The Japanese bank reported that 22 of the 32 nations covered by its internal “Damocles” warning system have witnessed an increase in risk since its last update in May, with the Czech Republic and Brazil experiencing the biggest rises.
It indicated that since May, the model’s overall score total, which was originally 1,744, had climbed significantly to 2,234 from 1,744.
The Nomura economists referred to it as “an ominous warning sign of the mounting broad-based risk in EM currencies” and noted that it was “the highest total score since July 1999 and not far off the top of 2,692 during the height of the Asian crisis.”
The model computes an overall score based on eight important indices of a country’s foreign currency reserves, exchange rate, financial soundness, and interest rates.
Nomura calculates that a score above 100 implies a 64% likelihood of a currency crisis in the next 12 months based on data from 61 prior EM currency crises that have occurred since 1996.
Egypt currently has the lowest score at 165 after devaluing its currency significantly twice already this year and applying for an IMF program.
Romania, which has been using interventions to support its currency, is listed next on page 145. Sri Lanka, which is now in default, and Turkey, which frequently has currency crises, both earn scores of 138, while the Czech Republic, Pakistan, and Hungary receive 126, 120, and 100 points, respectively.
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