It’s earnings season again, and as we predicted in February (see Another Shot in the Currency War: Venezuela Announces 32% Devaluation), the Venezuelan bolivar is at the top of the list of most impactful (and surprising) currencies for many corporates, particularly those in the consumer goods and auto industries. Among the companies that have reported first quarter earnings, bolivar-related losses already total nearly $1 billion. We expect that our quarterly analysis of currency-related impacts (to be released in a few weeks) will reveal the bolivar as the most significant currency surprise in Q1, and a source of material impacts for many corporations, including consumer products companies.
Given the 32 percent devaluation of the bolivar in February, that Venezuela’s currency negatively impacted the earnings of companies doing business there shouldn’t be a big surprise. But those negative impacts may be exacerbated by uncertainty surrounding the exchange rate mechanism and capital controls since the death of former president Hugo Chavez and election of his long-time supporter Nicolas Maduro. What will the Maduro regime’s policies be vis-à-vis corporations’ ability to repatriate cash from their Venezuelan operations – and the price at which they can exchange bolivar for dollars?
From a currency perspective, Venezuela is a difficult place for foreign multinationals to do business because of strict capital controls and a huge gap between the “official” exchange rate and the black market rate.
It’s your money, but you can’t have it
Venezuela has strict controls on the repatriation of cash held there by foreign multinationals. Quoted in a recent Bloomberg report, Asdrubal Oliveros, a research director at Ecoanalitica in Caracas, said that overseas companies may hold about $12 billion in dividends in Venezuela that they can’t repatriate. With the devaluation of the currency by a third, those funds are not only trapped, but worth less too. If strict capital controls remain, inflation stays high (it’s currently around 20 percent), and the government devalues the currency further, companies will face even steeper losses this year.
How much is your money even worth?
Foreign multinationals with cash trapped in Venezuela know that their funds are worth less – because of the devaluation and inflation – but how much? Venezuela’s controlled currency, the bolivar, officially trades at 6.3 to the U.S. dollar. But that “official” rate is only applicable to Venezuelan importers in certain “key” industries. And sometimes the government offers those importers a rate much weaker even than the official rate (as it did in March when it auctioned $200 million to 400 local importers at an estimated rate of 14 bolivar to the U.S. dollar). Then there is the black market exchange rate – currently estimated to be 24 bolivar to the U.S. dollar. So a company holding 1 billion in Venezuelan currency might have the equivalent of $159 million, or $42 million, or some amount in between.
So when a company with cash trapped in Venezuela is preparing its quarterly earnings reports, how does it value that cash? How does it determine when and at what value it might be able to repatriate the funds? Auditors may be forcing companies to use worst-case scenario exchange rates – 24 bolivar to the U.S. dollar or something like it. That may well be one of the reasons why so many companies are reporting such large negative impacts from the bolivar in the first quarter.
Change on the horizon?
Former President Hugo Chavez, who was ailing but still in charge when Venezuela devalued its currency by 32 percent in February, died in March. His heir apparent, Nicolas Maduro, narrowly won election to the presidency in April. Maduro campaigned on plans to continue and even deepen Chavez’s signature socialism (Chavez oversaw the nationalization of more than 1,000 companies or their assets and the imposition of strict currency controls). On that count, Maduro looks like more of the same – or worse.
But in late April Maduro appointed Nelson Merentes finance minister, in what local analysts called “a positive sign for the market.” Merentes is widely recognized to be more pragmatic than his predecessor Jorge Giordani. Analysts predict that Merentes will oversee more flexible foreign exchange policies.
Bottom line for companies
What Maduro and his ministers will do vis-à-vis the Venezuelan economy is still speculation. Assuming that they want economic growth, they’ll have to loosen capital controls. If they wait, the measures they take might be desperate – like ending the Petrocaribe energy agreement that affects trade across Latin America. Either way, multinationals need to prepare for greater volatility around the Venezuelan bolivar and, perhaps, more quarters with significant bolivar-related earnings losses.
 Bloomberg, “Telefonica Said to Use Part of $3 Billion Stuck in Venezuela,” 16 Apr 2013.