Nomura Holdings, Japan’s top brokerage and investment bank, has warned that seven countries — Pakistan, Egypt, Romania, Sri Lanka, Turkey, Czech Republic, and Hungary — are now at a high risk of currency crises.
The Japanese bank said that 22 of the 32 countries covered by its in-house “Damocles” warning system have seen their risk rise since its last update in May, with the largest increases in the Czech Republic and Brazil, Geo News reported.
It means the sum of the scores generated by the model on all 32 increased sharply to 2,234 from 1,744 since May.
“This is the highest total score since July 1999 and not too far from the peak of 2,692 during the height of the Asian crisis,” Nomura economists said, calling it “an ominous warning sign of the growing broad-based risk in EM currencies”, Geo News reported.
The model crunches eight key indicators — a country’s foreign exchange reserves, exchange rate, financial 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 per cent chance of a currency crisis in the following 12 months.
Egypt, which has already devalued its currency heavily twice this year and sought an International Monetary Fund (IMF) programme, now generates the worst score at 165, Geo News reported citing the estimates.
Romania is next on 145 having been propping up its currency with interventions.
Default-stricken Sri Lanka and currency crisis-regular Turkey both generate scores of 138, while the Czech Republic, Pakistan and Hungary notch 126, 120 and 100 respectively.
Nomura also ran the Damocles model on the G7 group of leading economies, with the results showing that all but Japan now have Damocles scores above the 100 thresholds, led by the US and Britain.
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 weaker balance of payments and diminished FX reserve cover.
“It is somewhat surprising that there have not been more full-blown EM currency crises this year,” Nomura added.
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