Sri Lanka among EM countries at risk of Exchange-Rate Crisis, says Nomura analysis

According to analysis by Nomura Holdings, seven emerging economies including Sri Lanka are at risk of an exchange-rate crisis. The other countries include  South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine.

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, Bloomberg reported quoting the research.

 Nomura is an Asia-headquartered financial services group with an integrated global network spanning over 30 countries. Nomura's research dates back to 1906, when it became the first company in Japan to establish a research department. Today, Nomura has 300 research specialists stationed in 15 regions around the world, covering politics, economics, foreign exchange, interest rates, equities, credit and quantitative strategies.

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.

“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