Central and Eastern European countries ranked in the top 10 of the new financial risk index
Hungary, Poland and Romania are ranked in the top quarter of a new financial risk index. Nomura says countries should act now to reduce the risk of a crisis in the next three years.
Three Central and Eastern European economies have been flagged by a new analysis which identifies the countries most at risk of financial crisis in the medium term.
Hungary and Poland are in the top 10 countries identified by investment bank Nomura as the most vulnerable to a shock over the next 12 quarters – with Romania just outside at number 11.
Nomura economists focused on five early warning indicators: the ratio of private credit to GDP; the debt service ratio; actual stock prices; real estate prices; and the real effective exchange rate.
Nomura’s clue, which he nicknamed Cassandra after the Greek mythological figure whose warnings were fatally ignored, currently highlights six economies – the United States, Japan, Germany, Taiwan, Sweden. and the Netherlands – as vulnerable to financial crises over the next 12 quarters, with scores above 100.
While the three Central and Eastern European countries all have lower scores of 38, they contrast with 21 economies in the assessment that are considered to have no risk of crisis, including countries like Australia, l Spain and the UK which drew warnings from other forecasters.
Rob Subbaraman, chief economist of Nomura and head of global macroeconomic research, said he was concerned that only six countries crossed the threshold due to 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 reached 70 on the index.
“Cassandra suggests that in fact the navigation is not always smooth. There are quite a few countries that are approaching this vulnerability threshold 100. Countries that are between 70 and 100 years old are starting to worry a little. “
He said policymakers in countries with a high reading should consider tighter macro-prudential policies, such as lowering mortgage-to-value ratios and lowering debt-to-income ratios.
While macroprudential measures would be preferable to tightening monetary policy, he said policymakers in CEECs would be right to raise interest rates in the face of rising inflation. “If you have inflation as well as signs of financial vulnerability, that just adds another reason to start raising rates,” Subbaraman said.
The National Bank of Romania (NBR) said the analysis was “not … very plausible”, pointing to a recent European Systemic Risk Council report which gave it a low risk rating and found that prices of real estate were 36% undervalued against their core values. .
A spokesperson added: “In a paper prepared by the NBR, we estimated the likelihood of a banking crisis event that showed a relatively weak and downward trend between 2014 and 2019.”
Nomura also added a measure of climate change risks to account for the physical risks of climate change and the transition risk of moving towards a greener economy. “Both lead to more financial vulnerabilities,” he said.
The combination of climate change and interest rate shocks pushed readings for Romania to 91 and Hungary to 81. He said countries that failed to adequately manage the transition were facing to the risks of higher financing costs and falling asset prices. “The longer it takes for policymakers to address financial vulnerabilities, the greater the damage in the long run,” he said.