Nomura Investment Bank: Romania Could Face a Currency Crisis

Nomura Investment Bank warns Romania about a potential exchange rate crisis. Turkey is the first country hit by this sort of crisis, and the Turkish lira is dramatically losing its value daily. The inflation rate in Turkey exceeds 40%, and the perspectives are not optimistic at all. The Turkish lira lost 40% of its value only during the last month.

This is the context of the analysis conducted by Nomura, the Japanese investment bank. The experts from Nomura, cited by Financial Times, warn a series of emerging market countries, including Egypt, Sri Lanka, Romania, and Turkey, that they are at risk in an upcoming exchange rate crisis.

The reason for including these countries in the riskiest category is they have all scored very low at three main characteristics. The analysis considered external debt as a percentage of gross domestic product, the ratio of foreign exchange reserves to imports, and the stock market index.

The Japanese specialists use a particular index to predict the countries at risk, Damocles, which monitors exchange rate risks in 32 emergent countries. Each time Damocles exceeds 100 points, there is a risk involved regarding the local currency. For Romania, it reaches 115 points, while Turkey is at 108 and Sri Lanka at 104. Notably, the riskiest country from this perspective is Egypt, with 175 points. As a comparison, in 2018, Romania registered 61 points on Damocles ranking, significantly low.

Damocles, an early warning system, proved to be right in 64% of cases in the last 25 years, a reasonable rate of predicting the risks. Also, the index indicates the inevitable up to 12 months before, which is quite a timespan for those responsible for taking proper measures.

The loans from the external markets, contracted frantically by the Romanian Government and the low level of foreign exchange reserves make Romania a country at risk for foreign currency. On top of that, the 7% inflation rate and the weak Leu (RON – Romanian currency) contribute to the worst-case scenario.

Will the new Government in Romania, to be sworn in on Thursday, November 25th, be ready to face this crisis when it comes? Will this crisis miss Romania in the following months? Only the future will tell, but what happens in Turkey is to be avoided at all costs in all the emerging countries.