Sri Lanka most at risk of the next emerging market currency crisis: Nomura
Posted on September 13th, 2018

New Delhi: Seven countries, including Sri Lanka, Pakistan and Turkey, are at risk of an exchange rate crisis as investors reassess their investments following the contagion in Argentina and Turkey, a new index by Nomura says.

According to the global financial services major, emerging markets are under pressure as investors reassess the risks amid monetary policy normalisation in developed markets, trade protectionism and China’s economic slowdown.

The new gauge, Damocles, which assessed the risk of exchange rate crises for 30 emerging market economies, noted that seven countries were at risk of exchange rate crises with scores over 100: Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine. A score above 100 suggests a country is vulnerable 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 has a score of 175, followed by South Africa (143), Argentina (140), Pakistan (136), Egypt (111), Turkey (104) and Ukraine (100). India’s score stood at 25.

On India, the report said CPI inflation had moderated (to around 4.5 percent in 2018 from 9.7 percent in 2012), as had the current account deficit (around 2.5 percent of GDP versus 5 percent). Moreover, the central bank has a sufficient forex reserve buffer, as a result, India’s score has fallen to 25 in the July-September quarter.

Given that India runs a current account deficit, it remains vulnerable to bouts of global risk aversion,” Nomura said, adding that higher oil prices and portfolio outflows are its key external vulnerabilities”.

The other risk factors for the Indian economy stem from the government turning more populist ahead of the 2019 general elections and a sharper-than-expected domestic growth slowdown, which in turn would trigger equity outflows, it added.

The Indian rupee has depreciated 13 percent so far in 2018 and has touched a historic low of Rs 72.67 to a dollar.

CBSL refutes Nomura’s analysis that SL economy risks currency crisis

Nomura Holdings Inc., releasing their latest analysis, lists Sri Lanka among the seven emerging economies at risk of an exchange-rate crisis, reported several foreign media.

Nomura’s Damocles” model –an early warning model – showed Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine as the next in line for an exchange rate crisis.

The economists used eight indicators as they tried to predict the next emerging market currency crisis – import cover, short-term external debt/exports, exchange rate reserves/short-term external debt, broad money/exchange rate reserves and real short-term interest rate.

Nomura’s analysis lists Sri Lanka as the country that is most vulnerable to an exchange rate crisis. The article that appeared on www.ft.com quotes Nomura analysts as saying Sri Lanka had the worst outlook, and with high short term external debt (US$ 160 billion), [Sri Lanka]’s refinancing needs are large.”

However, the Central Bank of Sri Lanka (CBSL) has issued a statement contradicting these findings stating that Nomura had made a computational error.

According to CBSL Sri Lanka’s short term external debt is nowhere near the US$ 160 billion figure that Nomura analysts have quoted. CBSL claims, Nomura Holdings have made a serious computational error with regard to Sri Lanka’s external vulnerability”.

As such an erroneous report could to trigger an unwarranted panic amongst investors, particularly in the context of current volatile global market conditions, CBSL has already written to Nomura Holdings, and requested them to correct this error without any delay, stated CBSL.

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