By Phil Thornton
Three central and eastern European economies have been flagged up by a new analysis that identifies countries most at risk of a financial crisis over the medium term.
Hungary and Poland are in the top 10 of the countries identified by Nomura investment bank as most vulnerable to a shock within the next 12 quarters — with Romania just outside on number 11.
Nomura’s economists focused on five early warning indicators: the ratio of private credit to GDP; the debt service ratio; real equity prices; real property prices; and the real effective exchange rate.
Nomura’s index, which it has dubbed Cassandra after the mythological Greek figure whose warnings were fatally ignored, is currently highlighting six economies — the US, Japan, Germany, Taiwan, Sweden and the Netherlands — as vulnerable to financial crises over the next 12 quarters, with scores over 100.
While the three CEE countries all have lower scores of 38, they contrast with 21 economies in the assessment that are deemed as having zero risk of a crisis including countries such as the Australia, Spain, and the UK that have attracted warnings from other forecasters.
Rob Subbaraman, Nomura’s chief economist and head of global macro research, said he was concerned the reason only six countries breached the threshold was due to the current historic low levels of interest rates.
“So, we did a stress test where we shocked Cassandra with an interest rate shock,” Subbaraman told Global Markets. Hungary and Romania both rose to 70 on the index.
“Cassandra’s suggesting that, actually, it's not all smooth sailing going ahead. There’s quite a few countries that are getting close to that vulnerability 100 threshold. Countries that are between 70 and 100 are starting to give a bit of concern.”
He said policymakers in countries with a high reading should consider tighter macro-prudential policies, such as cutting mortgage loan to value ratios and reducing debt to income ratios.
While macroprudential measures would be preferable to tightening monetary policy, he said CEE policymakers would be right to raise interest rates in the face of rising inflation. “If you have inflation as well as signs of financial vulnerabilities, that just adds more reason for starting to raise rates,” Subbaraman said.
The National Bank of Romania (NBR) said the analysis was “not… very plausible”, pointing to a recent European Systemic Risk Board report that gave it a low risk rating and estimated property prices as being undervalued by 36% compared to their fundamental values.
A spokesperson added: “In one paper developed by NBR, we estimated the probability of a banking crisis event that showed a relatively low and decreasing trend between 2014 and 2019.”
Nomura also added in a measure for climate change risks to account for the physical risks around climate change and the transitional risk of moving towards a greener economy. “Both result in more financial vulnerabilities,” he said.
Combining the climate change and interest rate shocks pushed the readings up for Romania to 91 and Hungary to 81. He said countries that failed to tackle the transition adequately faced risks of higher financing costs and falls in asset prices. “The longer it takes for policymakers to address financial vulnerabilities, the greater the damage further down the road,” he said.