U.S. Corporate Profits Probably Fell for Sixth-Straight Quarter

U.S. corporate earnings probably fell for a sixth-straight quarter, the longest streak in at least 20 years, as consumer spending on automobiles, homes and retailers collapsed.

Fourth-quarter profit at companies in the Standard & Poor’s 500 Index may have dropped an average of 11.9 percent from a year earlier, according to data compiled by Bloomberg.

The slump would be the longest since at least 1988 when the index began compiling the data, said Standard & Poor’s senior analyst Howard Silverblatt. Weyerhaeuser Co., the largest North American lumber producer, said fourth-quarter earnings will be “significantly” lower than it expected. General Motors Corp., which is receiving a $9.4 billion government bailout, may report a loss of $6.61 a share, according to analysts’ estimates.

“The earnings weakness has spread beyond the financial sector,” said John Praveen, the Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages about $602 billion. “I don’t think this is the bottom.”

Analysts are predicting the streak will reach eight quarters with a 10.3 percent decline in the first three months of 2009 and a drop of 5.8 percent in the second quarter. Analysts currently expect a 12.6 percent increase in earnings in the third quarter next year.

The S&P 500 Index has fallen 25 percent in the fourth quarter through Dec. 26, the biggest drop since the third quarter of 1974. For the year, the index has plummeted 41 percent, the worst annual performance since a 47 percent drop in 1931, according to data compiled by Bloomberg.

Dollar’s Gains

Earnings slid 23 percent in the second quarter, the most since at least 1998, according to Bloomberg data, and 18 percent in the third quarter. Profit declined 22 percent in the fourth quarter of 2007.

In prior years, the declining value of the dollar meant overseas earnings boosted profit of U.S. companies, Praveen said. Now with the dollar gaining against currencies in Europe and Japan, profit from overseas doesn’t help the bottom line as much, he said.

Of 10 industry groups in the S&P 500, seven will see earnings decline, analysts estimated.

Raw-materials producers will be hit hardest, with profit falling about 63 percent, according to analysts.

Weyerhaeuser cut its dividend by more than half on Dec. 19. Analysts on average expect a loss of 50 cents a share compared with a profit of 51 cents a share in the same period a year earlier.

The next biggest group affected is consumer discretionary, which includes the auto industry. Earnings for these companies may be down 47 percent. Consumer spending, which accounts for more than two- thirds of the U.S. economy, fell at a revised 3.8 percent annual rate, according to the U.S. government. It’s the first decline since 1991 and the biggest since 1980. The unemployment rate has climbed to 6.7 percent, the highest level since 1993.

Retail, Finance Earnings

Among retailers, Office Depot Inc. may report a loss of 5 cents a share compared with a 10-cent profit a year earlier, according to analysts’ estimates. The world’s second-largest office-supplies retailer said it will close almost 10 percent of its North American stores and cut 2,200 jobs as the U.S. recession saps demand for business furniture.

Financial services companies, which have been weighed down by $1 trillion in losses and writedowns from the collapse of the subprime mortgage market, should be able to stop a run of five straight quarters of declining profit.

In finance, earnings are expected to rise 68 percent, led by Bank of America Corp. where a per-share profit of 25 cents is predicted, up from 7 cents a share a year earlier, according to the average of 21 analysts’ estimates in a Bloomberg survey.

‘Turning the Corner’

“We are turning the corner,” said Thomas Sowanick, chief investment officer of Princeton, New Jersey-based Clearbrook Financial LLC, which manages $20 billion. “If we do enter into a period where credit quality stabilizes, you could get a huge jolt to earnings.”

Others aren’t as optimistic. The banks and real estate sub- groups may fall 31 percent and 21 percent, respectively, on average, according to analyst estimates.

“My gut feeling says analysts are too optimistic in terms of the magnitude of the write offs,” said Frederic Dickson, who helps oversee about $19 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “It probably won’t be as bad as we saw a year ago, but there could be some shock value.”

