London: Japan’s top brokerage and investment bank, Nomura Holdings, has warned that seven countries – Egypt, Romania, Sri Lanka, Turkey, the Czech Republic, Pakistan and Hungary – are now at high risk of a currency crisis.
The Bank of Japan said 22 of the 32 countries covered by its domestic “Damocles” warning system had seen their risk increase since its last update in May, with the Czech Republic and Brazil the most. has increased.
That means the sum of the scores produced by the model on all 32 rose sharply to 2,234 from 1,744 in May.
“This is the highest total score since July 1999 and not far from the peak of 2,692 during the height of the Asian crisis,” economists at Nomura said, calling it “a dire warning sign of growing broad-based risk in EM currencies.” ” declared. .
The model crunches eight key indicators—a country’s foreign exchange reserves, exchange rate, fiscal health, and interest rates—to give an overall score.
Based on data from 61 different EM currency crises since 1996, Nomura estimates that a score above 100 indicates a 64% probability of a currency crisis in the next 12 months.
Egypt, which has already heavily devalued its currency twice this year and tried an International Monetary Fund (IMF) program, now scores the worst at 165.
Romania is ranked 145th for interveningly expanding its currency. Default-ridden Sri Lanka and currency crisis-hit Turkey both score 138, while the Czech Republic, Pakistan and Hungary score 126, 120 and 100 respectively.
Nomura also ran a Damocles model on the G7 group of leading economies, with results showing that all but Japan now have Damocles scores above 100, led by the US and the UK.
EM economies are still more vulnerable. Most have not fully recovered from the COVID-19 pandemic and now face high inflation, limited fiscal space, negative real interest rates, a weak balance of payments and shrinking FX reserve cover.
“It’s a bit surprising that there haven’t been more major EM currency crises this year,” Nomura added.
“Then again, the EM challenges are far from over… As the late Professor Rudiger Dornbusch once said, a crisis takes longer than you think, and then it happens much faster. More than you might think.”
