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Insight to All Things Currency and Treasury Management

On Friday, February 8, Venezuela’s finance minister announced that the government would be weakening the exchange rate by 32 percent today, February 13. The devaluation of the bolivar from 4.3 to 6.3 to the dollar should bolster Venezuela’s oil exports and bring more money into government coffers ($13.4 billion more, cutting the government’s budget deficit in half).[1] It will also fuel inflation, already above 20 percent, and have a significantly negative impact on multinationals that haven’t managed their bolivar exposure.

That the Venezuelan finance minister announced the devaluation at the end of the trading day on Friday, ahead of a two-day banking holiday, caught markets off-guard. It shouldn’t be a surprise, though: this is open warfare in the currency markets, and in this war we often see central banks move at the end of a trading week or the end of the year (as Japan did the last week of 2012). They move then because it’s an inopportune moment – like attacking when the other side is sleeping.

Who it affects

The Venezuelan government probably doesn’t view this huge competitive devaluation as an act of currency warfare, but for the countries, and the companies, affected, the impact is the same. The casualties of this war are the multinational corporations that have not taken steps to manage currency risk. In the case of Venezuela, consumer packaged goods companies – not typically active at hedging currency risk – have been and will continue to be hit particularly hard.

Even before Venezuela announced its plans late last week, top executives from leading multinational CPG companies warned that a bolivar devaluation would reduce their earnings outlook. As we’re analyzing earnings reports and analyst calls for our quarterly impact report, we’ve seen a number of top executives talk about impact from the bolivar. Among them:

  • Ÿ  Colgate-Palmolive – “As we discussed on the last call when I said that a significant devaluation (incident) in Venezuela, along with price controls would weigh heavily on our results, we were quite straightforward in our release in saying that the double-digit in dollar terms guidance was absent a macroeconomic devaluation in Venezuela, and that continues to be our view.”
  • Ÿ  Avon – “We estimate the one-time P&L impact [of bolivar devaluation] on quarter 1 results to be approximately $50 million…Additionally, hyperinflationary accounting requires us to carry some nonmonetary assets…at historical cost, where our sales are reported at the devalued rate. We estimate this will have an impact of approximately $50 million in 2013…On a reported basis, sales were down 1%, impacted by currency.”

Other companies outside the CPG sector have also forewarned analysts about potentially significant impacts related to the bolivar devaluation:

  • Ÿ  Ford – “We’re expecting very substantial adverse exchange effects from an expected significant devaluation in Venezuela and we are also thinking that we’ll see a substantial weakening of the currency in Argentina that’s going to affect us.”
  • Ÿ  Goodyear – “The foreign exchange impact that we expected a year is a negative impact of 40 million to 60 million. Significant part of that driven by the situation in Venezuela, but I’ll say that it is early enough on that we are still evaluating Venezuela, so not easy to pin that down with any precision at this point.”

This is not likely to be the last bout of competitive devaluation in Venezuela; analysts have already predicted that the country will have to devalue again within the year. And it’s not just Venezuela; globally, this is just another battle in a currency war that will continue to rage.

The ongoing currency war is exactly the reason that multinational corporations need to take the approach we’ve been talking about: a portfolio approach to managing currency risk. Last year it was the euro. Last month it was the yen. Now it’s the bolivar. Where will currency impacts come from next? Instead of trying to guess, manage risk across all of the currency pairs you do business in.

 

 


[1] Bloomberg, “Chavez Risks Backlash After Venezuela Devalues Bolivar 32%” 9 Feb 2013.