Nomura Holdings, Japan’s biggest brokerage and investment bank, warns Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan, and Hungary may face currency crises.
The Japanese bank “Damocles” an early warning indicator of EM Exchange Rate Crises, has highlighted its risk rise since its last update in May, with the largest increases in the Czech Republic and Brazil.
Since May, the model’s total score on all 32 increased to 2,234 from 1,744.
The model scores a country’s foreign exchange reserves, exchange rate, financial health, and interest rates.
Nomura thinks a score above 100 suggests a 64% likelihood of a currency crisis in the next 12 months.
Egypt, which deflated its currency twice this year and sought an IMF program, scores 165.
Romania’s currency has been propped up via interventions. Sri Lanka and Turkey scored 138, while the Czech Republic, Pakistan, and Hungary got 126, 120, and 100.
Nomura performed the Damocles model on the G7 group of top economies, and all but Japan have Damocles scores above 100, led by the US and UK.
Emerging markets are fragile. Most have not yet recovered from COVID-19 and confront high inflation, limited fiscal room, negative real interest rates, a poorer balance of payments, and lower FX reserve protection.
Nomura: “Surprisingly, there haven’t been more EM currency crises this year.”
“EM difficulties aren’t over, though. Professor Rudiger Dornbusch said, “A crisis takes longer than you imagine and then happens much faster.” “less