Biggest Bond Buyers Favor European Notes as ECB Cut

The world’s biggest bond investors are betting European Central Bank President Jean-Claude Trichet will be forced to follow Federal Reserve Chairman Ben S. Bernanke and step up the pace of interest-rate cuts.

BlackRock Inc., Schroder Investment Management and Standard Life Investments Ltd., which together oversee $1.6 trillion, are buying German debt securities even though yields are close to record lows. Barclays Capital, the top primary dealer of German debt, says bunds offer “unprecedented value” because the ECB will accelerate rate cuts as the economic slump deepens.

“It still makes sense to be long selective markets and Europe is one of those,” said Michael Krautzberger, a European fund manager in London at BlackRock, which manages $1.3 trillion. “The ECB is behind the curve.”

While the Fed reduced its target rate 4.25 percentage points this year to as low as zero, and the Bank of England cut its benchmark by 3.5 percentage points to 2 percent, the Frankfurt- based ECB lagged behind.

The ECB lowered the main refinancing rate by 1.5 percentage points to 2.5 percent and will cut the benchmark rate 1 percentage point to 1.5 percent by June, based on the median of 16 economists’ forecasts compiled by Bloomberg.

Closer to Fed

Even though Trichet said in a Dec. 16 speech further reductions may fail to bolster the economy as long as banks refuse to lend to each other, the ECB may bring its key rate closer to the Fed’s, according to Gregor MacIntosh, a money manager in Edinburgh at Standard Life. The firm has about $265 billion in assets.

“The European economy will underperform the U.S. next year,” Macintosh said. “On a relative basis, European bonds look more attractive than the U.S. market.”

German bunds returned 12.1 percent this year, including price gains and reinvested interest, the most since gaining 16 percent in 1995, according to Merrill Lynch & Co. index data. French government debt returned 11.5 percent, while Spanish bonds added 8.8 percent.

Treasuries returned more than bunds, handing investors 14.6 percent. A rally in Treasuries in the fourth quarter pushed 10- year U.S. debt yields to 89 basis points below bunds of similar maturity, the lowest since 1993. As recently as last month they yielded 22 basis points, or 0.22 percentage point, more than bunds.

The spread was 84 basis points by 3:29 p.m. in London.

‘Unlikely’ Reversal

Investors piled into the relative safety of government debt this year as credit losses and writedowns at the world’s largest financial companies surpassed $1 trillion and Europe, the U.S. and Japan entered their first simultaneous recessions since World War II. The rally drove yields on German two-year notes down by more than 200 basis points to 1.73 percent, the steepest drop since falling 268 basis points in 1995.

“A reversal of the bullish trend is unlikely to take hold before the third quarter of next year,” said Laurent Fransolet, head of European fixed-income strategy at Barclays in London. Fransolet recommends bonds due in five and 10 years, which he says offer “unprecedented value.”

Yields on German 10-year notes will fall to 2.85 percent by the end of the second quarter from 2.93 percent last week before rising to 3.20 percent at year-end 2009, according to Barclays. The London-based bank buys more debt at German government-bonds auctions than any of the other 28 primary dealers, according to the Bundesbank.

Breaking Even

While analysts expect yields on 10-year bunds to rise to 3.4 percent by the end of 2009, investors will likely break even for the year, according to the median of 10 forecasts compiled by Bloomberg.

An investor buying $1 million of 10-year bunds would lose about $5,000 by the end of next year if the yield rose to the level forecast in the survey. That compares with the $78,000 a buyer of the same amount of 10-year Treasuries would lose should the yield increase to the 3.4 percent predicted in a separate Bloomberg poll of 54 strategists.

Bonds may fall in 2009 as governments prepare to sell a record amount of debt to finance bank bailouts amid falling tax revenue, according to Zurich-based UBS AG, Switzerland’s biggest bank.

Germany will issue a record 323 billion euros ($456 billion) of debt next year, including 149 billion euros of bonds maturing in more than one year, according to the Federal Finance Agency. France plans to sell a record 145 billion euros of securities.

