Archive for December 22nd, 2013

Virtual Profits In Venezuela

December 22, 2013


This week, Ford Motors said that it expects to lose US$ 350 million in Venezuela with the upcoming devaluation, which they believe will take the Bolivar from Bs. 6.3 per US$ to around Bs. 12. Basically Ford has investments in Venezuela valued at around US$ 802 million plus the Government owes them a few hundred million in Cadivi imports, which could eventually be paid at the higher rate of the new official devaluation, which people think will be around Bs. 12. Thus, Ford expects that in 2014 it will not make money in Latin America, only because of Venezuela.

Which shows how difficult it has become to do business in Venezuela, when you book  “virtual” profits one year, only to see them disappear the next, together with the loss in value of your assets. Last year, Ford took a US$ 186 million hit when the Government devalued to Bs. 6.3. For years, multinationals have been saying they are in Venezuela for the long run, but most of them never imagined it would “long” would take all this time. And there is no end in sight for earning this virtual, “funny” money.

Essentially, companies have not been given foreign currency to repatriate dividends since 2007, when the Bolivar was officially at Bs. 2.7 per US$, but at least until May 2010, companies could buy foreign currency at their own risk via the parallel swap market. Today that market, which is illegal,  is almost a factor of 10 higher than it was in May 2010.

Thus, companies are trapped, their earnings get diluted by the devaluation, their assets lose value and the Government fails to pay them for imports of parts and goods sold at the lower rate before the evaluation. It’s funny money, almost like Monopoly money.

Except that things may actually be or get even worse than Ford expects, depending on “how” the Government devalues. Essentially, Ford has little visibility going forward, because not even the Government knows what it will do with the devaluation, least of all the companies in the country.

In fact, according to the latest rumors and information, the Government may be planning to set up an even more complicated system, in which there will be two Cadivi rates (Bs. 6.3 and bs. 12) plus the Sicad rate (Bs. 17-18). What this means, is that whether companies take the hit at Bs. 12 or the higher Sicad rate, will depend on the detailed wording of the decrees. If, for example, there is no mention of dividends at the higher Cadivi rate, then companies will have to do their accounting at the Sicad rate, because now that rate will be public, like Sitme used to be. (Up to now the Government had kept the Sicad rate secret, so that accounting was all done at Bs. 6.3, but when Sitme existed, if you had no access to Cadivi dollars, you had to do your accounting at the Bs. 5.3 Sicad rate)

This means that they could lose even more than they think

Thus, Ford, or any other company has no clue today as to the size of the hit they will have to take with the devaluation which is likely to take place in the next couple of weeks at the latest.

Which shows how hard it is to do business in Venezuela under the current environment. Companies have no way of hedging their profits, which lose value in a country with 50%-plus devaluation. They can’t plan, they have little clue about 2014 and there are only seven days left in 2013.

If, as rumored, the Bs. 6.3 per US$ Cadivi rate is left only for food and medicines, at least companies in these two sectors will not take a hit (por ahora!) like what happened last year. Those are the only guys feeling better.

There are dozens of multinational companies in this situation and every year it gets worse, as the numbers of Bolívars they have grows, but there is no way out.

And they keep waiting for the long run to end…