Newsnomics AJAY ANGELINA reporter | Nomura, a Japanese finance company and investment bank has warned Egypt, Romania, Sri Lanka, Turkey, Pakistan, Czech Republic and Hungry in danger of currency crisis.
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 increase in the Czech Republic and Brazil. It means the sum of the scores generated on all 32 countries 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 board-based risk in EM(Emerging Markets) currencies.”
This time Egypt whose currency devalued heavily twice this year now generates the worst score at 165.
Romania is next on 145 having been propping up its currency with interventions. Default-stricken Sri Lanka and currency crisis-regular Turkey both generate score 138, while Czech Republic scores 126, Pakistan scores 120 and Hungary notch 100 respectively.
Based on the data from 61 different EM currency crises since 1996, Nomura estimates that a score above 100 indicates a 64% chance of a currency crisis. Nomura also ran the Damocles model on the G7 group of leading economies, with the results showed by Damocles model on the G7 group that all but Japan now have Damocles scores above the 100 thresholds, led by the United States 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. "Then again, EM challenges are far from over... The late Professor Rudiger Dornbusch once said, A crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought".