‘Overwhelming Issuance’

“The sheer amount of issuance due from European governments is likely to overwhelm potential demand,” UBS strategists Meyrick Chapman and Andrew Rowan wrote in a report to clients Dec. 18. Investors will see “the bulk of the returns” in the first half and “barely break even” in the second, the London- based analysts said.

Two-year German note yields will rise to 2.05 percent by the end of next year, according to the median of 10 economists’ forecasts compiled by Bloomberg, from 1.694 percent today.

The global credit seizure prompted the world’s biggest central banks to cut rates and offer record amounts of cash to prevent financial institutions from collapse following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

“A quicker-than-expected return to risk appetite is a risk for bonds and could lead to a sell-off, even though the European economy isn’t likely to recover in the next half or one year from now,” said Michiel de Bruin, who manages about $18 billion as head of European government bonds at F&C Asset Management’s Dutch unit in Amsterdam.

No Choice on Rates

Trichet may have no choice but to lower borrowing costs again, according to David Scammell, a money manager in London at Schroder, a unit of the U.K.’s largest publicly traded fund company. The economy of the 15 nations sharing the euro will shrink 1 percent in 2009 after expanding 1 percent this year, based on the median of 15 forecasts compiled by Bloomberg. The U.S. is likely to contract 1 percent, a separate poll shows.

“Poor economic numbers will bring them to their knees,” said Scammell, whose parent firm oversees $19 billion of assets. “The ECB will have to cut interest rates more aggressively. We are bullish on European bonds, as next year is not going to be any better than this year in terms of the economy.”

Growing pessimism over the economy and expectations of rate reductions drove the yield on two-year bonds to 148 basis points below 10-year bunds in November, the widest spread since 2004.

As the ECB brings rates closer to zero, the gap may narrow because investors will seek higher yields offered by longer-dated securities, Scammell said.

“The curve will flatten because there’s nowhere for the short end to go anymore, and not because of expectations of an economic recovery,” he said. “The U.S. led this cycle and it’s moving into a curve-flattening mode. Europe is likely to follow.”

Rohm & Haas Drops After Dow Deprived of Kuwaiti Funds

Rohm & Haas Co., the target of a $15.4 billion takeover offer, dropped the most in 20 years in New York trading after suitor Dow Chemical Co. lost access to $9 billion of cash planned to fund the acquisition.

Kuwait yesterday scrapped a deal to buy a 50 percent stake in Dow Chemical’s plastics unit, eliminating proceeds earmarked for the takeover. Rohm & Haas, a maker of paint and circuit-board coatings, fell $14.36, or 23 percent, to $49.20 at 9:39 a.m. in New York Stock Exchange trading, the most since October 1987. Midland, Michigan-based Dow Chemical declined $3.75, or 19 percent, to $15.59.

While the collapse of the joint venture damages Dow Chemical Chief Executive Officer Andrew Liveris’s plan to cut the company’s reliance on commodity products, it may also leave shareholders of Rohm & Haas in the lurch. The Philadelphia-based business rose 64 percent after Dow Chemical’s $78-a-share offer on July 10 and has already lost 10 percent this month in New York trading.

“This throws into question whether the Rohm & Haas acquisition will go through,” said London-based Christopher Middleton, CEO of Atlantic Equities LLP, in a phone interview. “It’s less likely, because they still need to find the money.”

Liveris planned to fund the purchase with a $13 billion bridge loan, a $3 billion equity investment by Warren Buffett’s Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority. Dow needed only about $5 billion of the bridge loan assuming the Kuwait proceeds, Chief Financial Officer Geoffery Merszei said Oct. 23 on a conference call.

Rohm & Haas issued a statement today saying the aborted deal “is not a closing condition for the proposed merger” and that it “continues to work diligently towards completing the proposed transaction with Dow in early 2009.”

Overpriced

The Kuwaiti government has been under pressure from opposition lawmakers to scrap the deal, which they said was overpriced. Some members of parliament threatened public questioning of Prime Minister Sheikh Nasser al-Mohammed al-Sabah, a nephew of Emir Sheikh Sabah al-Ahmed al-Sabah, Kuwait’s ruler. They said the investment was too large at a time of falling oil prices.

