In a report on Monday, Moody's Investors Service said that banks in countries such as Ukraine and Turkey face very high risk due to restrictions on capital flows, weak international reserves and a high level of foreign currency debt.
According to the report, 39 banking systems in emerging market economies where foreign exchange deposits are 10% or more of total deposits are covered by Belarus, El Salvador, Nigeria, Kyrgyzstan and Tajikistan.
According to the report headed by Moody's vice-president and senior credit officer Eugene Tarzimanov, high dollarization causes multiple problems when the local currency drops sharply in value. The banks are vulnerable to a rise 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. Local currencies 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 biggest drop since 2015.
The credit agency said that the most of the currencies in Ghana, Argentina and Egypt have fallen this year. El Salvadoran uses the U.S. dollar as a legal tender.
Macroeconomic vulnerabilities in Uganda, Georgia, Kenya and Armenia could affect banks. The report said that 20 banking systems have a high or very high foreign-currency risk.
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.
Foreign exchange risk is the lowest in emerging markets such as Indonesia, Ivory Coast and Chile.