File photo. Rizwan Tabassum—AFP
Nomura Holdings, Japan’s top brokerage and investment bank, on Tuesday warned that seven countries—Pakistan, Egypt, Romania, Sri Lanka, Turkey, Czech Republic and Hungary—are at “high risk” of a currency crisis within the next 12 months.
In a statement, the bank said that 22 of the 32 countries examined by its in-house “Damocles” warning system had seen their risk rise in the five months since its last update in May. The Czech Republic and Brazil have recorded the highest risk increase, it added.
According to Nomura, the sum of the scores generated by the Damocles model on all 32 monitored states increased from 1,744 in May to 2,234 now. “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,” it said, noting this was “an ominous warning sign of the growing broad-based risk” in emerging markets’ currencies.
The Damocles model, per the bank, examines eight key indicators—foreign exchange reserves, exchange rate, financial health, and interest rates—to determine an overall score for each country. Utilizing data from 61 different emerging markets’ currency crises since 1996, the bank’s model estimates a score above 100 to indicate a 64 percent chance of a currency crisis in the next 12 months.
Egypt, which has already devalued its currency twice this year and sought an International Monetary Fund (IMF) program, now has the worst score at 165. Romania is next at 145, due to its policy to prop 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 said it also ran the Damocles model on the G7 group of leading economies, noting that all but Japan now had scores above the 100 thresholds, led by the U.S. and Britain, reflecting a growing global crisis.
However, it stressed, emerging markets are more vulnerable, as most have yet to fully recover from the COVID-19 pandemic and are now facing high inflation, limited fiscal space, negative real interest rates, weaker balance of payments and diminished foreign exchange reserve cover.