Crude-oil futures in New York have dropped more than 70 percent from the record $147.27 a barrel in July on signs that a deepening global recession is cutting demand for fuel and energy. Oil reached a four-year low of $32.40 on Dec. 19.

“There is a reassessment on the part of all of the sovereign wealth funds about where they want to be strategically,” said Middleton. “Commodity prices have come off an awful lot, and these funds have become more circumspect.”

Breakup Payment

Kuwait’s state-owned Petrochemical Industries Co. has the advantage of seeing how faltering demand impaired the $11.6 billion acquisition of General Electric Co.’s plastic division by Saudi Arabia’s chemical company. Saudi Basic Industries Corp., also known as Sabic, plans to cut 1,000 jobs, or 9.5 percent of its plastics unit workforce, after taking over the business last year. The Riyadh-based chemicals supplier is reducing thermoplastic production by about 20 percent.

“Dow is extremely disappointed with the decision by the Kuwait government and is in the process of evaluating its options pursuant to the joint-venture formation agreement,” Dow Chemical said yesterday in the statement.

Either side can claim as much as $2.5 billion if the other cancels the transaction, Dow Chemical said in a Dec. 1 regulatory filing.

“It is doubtful that Dow will be able to easily raise the funds” to complete the Rohm & Haas deal, Sean Egan, managing director of Egan-Jones Ratings Co. of Haverford, Pennsylvania, said in an e-mailed report. Dow has been “skewered,” he said.

Holiday Sales Drop to Force Bankruptcies, Closings

U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers will close 12,000 stores in 2009, according to Howard Davidowitz, chairman of retail consulting and investment- banking firm Davidowitz & Associates Inc. in New York. AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”

Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the International Council of Shopping Centers said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers will report December results on Jan. 8.

Women’s Clothing, Electronics

Consumers spent at least 20 percent less on women’s clothing, electronics and jewelry during November and December, according to data from SpendingPulse.

Retail Metrics Inc.’s December comparable-store sales index will drop an estimated 1.2 percent, or 5 percent excluding Wal- Mart Stores Inc. Retailers’ fourth-quarter earnings may fall 19 percent on average, the seventh consecutive quarterly decline, according to Ken Perkins, president of Retail Metrics, a Swampscott, Massachusetts-based consulting firm.

Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP.

Store Closings

About 200,000 stores may close in 2009, compared with a record 160,000 in 2008, Flickinger said.

The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to the Commerce Department. Economists surveyed by Bloomberg in the first week of December forecast the world’s largest economy will contract through the first half of 2009.

The Standard & Poor’s 500 Retailing Index shed 34 percent this year before today, with only two of its 27 companies rising.

The index doesn’t include Wal-Mart, the world’s largest retailer, which fell 21 cents to $55.14 at 9:58 a.m. in New York Stock Exchange composite trading. Wal-Mart shares gained 16 percent this year through Dec. 26.

“If you’re going to be in retail right now, the discount space is where you want to be,” Patrick McKeever, a senior equity analyst at MKM Partners LLC, said today in a Bloomberg Television interview.

Discount Advantage

Discounts of 70 percent off or more by Macy’s, AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Consumers are trained for sales, according to Patti Freeman Evans, an analyst at Jupiter Research in New York.

“The situation is not going to right itself in January; it’s going to be a long while that discounting’s going to be around,” said Evans. “Consumers are going to get used to it and it’s going to very difficult for retailers to move forward in a full-price mode.”

Retail bankruptcies may help the industry in the long run, according to Flickinger.

“We’ll be going from a Dickens-esque worst of times this December to the best of times in future Decembers because we’ll rationalize out all the redundant retailers and retail space in shopping centers,” Flickinger said.

Recession Opens U.S.-China Rift Paulson Talks Bridged

The global recession is re-exposing fissures in U.S.-China relations that Treasury Secretary Henry Paulson spent more than two years smoothing over.

