Thank God! India among top EMs that show no signs of major financial stress

Global research firm, Nomura, has flagged concerns on financial stress in emerging markets (EMs) based on what it calls ��early warning indicators�� (EWIs). However, India, among other few Asian economies, is an exception as it showed no signs of stress in the past three years.

In a research note, the firm highlighted how emerging markets showed signals in the past 12 quarters, which qualified as EWIs. "Note that our EWIs are designed to warn of domestic credit and financial risks rather than balance of payments risk," it said in a statement. These EWIs flash a signal of a financial crisis occurring within the next 12 quarters when they breach predefined thresholds.

Nomura noted that Asia was most at risk among these segments. On a nation-specific basis, Hong Kong tops the chart with around 52 signals in the past 12 quarters, while India, Korea, Hungary, and Poland were among the few nations that showed no signs of risk.

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This is a major change from the conditions just before the global financial crisis when, in Q3 2008, the 12 DMs had a whopping 251 EWIs flashing red. Zooming in on Asia, Hong Kong looks the most vulnerable, with 52 EWIs flashing, up from 50 in Q3 �� more than during the peak of the Asian crisis.

��Buffers notwithstanding, Hong Kong has the classic symptoms of what have caused many past financial crises: an overvalued property market and high debt, leaving the city vulnerable to an accelerated Fed hiking cycle (local rates are closely linked to US rates because of the HKD peg),�� analysts at Nomura wrote in the note.

Meanwhile, it observed that China showed encouraging trends as indicators point to a peaking out of such threats. EWIs in China peaked in Q2 2017 at 36, before falling to 35 in Q3 and 33 in Q4.

This presents tentative evidence that financial deleveraging efforts are starting to pay off, Nomura added in its report.

��Credit and property gaps (from their long-run trend) have narrowed from 15.8pp and 28.0pp in Q3 2017, respectively. Overall, these are nascent signs that China��s policy efforts to crack down on shadow financing and property market speculation are paying dividends.�� First Published on Jun 22, 2018 12:40 pm