James Kelleher and Martinne Geller Chicago and London
International companies are taking steps to mitigate the effects of the turmoil in emerging markets, including hedging foreign currency exposure more aggressively, reducing some investment plans, cutting costs, and raising prices.
While executives are not hitting the panic button just yet, and many say the risks they face are hardly unique, they are still aggressively tackling costs and making sure that revenue keeps up with inflation. And many warn that if China suffers a credit crisis, things could get a whole lot worse.
From Africa to Asia to Latin America, policymakers are scrambling to prop up their currencies and prevent a sudden exodus of foreign capital by jacking up interest rates and taking other steps – all this just as many emerging economies were already starting to slow sharply after a 10-year boom.
The sudden onslaught of market volatility in Turkey, Argentina, South Africa and Brazil, along with worries about an abrupt slowdown in China, means companies are now bracing for deeper reversals in demand for their products in emerging economies. And this is happening at a time when their dollar or euro revenues from many of these countries are also taking a hit because of plunging emerging market currencies.
Ford Motor, Fiat, Whirlpool and Diageo all cited weakness and a more sober outlook in emerging markets in earnings reports last week.
Still, for many executives, especially those with decades of experience in the developing world, wild currency swings and economic ups and downs are a fact of life that they must deftly navigate.
“We have had quite a bit of currency changes, particularly in the very weak emerging markets. But let’s put it in context,” Whirlpool chairman and chief executive Jeff Fettig said. “We’ve been in the Brazilian market for over 60 years and we’ve managed hyper inflationary periods, busts, booms, and we’ve never had a loss-making year in Brazil.”
Fettig said Whirlpool was not overly concerned that the downturn in emerging markets would significantly affect the company financially, since the most troubled economies made up less than 3 percent of overall revenue. The company had taken steps in countries where currency devaluations had occurred to recoup dollar-based raw materials costs.
Economists at Bank of America Merrill Lynch described the turmoil of the past week as “a perfect storm of idiosyncratic risks” within emerging markets – citing credit risks in China, political crises in Turkey, Ukraine and Thailand, and the currency devaluation in Argentina.
While all these events further dimmed an already bearish outlook for many emerging economies, a full-fledged crisis does not look likely.
While voicing concerns about the year ahead in developing economies, executives all stressed their long-term commitment.
“Overall, we like emerging markets. What worries me are the currency fluctuations and the unrest in some of the countries,” Philips chief executive Frans van Houten said.
Meanwhile, the International Monetary Fund has said some developing countries needed to take action to “improve fundamentals”.
“The turbulence also underscores the need for vigilance among central banks over liquidity conditions in international capital markets,” the fund said on Friday. – Reuters