NEWS DESK
TOKYO: Nomura Holdings, top brokerage and investment bank of Japan, has warned that seven countries – Egypt, Romania, Pakistan, Sri Lanka, Turkey, Czech Republic, and Hungary – are facing a severe risk of a currency crisis.
The financial company said that the risk level for 22 of the 32 states, covered by its in-house “Damocles” warning system, has increased since its last update in May, with the highest observed in the Czech Republic and Brazil, inferring that the sum of the scores according to the model on all 32 countries surged sharply to 2,234 from 1,744 since May.
The score was the highest since July 1999 and quite close to the peak of 2,692 during the most severe point of the Asian crisis, Nomura economists said. They described the current crisis as an ominous warning sign of the growing broad-based risk in EM (emerging market) currencies.
The model provides an overall score after assessing eight key indicators, a country’s foreign exchange reserves, financial health, exchange rate and interest rates.
As per data from 61 different EM currency crises since 1996, Nomura infers that a score above 100 indicates a 64% likelihood of a currency crisis in the upcoming 12 months.
EM currencies
Egypt, which has undergone heavy devaluation of currency and sought an International Monetary Fund (IMF) programme, has the worst score of 165.
Romania is next on 145, followed by default-stricken Sri Lanka and Turkey with scores of 138, while the Czech Republic, Pakistan and Hungary come next with 126, 120 and 100 respectively.
G7 countries not doing well either
Nomura also assessed the G7 group of leading economies according to the Damocles model, with the results indicating that all but Japan have Damocles scores above the 100 thresholds, with the United States and Britain have the highest.
However, EM economies, most of whom have not fully recovered from the COVID-19 pandemic, are still more vulnerable and suffering from severe inflation, negative real interest rates, limited fiscal space, a weaker balance of payments and diminished FX reserve cover.
