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Candidates For Currency Woes


Economic Trends

CANDIDATES FOR CURRENCY WOES

The next Mexico? Take your pick

Although investors became a bit disillusioned with emerging economies after the Mexican peso's crash in late 1994, the huge profit opportunities offered by such markets have inevitably attracted fresh flows of investment funds. Yet as Nariman Behravesh of DRI/McGraw-Hill observes, the risks of investing in emerging markets haven't disappeared. "Poor economic policies or political instability," he says, "can still precipitate a sudden currency decline."

Where is the next currency crisis likely to occur? To assess the risks, DRI weighs such possible danger signals as large current-account deficits, low savings rates and foreign exchange reserves, and capital inflows skewed toward portfolio rather than direct investments. It also assesses such political woes as wars and domestic unrest.

According to DRI's Global Risk Service, Brazil currently heads its list of nations that could suffer a sizable currency depreciation over the next year. Others high on the list include Taiwan, Turkey, Malaysia, and India (chart).

Economic factors threaten Brazil's and Malaysia's currencies. Brazil's exploding budget deficit has forced the central bank to jack up interest rates to quell inflation, leading to an overvalued currency and trade imbalance. Malaysia's boom, along with shortages of skilled labor and infrastructure bottlenecks, has imports surging. With its currentaccount deficit nearing 10% of gross domestic product, investors are jittery.

By contrast, Taiwan's currency vulnerability is largely due to a political factor: its tense relations with China. In Turkey, which suffered a huge devaluation in early 1994, a recently elected, shaky coalition government may be unable to implement austerity measures needed to curb government spending and temper a chronic, 80% inflation rate. And India's currency is being buffeted by uncertainty over upcoming elections, a major political scandal, a worsening budget deficit, and rising inflation.

Although the chances of a big near-term currency decline in any specific nation on this list is no higher than about one in three, Behravesh notes that the likelihood that at least one will suffer such a crisis is well over 50%. Thus, "companies investing in emerging economies would be wise to take steps to hedge against devaluation in countries where their exposure is large."BY GENE KORETZReturn to top

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DO LARGE STAKES INHIBIT CEOs?

Big holdings may curb risk-taking

Rewarding top corporate executives with stock options seems to promote shareholder value. But can it sometimes be too much of a good thing?

That's the question raised by a study in the Academy of Management Journal, which finds that companies whose senior executives and directors own a sizable chunk of the enterprise seem to exhibit a reduced appetite for the kind of risk-taking that enhances growth.

Researchers led by Peter Wright of Memphis State University surveyed 872 publicly traded companies with median assets of $2 billion in the mid-1980s and early 1990s. To measure risk-taking, they used the standard deviation (degree of diversity) of analysts' forecasts of earnings. They found that insider stakes had no effect on risk-taking among companies whose stock price was below its per-share book value. But among companies whose shares exceeded book value--presumably reflecting growth potential--risk-taking rose with the level of insider shareholdings as long as such ownership was below 7.5%.

Once the size of holdings hit 7.5%, however, risk-taking fell as insider ownership increased. By contrast, institutional holdings had a positive effect on risk-taking, and large family and individual holdings had no effect.

"Our findings," says Wright, "suggest that while it's good for top executives to have equity stakes in their company, they may grow excessively cautious if their stakes become too large."BY GENE KORETZReturn to top


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