Seven countries including Pakistan face currency crisis danger: Nomura

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.

The Japanese bank said that 22 of the 32 countries covered by its inhouse 'Damocles' warning system have seen their risk rise since its last update since May, with the largest increases in the Czech Republic and Brazil.

It meant the sum of the scores generated on all 32 by the model had increased sharply to 2,234 from 1,744 since May. "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," Nomura economists said, calling it "an ominous warning sign of the growing broad-based risk in EM currencies".

The model crunches 8 key indicators on a country's FX reserves, exchange rate, financial health and interest rates to give an overall score.

Based on data from 61 different EM currency crises since 1996, Nomura estimates that a score above 100 indicates a 64% chance of a currency crisis in the following 12 months.

Egypt, which has already devalued its currency heavily twice this year and sought an International Monetary Fund (IMF) programme, now generates the worst score at 165. Romania is next on 145 having been propping 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.

The Czech Republic, Romania and Hungary face the risk of exchange-rate crises over the next one year as fiscal and external challenges mount, according to Nomura Holdings Inc. The warning is based on analysis of eight indicators including FX reserves import cover, real shortterm interest rates, as well as fiscal and current account measures, according to Nomura's Damocles Index which assessed 32 emerging markets' vulnerability to a currency crisis.

Egypt, Sri Lanka, Turkey and Pakistan have already experienced crises but are not yet out of the woods, Nomura analysts Rob Subbaraman and Si Ying Toh wrote in a report Monday. Hungary's forint is among the worst-performing emerging market currencies this year after a hold up in recovery funding from the European Union. Currencies of Romania and the Czech Republic have also declined more than 8% against the dollar.

Vulnerability of emerging market currencies is now at the highest in more than two decades and gives an "ominous warning" of growing broad-based risks, the report said.

The index, which Nomura says is an "early warning system", condenses macroeconomic and financial variables and gives countries a score from zero to 200. A score above 100 suggests vulnerability to an exchange rate crisis in the next 12 months, while a reading above 150 signals a crisis could erupt at any time. Sri Lanka is most at risk, with a score of 175, followed by South Africa and Argentina, with 143 and 140, respectively. Sri Lanka had the worst outlook "due to still-weak fiscal finances and a very fragile external position," Nomura analysts said. "With [foreign exchange] reserves of less than five months of import cover and high short-term external debt ($7.5bn*), its refinancing needs are large. Political stability also remains an issue."

The report comes amid renewed concern about emerging markets currencies and equities in recent weeks, with Argentina and Turkey already suffering rapid declines in the value of their currencies, the Indian rupee trading at a record low and pressure on the Indonesian rupiah.