FeaturedNationalVOLUME 18 ISSUE # 02

Crisis after crisis

Pakistan faces a currency crisis, which may raise its risk of default in the next 12 months. The situation appears to be alarming but it is hoped Pakistan will overcome it with the help of international organisations and friendly countries, as has happened in the past.

According to an international finance services company, Egypt, Romania, Sri Lanka, Turkey, Czech Republic, Pakistan and Hungary are now at a high risk of currency crises. Nomura, the Japanese bank, said that 22 of the 32 countries covered by its in-house “Damocles” warning system have seen their risk rise since its last update since May, with the largest increases in the Czech Republic and Brazil. It meant the sum of the scores generated on all 32 by the model had increased sharply to 2,234 from 1,744 since May. “This is the highest total score since July 1999 and not too far from the peak of 2,692 during the height of the Asian crisis,” Nomura economists said, calling it “an ominous warning sign of the growing broad-based risk in emerging market (EM) currencies”.

The model crunches eight key indicators on a country’s FX reserves, exchange rate, financial health and interest rates to give an overall score. Based on data from 61 different EM currency crises since 1996, Nomura estimates that a score above 100 indicates a 64pc chance of a currency crisis in the following 12 months. Egypt, which has already devalued its currency heavily twice this year and sought an International Monetary Fund (IMF) programme, now generates the worst score at 165. Romania is the next on 145 having been propping up its currency with interventions. Default-stricken Sri Lanka and currency crisis-regular Turkey both generate scores of 138, while the Czech Republic, Pakistan and Hungary notch 126, 120 and 100 respectively. Nomura also ran the Damocles model on the G7 group of leading economies, with the results showing that all but Japan now have Damocles scores above the 100 threshold, led by the United States and Britain.

EM economies are still more vulnerable. Most have not fully recovered from the COVID-19 pandemic and now face high inflation, limited fiscal space, negative real interest rates, a weaker balance of payments and diminished FX reserve cover. “It is somewhat surprising that there have not been more full-blown EM currency crises this year,” Nomura added. “Then again, EM challenges are far from over. The late Professor Rudiger Dornbusch once said, a crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought”.

The slow inflow of foreign loans compared to the estimates during July-October 2022 mounted pressure on the rupee against the US dollar. On the other hand, Pakistan’s benchmark 5-year Credit Default Swap (CDS) dropped significantly on November 22 by a whopping 5,224 basis points to 71.64pc. The risk has waned but it is still high. Finance Minister Ishaq Dar once again said that Pakistan does not face any default risk. “There is no default risk, I would say that we have a zero percent default risk,” Dar said in an interview. As per data provided by Arif Habib Limited (AHL) last week, Pakistan’s 5-Year credit default swap (CDS) increased from 5,620bps on November 14 to 7,550bps on November 15, an increase of 1,929.6bps.

State Bank of Pakistan Governor Jameel Ahmad said the country would repay a $1 billion international bond on December 2, three days before its due date in a bid to allay growing uncertainty about Pakistan’s ability to meet external financing obligations. Pakistan’s reserves with the central bank stood at $7.8b as of November 18, barely enough to cover a month’s imports.

The global economy should avoid a recession next year but the worst energy crisis since the 1970s will trigger a sharp slowdown, with Europe hit hardest, the Organisation for Economic Cooperation and Development warned in a report. It suggested that fighting inflation should be policymakers’ top priority. It forecast that world economic growth would slow from 3.1pc this year – slightly more than it foresaw in its September projections – to 2.2pc next year, before accelerating to 2.7pc in 2024. “We are not predicting a recession, but we are certainly projecting a period of pronounced weakness,” OECD head Mathias Cormann told a news conference to present the organisation’s latest Economic Outlook.

The OECD said the global slowdown was hitting economies unevenly, with Europe bearing the brunt as Russia’s war in Ukraine hits business activity and drives an energy price spike. It forecast that the 19-country eurozone economy would grow 3.3pc this year then slow to 0.5pc in 2023 before recovering to expand by 1.4pc in 2024. That was slightly better than in the OECD’s September outlook, when it estimated 3.1pc growth this year and 0.3pc in 2023. The OECD predicted a contraction of 0.3pc next year in regional heavyweight Germany, whose industry-driven economy is highly dependent on Russian energy exports – less dire than the 0.7pc slump expected in September. Even in Europe outlooks diverged, with the French economy, which is far less dependent on Russian gas and oil, expected to grow 0.6pc next year. Italy was seen eking out 0.2pc growth, which means several quarterly contractions are probable.

Outside the eurozone, the British economy was seen shrinking 0.4pc next year as it contends with rising interest rates, surging inflation and weak confidence. Previously the OECD had expected 0.2pc growth. The U.S. economy was set to hold up better, with growth expected to slow from 1.8pc this year to 0.5pc in 2023 before rising to 1pc in 2024. The OECD had previously expected growth of only 1.5pc this year in the world’s biggest economy and its estimate for 2023 was unchanged.

China, which is not an OECD member, was one of the few major economies expected to see growth pick up next year, after a wave of COVID lockdowns. Growth there was seen rising from 3.3pc this year to 4.6pc in 2023 and 4.1pc in 2024, compared with previous forecasts of 3.2pc in 2022 and 4.7pc for 2023.

As tighter monetary policy takes effect and energy price pressures ease, inflation across OECD countries was seen falling from more than 9pc this year to 5.1pc by 2024. “On monetary policy, further tightening is needed in most advanced economies and in many emerging market economies to firmly anchor inflation expectations,” Cormann said. While many governments had already spent heavily to ease the pain of high inflation with energy price caps, tax cuts and subsidies, the OECD said the high cost meant such support would have to be better targeted going forward.

The two reports show it is not only Pakistan that is facing issues. Other economies are also facing problems after the onset of the pandemic and Russia-Ukraine war. It is hoped Pakistan will overcome its problems by adopting prudent economic policies. However, it badly needs political stability.