Archive for February 17th, 2013

The Perverse Entrapment Of Foreign Exchange Controls For Both The Government And Multinationals

February 17, 2013


Being a multinational in Venezuela is not easy. The numbers are outstanding, the sales and/or return on equity are fabulous and you are the envy of the region.


It has been five years since the Chavez Government last allowed you to repatriate earnings. Since then, those fantastic earnings have followed a roller coaster ride. You used to register them at the request of your accountant at the parallel swap rate, which was banned in May 2010, while it was hovering above Bs. 8 per US$. At that moment your earnings were actually revalued to the Sitme rate of Bs. 5.3, only to be devalued last week to Bs. 6.3, as SITME was disappeared and only the official rate exists now.

But wait, the rate exists, but companies have had no access to it for repatriation for the last five years. Thus, they are “virtual” earnings, virtual revenues, virtual returns on equity, they only exist in your books, but can not be transferred to your home office, let alone distributable to your shareholders. They only exist in local currency. And no end in sight.

You may wonder if your business is even real!

And as the Venezuelan officials had the lack of courtesy of making the announcements while markets were open (Revolutionaries don’t believe in markets), shares of Colgate, P&G, BBVA, Telefonica, Unilever and others dropped. Some like Colgate, said how much this would cost them, US$ 120 million in a one time charge, while Merck said it would cost the company US$ 200 million in income. P&G says between US$ 200 and 275 million and I imagine Telefonica knows it’s about half a billion euros, but prefers to say it later.

CADIVI has accumulated US$ 2.8 billion in requests for dividend repatriation and there is an estimated US$ 13  billion total repressed in local currency (at Bs. 4.3 per US$). But after five years, most multinationals are learning that saying “We are here for the long term” sounds tough and audacious, until it feels that this is the long term and you have lived through the whole thing. And it ain’t over…

So, they are trapped, apparently forever.

But the irony is, their trap has by now also become the Government’s trap.

You see, one of the main reason the Government can not create any sort of alternative, parallel, whatever you wanna call it, market, is that currently, all of these multinationals register those dollars at Bs. 6.3 (as of two days ago). This means that they lost 15.9% of their dollar earnings this week. (Only that much, because their accountants probably forced them before to register the Bolivars at the highest “legal”rate of Bs. 5.3 per US$)

But if the Government allowed any sort of floating market, that went to the levels of the black one, these companies would lose say 73.5% of their earnings at Bs. 20 per US$. And if the Government allows any form of parallel real market, that is what accountants will tell these companies they have to do and use. And if they are forced to take this huge loss, hey! they might as well go to the market, buy the foreign currency and take the money home. At least it will be real foreign currency and in their pockets!

But that will only push the new rate higher, as all these companies scramble to buy!

Which is the real reason the swap market rose sharply in 2010 before the Government shut it down. Companies began realizing that their earnings were being devalued day after day, so they mostly decided they might as well take the money home, because it became clear there would be no Government autorized repatriation. When the Government shut down the market, they actually had to revalue from around Bs. 8 to Bs. 5.3. Their numbers looked great all of a sudden! But they were all in Bolivars.

But for the Government, it became a trap. Before, the swap rate would slide in time, companies would adjust, buy what they could, and manage.

But any approval for an “alternative” market implies a huge amount of money that would look to buy after almost three years of being frozen out of any form of dividend repatriation. The new rate would soar, would set prices and the spiral would continue.

A virtuous or vicious circle or spiral for both the Government and multinationals. A trap. Except companies only care about their bottom line and the Government about staying in power. So the Government keeps digging deeper, until the hole will reach the other end of the planet.