The paper "Dollar’ s Surge Pummels Companies in Emerging Markets by Talley and Trivedi" is a delightful example of an article on macro and microeconomics. The paper reviews the article published in the Wall Street Journal under the title Dollar’ s Surge Pummels Companies in Emerging Markets. After a brief introduction, the paper aims at producing a gist of the article describing how companies in the emerging market such as Indonesia, Brazil or Malaysia are likely to be impacted in the coming months. Will there be a huge upheaval in the emerging markets and the world economy at large?
What kinds of companies are likely to be affected most in the emerging markets? Or in view of the likely economic disruption in emerging markets what course of investment action one needs to make? These are some of the crucial points that will be discussed in this paper. Introduction 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 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 result in a full-blown crisis. The post-2008 financial crisis, the outstanding bonds 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 the dollar 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. Even worlds 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 likely to face severe economic woes in the near future.
Reflection From the article, it is amply clear that companies from emerging markets, especially those who have accumulated the 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 terms of local currency. At the same time, all importers without any export commitment will suffer due to increased costs. It is likely that emerging market growth rates may begin to fall down.
It is advisable to keep from investments in emerging economies until the market fully stabilizes. Implications Economic implications of appreciating dollar and reducing crude oil prices across the world are likely to be extensively leading to recession for many emerging economies. While 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.