Pakistan is now at a high risk of currency crises owing to dwindling forex (FX) reserves, exchange rate, financial health, and interest rates, Reuters reported.
Top Japanese investment bank Nomura has warned that seven countries – Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary – are now at a high risk of currency crises.
Nomura economists ran the bank’s “Damocles” warning system that computed the overall score by crunching eight key indicators based on a country’s foreign exchange reserves, exchange rate, financial health, and interest rates. The model is based on the condition that a score above 100 foretells a currency crisis in the next 12 months by 64 percent.
The researchers determined that 22 of the 32 countries covered by its in-house warning system have seen their risk increase from 1,744 in May to 2,234 today, with the Czech Republic and Brazil experiencing the greatest increases amongst the targeted list of emerging market (EM) economies.
“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,” they said, calling it an”ominous warning sign” of the broad-based risk in EM currencies.
“It is somewhat surprising that there have not been more full-blown EM currency crises this year. 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,” the bank stated.
EM economies continue to be more vulnerable. Most have not fully recovered from the pandemic and are now confronted with high inflation, limited fiscal space, negative real interest rates, a weaker balance of payments, and reduced FX reserve cover.
Overall, the above-mentioned Normura research studies data from 61 different EM currency crises since 1996. Egypt, which has already deflated its currency significantly twice this year and sought an IMF program, now has the lowest score of 165.
Romania is next on 145, having used measures to shore up its currency. Sri Lanka, which is in default, and Turkey, which is in a currency crisis, both sit at 138, while the Czech Republic, Pakistan, and Hungary get 126, 120, and 100, respectively.