On Edge

What emerging Europe's CFOs know about the downturn that others don't.

It was a matter of when, not if, as far as Wolfgang Rigler was concerned. Months ago, the veteran finance executive for Mars in central and eastern Europe (CEE) could see there was trouble ahead. “We always knew there was a certain risk in the region,” says Rigler, Mars’s Vienna-based corporate staff officer of services and finance. And although the $30 billion (€22.6 billion) US-based pet-care and snack-food company, like many western multinationals, recently began making “significant improvements” to its profitability in the emerging markets on Europe’s eastern edge, Rigler says, “we did nevertheless warn corporate a few years ago about upcoming problems.” The post-communist boom was indeed overheating; the heady days of fast-paced growth were in peril.

But what Rigler — and almost everyone else — did not foresee was the speed and severity of the meltdown. Notably, the dramatic devaluations of major CEE currencies such as the Polish zloty caught him by surprise. “I remember having talks with finance a year ago that we should expect a 10%, maximum 15%, devaluation [of the zloty against the euro],” he recalls. Instead, it lost a lot more against both the euro and the dollar at various times since the autumn, while the Russian rouble, Hungarian forint and many of the region’s other currencies suffered similarly, without recovering much ground since. (See “Off the Cliff” at the end of the article.)

Any hopes among corporate executives that the region could escape major damage from the global downturn have long been dashed. In fact, it looks as if many CEE economies will bear the brunt of it. Last month, the International Monetary Fund cut its growth forecasts for the CEE countries as a whole, predicting a 3.7% decline in 2009, compared with a 2.9% increase in 2008. It also warned of a wave of corporate defaults in emerging Europe this year — after all, there is some $700 billion in debt that needs to be rolled over, nearly all of it from corporates and banks. (See “Reaching Out” at the end of the article.) Add in the CIS countries, and the IMF’s predictions get even grimmer: growth in those countries will contract 5.1%, after growing 5.5% the previous year.

It’s a dramatic change of fortune for investors in the region, not least the foreign multinationals that have relied on these burgeoning emerging markets for growth in recent years. “Up until September, we were in a kind of comfort zone,” says Alois Höger, the Vienna-based CFO for CEE at Henkel, a €14 billion German homecare, cosmetics and adhesives company. Henkel, for its part, has built a formidable presence in the region, with more than 10,000 staff in 32 locations and 33 production units. Turnover in the region is now nearly €3 billion, Henkel’s third-largest region after western Europe and North America.

Not so long ago, the subsidiaries of many western multinationals “enjoyed the good life,” recalls another CEE finance chief of a big American manufacturer. “We were given a lot of leeway to do what we had to do.” What they had to do was deliver revenue growth, year after year, often in double digits. Now that this is nearly impossible, finance chiefs of CEE subsidiaries face a more delicate task when reporting to bosses back at headquarters.


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