Heightened tensions between China and the U.S. may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President- elect Barack Obama readies a two-year stimulus package worth as much as $850 billion that will require the U.S. to borrow more than ever from China, the largest buyer of Treasury securities.

“The American economic slump is running into the Chinese economic slump,” says Derek Scissors, a research fellow at the Washington-based Heritage Foundation. “It's creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship.”

Paulson, 62, who visited China 70 times during his career on Wall Street, made improving ties a priority when he arrived at the Treasury in 2006. He advocated diplomacy instead of confrontation, establishing a twice-yearly “strategic economic dialogue” with officials in Beijing, aimed at cooling tensions and deterring Congress from taking up trade sanctions.

The approach produced some results, including a pledge to share data on food safety and agreement to allow foreign mutual funds to invest in China's stock market. The value of China's currency, the yuan, rose 21 percent versus the dollar from 2005 levels to redress what U.S. officials saw as an unfair price advantage for Chinese products.

Shelved Sanctions

Paulson refrained from labeling China a currency manipulator and hailed an end to tax rebates on Chinese exports as a sign of improving trade relations. Congressional leaders, though dissatisfied with the pace of progress, shelved sanctions legislation.

Paulson “achieved some success, but it was much more difficult to get the Chinese to restructure their economy,” says Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce in Washington. Now, Brilliant says, the economic crisis has prompted China to turn back to “export-oriented policies that could lead to an increase in the trade imbalance” and new tensions with the U.S.

China's exports declined in November for the first time in seven years, and economic growth may slow by more than half to as little as 5 percent in 2009, according to Royal Bank of Scotland Plc. That has prompted China's leaders to increase tax rebates on thousands of exported products; meanwhile, the yuan's steady rise against the dollar stalled in July, and the currency has barely budged since. It was trading at 6.8462 a dollar at 1:33 p.m. in Shanghai today, from 6.8414 on Dec. 26.

A Harder Line

In the U.S., business and labor groups, along with lawmakers, are pushing the new Obama administration to take a harder line with China than President George W. Bush did.

Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, plans legislation that would raise tariffs on dumped imports from China and other nations. And newly elected Democratic congressmen such as Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China.

Lawyers representing companies such as Nucor Corp., the second-largest U.S. steelmaker, NewPage Corp., a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. During the presidential campaign, Obama promised groups including the National Council of Textile Organizations and the Alliance for American Manufacturing that he would take a tougher stance on China's currency policies.

Pushing Back

Officials in Beijing will push back, says James McGregor, chairman of Beijing-based research firm JL McGregor & Co. and author of the book “One Billion Customers,” about doing business in China. Chinese leaders “will do whatever they need to protect their interests and to say to the U.S., 'Do not mess with us on this one,'” he says.

Paulson, before leaving for talks in Beijing this month, told business representatives his biggest concern was that China was changing course and reversing moves it had made during the past year to cut aid to exporters and stimulate domestic consumption.

China's five-year plan through 2010 seeks to rebalance growth away from exports -- so far, without significant result. Household consumption slumped to slightly more than 35 percent of China's gross domestic product last year from 45 percent in 1993. By contrast, consumer spending represents more than two-thirds of the U.S. economy.

Low Consumption

“What separates China from the rest of the world is its incredibly low level of consumption relative to GDP,” says Brad Setser, a fellow at the Council on Foreign Relations in Washington. “What can China do that would most directly help the world economy during a period of very severe weakness? Get its consumption back up to 40 percent of GDP.”

Policies in both countries are shaped by the need to cope with steep declines in employment. More than 10 million migrant workers lost their jobs in China during the first 11 months of this year, Caijing Magazine reported Dec. 17, citing a Labor Ministry official.

The total will likely grow in 2009. The World Bank forecasts that global trade, which grew 6.2 percent in 2008, will shrink by 2.1 percent next year, the first such contraction since 1982.

The collapse in overseas demand is exposing China's years of overinvestment in industries such as automobiles and telecommunications.

