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Sri Lanka tops seven countries at risk of exchange rate crisis : Nomura

Seven emerging economies at risk of an exchange-rate crisis are Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine, according to a new analysis by Nomura Holdings Inc.

With five of the seven already in a currency crisis or a program run by the International Monetary Fund, that leaves South Africa and Pakistan as the standouts.

At the same time, the eight countries with the lowest risk of a crisis are Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, Philippines, Russia and Thailand, according to analysts including Robert Subbaraman, Singapore-based head of emerging-markets economics.

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.

“This is an important result,” they wrote in a note Monday. “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.”

Nomura’s findings are based on an early warning model — called Damocles — set up to identify exchange rate crises for 30 emerging economies. The model examines a variety of factors including foreign-exchange reserves, debt levels, interest rates and import cover.

It has predicted two-thirds of the 54 developing nation exchange-rate crises since 1996, up to 12 months in advance, according to the analysts.

“The results we have achieved are encouraging, but given the inherent limitations of any early warning system it would be foolish to make any exaggerated claims,” they said.

Damocles refers to the moral parable the Sword of Damocles, an allusion to imminent and ever-present danger

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