Emerging markets are in far greater danger of a financial crisis than their developed peers, and Hong Kong has the most to fear, according to an update of Nomura Singapore Limited’s collection of early-warning indicators. Hong Kong and China are the only constituencies in grave danger of a financial crisis or sharp drop in domestic demand in the next three years, with the red flags more prominent for Hong Kong than even during the peak of the Asian financial crisis in 1997-98, according to the research note published Wednesday by Nomura’s Rob Subbaraman and Michael Loo.
“The results continue to show that EM countries are considerably more vulnerable than DM countries to credit and financial stress,” Subbaraman and Loo wrote. At the same time, they found tentative evidence that China’s status is improving amid deleveraging efforts.
Taking some cues from work by the Bank for International Settlements, the Nomura economists tested the reliability of indicators used to gauge conditions across 30 countries dating to the early 1990s and separated equally among Asian economies, emerging markets, and developed markets.
The economists found that five gap measures were most accurate in predicting a financial crisis within the ensuing 12 quarters:
Private credit-to-GDP Private debt-service ratio Real effective exchange rate Real property prices, and Real equity prices
Judging by the most reliable 60 signals, Nomura determined that a financial crisis or demand plunge is typical for those economies that see at least 30 of those signals flashing red. Hong Kong is “well in the danger zone” with 52, and China still should be on guard at 33.
Thailand, Colombia, and the Philippines are the closest to the unfavorable threshold at 21, 20, and 19, respectively. The only Asian economies among the 14 that have zero signals flashing red are India and South Korea, the data show.