Turkey ‘highly vulnerable’ to liquidity pinch, says leading credit agency

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Turkey, Tunisia and other countries in the Middle East and North Africa are at risk of liquidity challenges due to tightening monetary conditions worldwide, according to S&P Global.

The New York-based credit rating agency released a report Monday identifying five emerging markets as especially susceptible to external funding stress: Turkey, Qatar, Tunisia, Egypt and Indonesia. 

Tightening monetary policy refers to the rise in central banks’ interest rates around the world in response to heightened inflation. Several Middle Eastern financial institutions have raised their rates this year, including Egypt and most Gulf states, including Qatar. 

Central banks raising interest rates tends to have a ripple effect on the economy. Commercial banks in turn increase their rates. This more expensive borrowing discourages people from taking out loans. Interest rates and money supply tend to have an inverse relationship. Liquidity refers to the ability to convert assets and securities such as stocks into cash for purchases, and cash itself is the most liquid asset, according to Investopedia

Here is how rising interest rates and less liquidity will affect the aforementioned countries in the Middle East and North Africa: 


S&P Global said that Turkey’s high debt and general economic problems will make investors less likely to work with Turkish banks. 

“Turkish banks remain highly vulnerable to negative market sentiment and risk aversion,” said S&P Global.

Turkey’s external debt amounts to around $180 billion at present. 

They also said the decline in global liquidity resulting from monetary policy will lead to “increasing refinancing risk for Turkish banks,” they added. 

Turkey’s skyrocketing inflation, the Ukraine war, and Turkish President Recep Tayyip Erdogan’s monetary policy will further worsen the situation, according to S&P Global. 

“These risks are compounded by very high local inflation, unpredictable monetary policy, and the potential negative impact of the Russia-Ukraine conflict on commodities imports, the tourism sector, and investor sentiment,” they said. 

Turkish President Recep Tayyip Erdogan has long held the unorthodox position that lower interest rates lead to lower inflation. The Turkish Central Bank said earlier this year that they would stop cutting rates, but last week, Erdogan again vowed to cut rates

Last December, Fitch downgraded Turkey’s debt rating to “negative,” reflecting concern regarding the country’s ability to pay back debt. 


S&P Global said Tunisia’s political turmoil could hurt its liquidity, including by harming talks with the International Monetary Fund (IMF). 

“If the political transition doesn’t succeed in Tunisia, banks will come under extreme pressure,” the agency said. “Although the country has held several technical discussions with the IMF, a lack of consensus about reforms and the uncertain agenda for a political transition are clouding the outlook.” 

Last year, Tunisian President Kais Saied dismissed the parliament led by the Islamist Ennahda party. In April, he dissolved parliament completely, leading to protests. This has made it difficult for Tunisia to secure a loan from the IMF. 


Egypt’s liquidity risk stems from the Russian invasion of Ukraine. Egypt is the largest wheat importer in the world, and received 80% of its wheat from the two eastern European countries before the war. The fighting has led to Egypt seeking wheat from other countries, such as India. 

“The provision of the commodity at subsidized affordable prices is important for maintaining economic stability,” the agency said. 

S&P Global has confidence that Egypt can diversify its wheat sources and boost local production, but added this could increase the country’s debt. 


S&P Global also noted “concerns” about Qatar’s liquidity due to its banks’ increasing debt, which reached more than $100 billion last year. However, preparations for the World Cup in Doha in November and increasing reserve requirements at banks are expected to “moderate” debt. 

What’s next: The US Federal Reserve raised interest rates again today, prompting the central banks of Qatar, the United Arab Emirates and Saudi Arabia to promptly follow suit. 

Adam Lucente


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