Across the 33 EM countries assessed each month by Nordea, only one has been assigned a red traffic light indicating the risk of extreme pressure on its currency over the next six months: Nigeria.
The traffic light system works by finding the risk indicators that have been “flashing in the months prior to historical periods of extreme currency pressure, and then uses the current level of those indicators to assess the risk in the period ahead”, the Nordic bank explained.
It has identified nine:
- Money supply growth relative to GDP growth (credits);
- Short-term external debt relative to FX reserves;
- GDP growth;
- Capital flows;
- Sovereign rating from S&P;
- FX over-valuation;
- Commodity prices; and,
- A measure of contagion.
It then assigns a colour based on the probability of extreme pressure on the local currency in at least one of the next six months.
Anything above 40% is flagged as red; amber if it is between 20-40%; or green for below 20% probability.
Nordea stresses that the traffic light system “is one tool and does not cover all risk”.
“A green light does not imply no risks.”
Of the nine indicators outlined above, Nigeria was red in four; namely Credits, Rating, FX over-valuation, and Commodities.
Its short-term external debt and inflation were flagged as amber; while it scored green for GDP, Capital flows and Contagion.
This gave it an overall rating of 52% – a 12 percentage point increase compared with the EM Traffic Light for September.
While Nigeria may have the dubious honour of being the sole representative of the red section of the leader board, movement has been recorded for currencies with a moderate risk of extreme pressure.
In September, Africa’s largest economy was one of four amber countries; alongside Singapore, Saudi Arabia and South Korea.
While the latter three currencies retain their position this month, they are joined by Taiwan, Hong Kong and Israel.
Across the board
The average extreme pressure risk across all currencies is 16% for October, up from 11% in September.
Every single country was flagged red for Credits and Rating.
The third most common category to hit a red traffic light was GDP; which was the case for Singapore, South Korea, Hong Kong, Thailand, Czech Republic, Peru, Mexico, Philippines and Ukraine.
The country at the very bottom of the rankings is Argentina, which recorded a 6% risk of extreme currency pressure in the next six months.
This was down from 7% from September.
Last month, pole position was taken by Indonesia, which indicated there was just a 5% risk. This has risen to 6% this month.