According to Nomura, seven nations are presently at high danger of currency crises: Egypt, Romania, Sri Lanka, Turkey, the Czech Republic, Pakistan, and Hungary.
The Japanese bank said that the danger in 22 of the 32 nations monitored by its internal “Damocles” warning system has increased since the previous update in May, with the highest rises occurring in the Czech Republic and Brazil.
It meant that the total scores the model provided over all 32 had risen significantly to 2,234 from 1,744 back in May.
Nomura analysts called it “an alarming warning sign of the mounting broad-based risk in EM currencies,” noting that it was the highest total score since July 1999 and not far off the peak of 2,692 at the height of the Asian crisis.
The model compiles a total score from 8 different metrics related to a country’s foreign currency reserves, exchange rate, financial soundness, and interest rates.
Nomura concludes that a score over 100 predicts a 64% likelihood of a currency crisis in the next 12 months, based on data from 61 prior EM currency crises since 1996.
Even after two major currency devaluations and an IMF programme request this year, Egypt’s score of 165 is the poorest in the world.
After Bulgaria (now at 165), Romania (currently at 145) is next in line for currency intervention. Scores of 138 are produced by default-plagued Sri Lanka and currency-crisis regular Turkey, whereas scores of 126, 120, and 100 are produced by the Czech Republic, Pakistan, and Hungary, respectively.
The Damocles model was also applied by Nomura to the G7 group of major economies, with the findings indicating that all except Japan now had Damocles scores over the 100 threshold, with the United States and Britain in the lead.
Developing-country economies are even more at risk. Most still aren’t back to normal after the COVID-19 epidemic, and they’re now dealing with soaring prices, tight budgets, negative real interest rates, a worsening trade surplus, and dwindling foreign exchange reserves.
“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”.