Seven countries at risk of exchange rate crises: Nomura

Seven emerging market economies, including Sri Lanka and South Africa, are at risk of an exchange rate crisis, according to a gauge published by Nomura, as investor fears about contagion from recent currency crunches in Turkey and Argentina continue to build.

Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine are most at risk, according to the bank’s “Damocles” index, which assesses the risk of exchange rate crises over the next 12 months across 30 emerging market economies.

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.

However, eight countries – Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, Philippines, Russia and Thailand – had scores of zero, implying little risk of a currency crash in those economies, the index showed. 

“As investors focus more on EM risk it is important not to lump all EMs together as one homogeneous group; Damocles highlights a long list of countries with very low risk of full-blown crises,” the bank’s analysts said.

*This post has been amended to correct Sri Lanka’s short-term external debt after the author of the report clarified the figure.