BRICs biggest currency depreciation since 1998 to worsen

Real, ruble, rupee and yuan falling fast

Chinese yuan Chinese yuan

June 25 (Bloomberg) -- The largest emerging markets, whose economies grew more than four-fold in the past decade, are making losers out of everyone from central bankers to Procter & Gamble Co. as their currencies post the biggest declines since at least 1998.

For the first time in 13 years, the real, ruble and rupee are weakening the most among developing-nation currencies, while the yuan has depreciated more than in any other period since its 1994 devaluation. P&G, the world’s largest consumer-goods maker, cut its profit forecast for the second time in two months last week in part because of currency losses. Brazil’s Fibria Celulose SA, the biggest pulp producer, asked banks to loosen restrictions on dollar loans as the real hit a three-year low.

Investors are fleeing the four biggest emerging markets, known as the BRICs, after Brazil’s consumer default rate rose to the highest level since 2009, prices for Russian oil exports fell to an 18-month low, India’s budget deficit widened and Chinese home prices slumped. Investors are bracing for more losses as economic growth slows.

“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.”

Ruble’s Retreat

Currencies from Brazil, Russia and India will probably decline at least 15 percent further by year-end, said Jen, the former head of global currency research at Morgan Stanley.

Russia’s ruble lost 12 percent this quarter through today, the biggest drop among the 31 most-actively traded currencies tracked by Bloomberg. The 11 percent depreciation in the real and rupee was almost twice the retreat in the euro. China’s yuan, which was kept unchanged during the global financial crisis in 2008 and 2009, fell 1 percent since March after the government widened the amount the currency is allowed to fluctuate each day.

The ruble sank 2.4 percent last week, while the rupee fell 2.9 percent to a record low against the dollar and the real dropped 0.8 percent.

Foreign Reserves

India’s currency rebounded 0.3 percent today as the government said it increased the amount of rupee-denominated debt overseas investors can own, one of several measures unveiled to support the currency. The yuan fell as much as 0.3 percent to 6.3827 per dollar, the weakest level since Nov. 29, before closing little changed. The ruble lost 0.3 percent.

A decade after Goldman Sachs Group Inc.’s Jim O’Neill coined the term BRIC, China has become the second-largest economy while Brazil, India and Russia are among the 11 biggest worldwide. Their combined gross domestic product rose to $13.3 trillion last year from $2.8 trillion in 2002 as their share of the global economy increased to 19 percent from 8 percent, according to IMF data. Together, they control $4.4 trillion in foreign-exchange reserves, about 40 percent of the total.

The MSCI BRIC Index of shares has surged 281 percent during the past decade, compared with 34 percent for the Standard & Poor’s 500 Index as the real and the yuan strengthened more than 30 percent. Local-currency debt in the BRIC nations returned an average 86 percent in dollar terms since data for JPMorgan Chase & Co. indexes on all four countries began in October 2005, versus a 48 percent increase in U.S. Treasuries.

Export Boost

The countries are still strong enough to account for 80 percent of growth at New York-based Goldman Sachs, the fifth- biggest U.S. bank by assets, Chief Executive Officer Lloyd Blankfein said at the St. Petersburg International Economic Forum in Russia’s second-largest city on June 21.

Weaker currencies will stimulate economic expansion by making exports more competitive, said Warren Hyland, an emerging-market money manager at Schroder Investment Management, which oversees about $319 billion worldwide. He’s been buying ruble bonds of Russian companies.

Earnings at the nation’s commodity producers, including OAO GMK Norilsk Nickel and Polyus Gold International Ltd., will get a boost because their sales are in dollars while the bulk of their costs are in rubles, New York-based Morgan Stanley said in a report this month.

Weaker currencies are hurting U.S. companies that rely on developing-nation revenue to offset slower growth in the U.S., Europe and Japan.

Lower Forecasts

P&G, led by Chief Executive Officer Bob McDonald, said in a June 20 presentation at the Deutsche Bank Global Consumer Conference in Paris that foreign-currency fluctuations will cut 2013 earnings growth for the maker of Tide washing detergent and Bounty paper towels by about 4 percentage points. China is the Cincinnati-based company’s second-largest market and some of the firm’s biggest businesses are in Russia and Brazil, P&G said.

Philip Morris International Inc., the world’s largest listed tobacco company, reduced its 2012 earnings forecast the next day because of currency swings. The New York-based maker of Marlboro cigarettes gets more than 40 percent of its operating profit from Asia and Latin America, according to data compiled by Bloomberg.

Pandit’s Expansion

A weaker real and lower interest rates in Brazil may reduce Coca-Cola Co.’s second-quarter profit by $30 million, according to JPMorgan. The Atlanta-based company left about $3 billion in cash in Brazil at the end of 2011 to take advantage of the country’s higher interest rates, Chief Financial Officer Gary Fayard said in a conference call in February. Half of the positions were left unhedged, he said.

Brazil’s central bank President Alexandre Tombini has cut the benchmark Selic rate by 2.5 percentage points this year to 8.5 percent, while the real has depreciated 9.7 percent.

“We continue to be concerned by Coke’s reliance on this income source,” JPMorgan analysts led by John Faucher wrote in a note to clients on June 7, reducing their 2012 profit estimate to $4 a share from $4.06.

Kent Landers, a spokesman for Coca-Cola, declined to comment.

Citigroup Inc., which has been expanding in Latin America and Asia under Chief Executive Officer Vikram Pandit, may take a $3 billion to $5 billion “hit” this quarter related to foreign exchange losses, Charles Peabody, a New York-based analyst at Portales Partners LLC, said in an interview with Bloomberg Television on June 20. The losses may reduce Citigroup’s book value, or assets minus liabilities, he said.

Fibria Loans

Peabody, whose recommendations on shares of New York-based Citigroup during the past year produced the highest total return among 31 forecasters tracked by Bloomberg, cut his rating on the stock to the equivalent of sell from buy in March.

“Citi’s unique global footprint and exposure to the higher economic growth regions of the world will drive above-average book value growth over time,” Jon Diat, a Citigroup spokesman, said in an e-mail. “The suggestion that having non-U.S. exposure is somehow detrimental to Citi’s ability to continue to grow value over time is simply wrong.”

Local companies in the BRIC countries are also being hurt. Sao Paulo-based Fibria said on June 11 that it renegotiated loan covenants after the real’s decline increased the cost of servicing foreign obligations. About 90 percent of the company’s net debt is in dollars, according to company filings.

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