Dollars Surge Pummels Companies in Emerging Markets - Article Example

       The article updated by Ian Talley and Anjani Trivedi in the Wall Street Journal on December 30, 2014, discusses how the appreciation of the dollar against emerging market currencies is likely to affect the functioning and net worth of several companies from these markets. 

Summary

       The dollar is on a continuous upswing against several world currencies, especially currencies of the emerging economies such as Brazil, Thailand, Indonesia, and Malaysia. The article reports that the dollar has appreciated, on average, by 7 percent in the last few months when compared with the currencies of these countries. The companies in these countries that issued bonds in dollar denominations are likely to hurt significantly. Earnings of these companies are not only likely to dip due to this unexpected higher payment on outstanding bonds but also their reserves may get hurt. However, economists believe this is not likely to resin into a full-blown crisis Post the 2008 financial crisis, the outstanding boo as issued by companies and countries have soared four times – exceeding $6 trillion. Currently, the Turkish lira, Chilean peso, Indonesian rupiah, and Brazilian real are trading against doing the liar at their lowest. The impact is likely to increase further when the Federal Reserve revises its interest rates upwards for the first time after the financial crisis set in. Strong dollar within the US will affect all exporters as their products will cost higher to importers. the Even world's leading institutions such as the Bank for International Settlements and the International Monetary Fund have shown their apprehension about the likely corporate defaults and asset-price busts in the months ahead. It is expected that Virgolino de Oliveira SA from Brazil will struggle to pay off its dollar-denominated debts. Similarly, Petronas from Malaysia has huge debts in US dollars and is likely to face severe economic shortly future.

Reflection

       From the article, it is amply clear that companies from emerging markets, especially those who have accumulated a significant amount of dollar-denominated debt without matching dollar-related export earnings are likely to suffer heavily.  This also implies that companies from emerging economies whose earnings are solely dependent on exports are likely to get benefitted as they will report higher earnings in the terms of local currency.  At the same time, all importers without any export commitment will suffer due to increased costs. It is like emerging market growth rates may likely fall. It is advisable from investments in emerging economies untitled market fully stabilizes.

Implications

      Economic implications of appreciating the dollar and reducing crude oil prices across the world are likely extensively leading to recession for many emerging economies. While the dollar appreciating and interest rates in the US getting revised upwards, asset valuations in emerging economies are likely to suffer significantly. Markets are likely to remain in turmoil in the coming months.