February 23, 2018

News in Charts: Crisis Watch: Not So Quiet in Sudan

by Fathom Consulting

Fathom’s Financial Vulnerability Indicator (FVI) combines high and low frequency, macro and financial market data in a rigorous analytical framework. It identifies the vulnerability of more than 170 countries to one or all of 4 types of financial crisis — banking, currency, sovereign and sudden stop — over the next 12 months. All variables in the model are updated on a quarterly basis, with higher frequency, financial market data updated more regularly. We track the movements of all the key financial market variables used in the FVI on a weekly basis to see which flag up.

The FVI highlights how episodes of financial crisis are perhaps more frequent than many would think, with the chart below showing both the proportion of countries and the proportion of the world (using PPP-GDP weights) that are in crisis at different points in time. Periods around recessions are clearly consistent with a larger share of countries suffering a crisis, but 10 to 15% of all countries is not an uncommon share even during supposedly quiet periods.

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The FVI is also able to discriminate across crisis types. For example, sudden stop and banking crises have been less correlated with the global macro cycle, while the currency and sovereign crises of the early 1980s, 1990s and 2010s have all been more closely aligned with it.

One country that is currently flagging up as being in crisis is Sudan. The Sudanese pound has weakened by over 60% since the beginning of last month and has interesting implications for the currency crisis FVI. We have used an ‘exchange market pressure’ (EMP) index defined as a weighted average of: the depreciation of the nominal exchange rate; the percentage change in international reserves; and the change in interest rates to gauge whether Sudan is in currency crisis territory. Once the EMP has been computed, a z-score is then calculated and compared against a critical value. Following the depreciation of its exchange rate, Sudan exceeds the critical value and under this metric is in a currency crisis. Nevertheless, going forward Sudan is less vulnerable to suffering subsequent currency crises largely because it has just suffered one.

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If a country is in a currency crisis, as Sudan is, that in turn increases a country’s vulnerability to suffering a sovereign crisis (as all crisis types are interlinked). The impact of this change is reflected in the chart below. As a result, Sudan’s probability of suffering a sovereign crisis within the next 12 months has risen almost three-fold.

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Further charts based on the FVI are available on the Thomson Reuters chartbook via Datastream.


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