Sitting on a Stockpile

China's steel industry, the world's largest, is sitting on a stockpile of 63 million metric tons, equivalent to about 13 percent of annual production, and Baosteel Group General Manager He Wenbo said in November that his company was facing the “most difficult” period since it was founded 30 years ago.

The government is considering measures including buying unsold inventory and raising export rebates to help steelmakers weather the slowdown, Minister of Industry and Information Li Yizhong said Dec. 12.

In the U.S., factory payrolls have shrunk by 4 million during the eight years of the Bush administration, and total job losses this year may top 2 million.

“China-bashing will only intensify in a softer economic climate,” says Stephen Roach, chairman of Morgan Stanley's Asia division in Hong Kong. “Bipartisan congressional support for anti-China trade legislation has been gathering in intensity.”

Obama's Pledges

Obama made specific pledges on the campaign trail to take a tougher approach to China than the Bush administration did. He has said the failure by Bush and Paulson to label China a currency manipulator was “unacceptable,” and he endorsed legislation to let U.S. companies seek import duties to compensate for the advantage an undervalued currency gives their Chinese competitors.

Obama also pledged to reverse course from Bush and consider petitions seeking higher tariffs on specific Chinese products.

American businesses, labor unions and lawmakers are already gearing up to force Obama's hand. Steelmakers, paper producers and textile companies are preparing trade complaints that could lead to increased tariffs. Unions and lawmakers plan to push measures to force China to raise the value of its currency.

McGregor says Obama's China policy will require a balancing act “fundamentally different” from what his predecessors faced: Obama's Treasury will need to fund a budget deficit heading for $1 trillion this year and “you don't scream at your banker.” China's holdings of U.S. Treasury securities, at $653 billion, are the world's largest.

That means an increase in trade tension “is very easy for China to handle,” says Guan Anping, a managing partner of Beijing-based law firm Anjin & Partners and a legal adviser to former Vice Premier Wu Yi until 1993. “China can react by reducing its purchases of U.S. government bonds.”

Even so, the Obama administration may not need much prodding to take a harder line on the currency issue, says William Reinsch, president of the National Foreign Trade Council and a former Clinton administration trade official.

“There will be consequences,” he says. “But they will do it anyway, if only to distinguish themselves from Bush.”

Russia’s Central Bank Devalues Ruble for Third Time in Week

Russia devalued the ruble for the third time in a week, sending the currency to its lowest level against the dollar since January 2006, as oil’s drop below $37 a barrel dimmed the outlook for growth.

The ruble, down 18 percent against the dollar since the beginning of August, weakened 0.9 percent against the U.S. currency to 28.6905 and 1.4 percent versus the euro to 40.1773, near an all-time low.

The central bank allowed the ruble to fall about 1 percent against a basket of dollars and euros, accelerating the slide after spending 27 percent of reserves, or $162.7 billion, trying to defend the currency over four months. Oil, Russia’s biggest export earner, lost 4 percent to $37.43 on the New York Mercantile Exchange and is down nearly 75 percent since the July high. The government requires oil to average $70 to balance its 2009 budget.

“As long as oil remains depressed and at many year lows the central bank has no other choice but to carry on with its devaluation,” said Mikhail Galkin, head of fixed income research at MDM Bank in Moscow.

The currency has fallen 14 percent against the dollar and 11 percent versus the euro this year amid the plunge in oil, international condemnation of the country’s war with Georgia and the spreading global credit crisis. BNP Paribas SA estimates investors withdrew $211 billion from Russia since August. The nation’s oligarchs, who and took over assets of the biggest companies after the collapse of the Soviet Union in 1991, are vying for $78 billion of Kremlin loans to meet debt payments.

Recession

The economy, which recovered from the government’s 1998 debt default to expand an average 7 percent in the eight years to 2007, may slip into a recession in the first half of 2009, Kremlin economic adviser Arkady Dvorkovich told Bloomberg Television on Dec. 19.

