donald Trump authorized doubling of steel and aluminum tariffs on Turkey, which exacerbated Turkey's economic crisis.

According to MUFG, the fundamental concern for the MENA region, as well as for international banks, is the apprehension that Turkish borrowers might not be hedged against the Lira's weakness and may begin to default on foreign currency loans.

Four key financial institutions - National Commercial Bank, Saudi Arabia; Kuwait Finance House, Kuwait; Emirates NBD, UAE; and Qatar National Bank, Qatar - could see a considerable detrimental impact on their balance sheets should the operating environment significantly deteriorate, it added.

While the proportion of the Turkish banking sector’s balance sheet represented by NPLs remains low at 3 percent, the bank said that "bad debt levels are likely to rise as economic pressure rises."

Meanwhile,  the report said that the longer the uncertainty goes on, the more likely the ongoing supply-side concerns, given that Turkey acts as a key transit point for international oil trade through its transport arteries and shipping routes.

"However, in the near-term, we view that supply risks of Turkey acting as a central international energy transit hub are muted," it added.