A recent Bloomberg article showed how the largest emerging markets are seeing their currencies post the biggest declines since at least 1998, and how the devaluation is affecting local businesses with dollar-denominated debt.
It cites Brazil’s Fibria Celulose, the biggest pulp producer, which asked banks to loosen restrictions on dollar loans as the real hit a three-year low. About 90 percent of the company’s net debt is in dollars, according to company filings.
Another company to take a hit is Coca-Cola. A weaker real and lower interest rates in Brazil may reduce its second-quarter profit by $30 million, according to JPMorgan. Coca-Cola Co left about $3 billion in cash in Brazil at the end of 2011 to take advantage of the country’s higher interest rates, the CFO said in February. Here is the bummer: half of the positions were left unhedged.
“We continue to be concerned by Coke’s reliance on this income source,” JPMorgan analysts wrote two weeks ago.
“I am quite bearish,” Stephen Jen, a managing partner at hedge fund SLJ Macro Partners LLP and a former economist at the International Monetary Fund, said in a phone interview from London. “When the global economy and capital flow slow down, it’s going to expose a lot of problems in these countries and make people stop and ask questions. A run on the currency could be particularly ugly.”
“All the BRIC looked ugly,” said currency trader and hedge fund manager John Taylor. According to him, the Brazilian real and the Russian ruble will suffer “fairly decent” declines later this year as a global recession spurs investors to buy dollars as a haven.
A surge in bad loans in Brazil will weaken the real further, said Amit Rajpal, who manages global financial funds for London-based Marshall Wace LLP (the same guy who wrote early last year that “Brazil may be heading for subprime“).
“What we’ll see now is basically a full-blown credit problem,” said Rajpal, who predicts rising defaults in Brazil will resemble the collapse of the U.S. subprime mortgage market five years ago.