The government will post a budget deficit next year for the first time in a decade and will use its $132.6 billion reserve fund, or extra oil revenue the government has set aside, to cover the financing gap, Dvorkovich told reporters in Moscow today.

An “accelerating” ruble devaluation is “detrimental” to economic growth because it stimulates currency speculation and limits new lending, Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, wrote in a research note today. Troika Dialog earlier called for a one-time depreciation of as much as 20 percent.

“If in 2009 the oil price is between $30 and $40 and the state carries on with its strange policies on the money market, the possibility of an economic downturn will rise,” Gavrilenkov said.

Currency Basket

The ruble fell 1.2 percent against the basket of dollars and euros that the central bank uses to manage its fluctuations, and traded at 33.86 at 5:02 p.m. in Moscow.

Bank Rossii allowed the ruble to decline against its currency basket for the third time in four working days and the 10th time since Nov. 11, according to a central bank official who declined to be identified.

The Micex stock index fell for the first time in four days to 654.29, a drop of 1.1 percent.

Vietnam's Trade Deficit Widens to Record $17 Billion

Vietnam's trade deficit widened to a record $17 billion in 2008, boosted by higher imports of equipment for projects such as the country's first oil refinery.

The gap expanded 21 percent from $14.1 billion a year earlier, according to preliminary figures from the General Statistics Office in Hanoi. Exports rose 29.5 percent to $62.91 billion and imports climbed 27.5 percent to $79.92 billion.

Vietnam's growing trade deficit created concern in the first half of a currency crisis. While the gap's slower growth since then has eased fears, analysts from companies including Credit Suisse Group AG and CLSA Asia-Pacific Markets forecast further trade deficits in years to come.

The government is pursuing ``an investment drive which continues to suck in imports,'' Anthony Nafte, a Hong Kong-based senior economist at CLSA Asia-Pacific Markets, wrote in a note sent last week. ``The current-account deficit will increase in 2009 as export revenues plummet and the investment drive prevents a steeper fall in imports.''

Morgan Stanley said on May 28 that Vietnam was heading for a ``currency crisis'' similar to that of Thailand's baht in 1997 because the current-account deficit was projected to widen to an ``unsustainably large'' level. The banking system and inflation rate are ``additional complicating factors,'' it had said.

Bank Lending

Vietnam's government tightened bank lending this year as part of an attempt to restrict imports and narrow the pace at which the trade shortfall was widening.

``The authorities have controlled the situation well,'' DWS Vietnam Fund Ltd. said in a note this month, referring to concern about the Vietnamese economy earlier in the year. There has been ``continued improvement in the balance of payments,'' DWS Vietnam said.

Imports in 2008 were led by foreign machinery and equipment purchases, which rose 22 percent to $13.61 billion. Vietnam's first oil refinery has been under construction all year at Dung Quat Bay in the central province of Quang Ngai, and is due to open in February 2009.

The refinery may reduce petroleum product imports, which rose 40 percent by value this year to $10.81 billion, while slipping 2 percent by volume. The average global price of crude oil has been 40 percent higher so far this year than in 2007.

Steel imports rose 24 percent by value to $6.34 billion while decreasing 5 percent by volume, based on the General Statistics Office figures.

Roads, Power Plants

``Even though economic growth is slowing, Vietnam still needs to develop infrastructure like its roads and power plants,'' said Alan Young, chief operating officer of Vietnam Industrial Investments Ltd., which operates steel plants in Vietnam. ``People will still need steel.''

Exports were paced in 2008 by crude oil, which climbed 23 percent by value to $10.45 billion while slipping 8 percent by volume. Garment shipments advanced 18 percent to $9.1 billion, the same pace of growth posted by Vietnamese footwear exports, which totaled $4.7 billion.

The impact of a tougher global economic environment may take as many as six months to show up in export figures, according to Shirley Justice, the Ho Chi Minh City-based chief Vietnam representative for Nike Inc., the world's largest athletic-shoe maker.

`We are already beginning to see the signs, through increased order cancellations,'' Justice said, in e-mailed comments.