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…

30 Responses to “Virtual Profits In Venezuela”

  1. […] has changed, I wrote an article on this last December, entitled “Virtual Profits in Venezuela” in which I warned companies that they will get screwed yet […]

  2. Carlos Says:

    I think devaluation losses are well above what official accounting and reports are disclosing. My reasoning is simple: multinationals book earnings and profits at official exchange rate (2.15, then 4.3, now 6.3, soon 10+. etc).
    At official rate and in this virtual profit circus, this is the most profitable country of the world.
    Now, when official rate changes the multinational reports a loss due to devaluation for all the accumulated earnings (actually still in bolivares).
    The point is that they will never be able to convert those virtual accumulated profits in dollars at official rate. And we are talking about billions from Movistar to GM, big pharma, etc. My estimated 12-15 billions of “profits” booked in corporate reports will be impaired someday to 8-10 cents at the dollar or less.

  3. Alex Says:

    I am surprised they have not shut down the factory. I guess as long as they don’t lose money they are fine with keeping it open.

  4. LD Says:

    Probably also announcing a new inflation index, surprise, surprise!

  5. Ira Says:

    Miguel, you mention the food and drug companies should be happy because of their more favorable exchange rates.

    But shouldn’t they be expecting greater than ever price controls as Maduro looks to contain the store/street level inflationary chaos sure to come?

    • Yes, but they could get what they got last year, a devaluation and payment of amounts owed at the new exchange rate. So, in the middle of the disaster they can live to live another day, or year fir that matter. Price controls in those sectors are almost total by now anyway

  6. Roger Says:

    Merry Christmas Venezuela !!!! They always do shit like this during the christmas break. Wonder what else they have planned while most of the country is suffering from Polar Polio?

  7. xp Says:

    Profits do not make a company rich.
    Cash Flow, on the other hand,
    can be made as whimsical as
    the regime’s next twist or turn.

    Profits don’t make us rich.
    When we live well with
    NO visible means of Income,
    then that’s RICH!

  8. Glenn Says:

    OK so the new rate for tourists start today. How many crazy people are going for the 11 to 1 rather than the 60 to 1 that still seems to be available?

  9. noel Says:

    Given the billions of dollars owed but not paid to multinationals operating in or with Venezuela (airlines are owed some $2.6 billions as per Bloomberg) it is surprising that Venezuela’s debt rating is not lowered to selective default, i.e. from B- as per S&P to below C.

  10. Island Canuck Says:

    This should explain part of the problem:

    $54 millardos ha recibido Pdvsa de los entes oficiales en 5 años
    Pdvsa ha creado con la banca pública y la ONT una red de financiamiento

  11. It is certainly difficult for multinationals to do business in Venezuela. No doubt about that. It is extremely undesirable that Multinationals cannot hedge their investments and dividends against currency risk. All Venezuelans are in the same situation, i.e trying to hedge against currency depreciation. Shameful situation from any point of view.
    Having said that, multinationals should manage the situation a bit more prudently. They should be more cautious when presenting the value of assets and profits from their Venezuelan operations to shareholders. The possibility of repatriating dividends at the official exchange rate is quite low. This somehow needs to be reflected in their books. I understand that is difficult to report financial statements at an exchange rate different from the official one. However they can make provisions in their accounts on a periodic basis to deal with contingencies ( in this case not having the opportunity of accessing dollars at the official rate and having to repatriate at a different rate in the future) . Provisions are a common accounting practice for contingencies such as lawsuit costs, bad loans in the case of banks, etc.
    Taking the hit when the devaluation happens is undesirable. It brings too much volatility to their PnL at that time. It also misrepresents (overestimates) the true value of assets for large periods of time.
    The venezuelan economy operates at prices that are congruent with the parallel exchange rate. For that reason, many multinationals (not all) are able to increase prices according to the “black”( “free” I prefer) fx market movements. Therefore, not having access to the official exchange rate should not be that critical to them. The important matter would be allowing a form of access to convert their profits. Just as it would be important for any venezuelan to have access to convert currency to protect his savings and hedge his assets. That however is a different discussion.

    No one with common sense in Venezula would tell his wife that he makes 2000 usd a month, because he earns 12.600 bsf a month. The same logic has to apply to multinationals.They cannot report oversized profits and asset values at the official exchange rate. It goes against common sense.
    I am trying to decipher the reason for this behaviour on the multinational books. It is not an isolated issue with Ford, it seems to be happening across the board. First reactive thought is that they are trapped in their managerial bonus incentive systems, but happy to hear comments…

    • moctavio Says:

      I agree. Even the guidances is bad and sometimes management does not even understand the issues. I have heard some say they are “hedged” because they bought property, as if property values were adjusted instantly by auditors and accountants.

      They should reserve. There is a Spanish bank, you all know which one it is, which has paid since May 2010 about US$ 3 billion in dividends which are registered as Bs. 6.3 (besides all other earnings, assets etc. valued at that rate). This means that if the Sicad rate prevails in January, the US$ 3 billion becomes US$ 1 billion, but that money is in caracas in Bolivars, so that they will have to take that 2 billion dollar loss. But the bank makes only US$ 2.3 billion, so a full year earnings will be wiped out.

      Bonus’s are one explanation, but accounting rigidity is another, they go too much by the book.

    • “The venezuelan economy operates at prices that are congruent with the parallel exchange rate. For that reason, many multinationals (not all) are able to increase prices according to the “black”( “free” I prefer) fx market movements. Therefore, not having access to the official exchange rate should not be that critical to them. The important matter would be allowing a form of access to convert their profits.”

      The first sentence is the most important statement regarding business in Venezuela.

      The most important factor is whether you can increase your selling prices at the free market rate on a daily basis. If you can do that 100% of the time, you have only one problem in a hyperinflationary economy like Venezuela: how do maintain the real value of your retained profits. You can do that by buying other Venezuelan businesses that also increase their selling prices at the daily parallel rate all the time or you can buy well located and well maintained properties.

      Property prices automatically follow the parallel rate on a daily basis. Whenever they are actually sold they will be sold at that day´s parallel rate even if accountants do not update their prices daily.

      One way of having a proper view of your business is to implement accounting-dollarization: you do all your accounting in US Dollars at the parallel rate. That is the true state of your business. I did it in 1996 in Auto-Sueco (Angola), the Volvo agents in that country during hyperinflation of 3800 percent.

      • Accounting-Dollarization is doing all your accounting ON A DAILY BASIS in terms of the parallel rate. It is NOT simply translating your year-end results at the year end parallel rate. It is accounting everything DAILY at the DAILY changing parallel rate.

  12. Glenn Says:

    For some reason the two exchange rates remind me very much of the two currencies in Cuba – one rate for survival; racioned food, medicines and the other for what you can’t afford. Which category will toilet paper fall into?

  13. xp Says:

    Foreigners used to book their losses with old fashion red ink,
    so now they book virtual losses at every operatic twist and turn –
    but it ain’t over until the fat lady sings –
    and ‘losses’ here help shelter profits elsewhere;
    locals & others laugh their life away
    collecting the 10+ premium on their money.
    An idyllic life. What more can we ask? Manna from heaven?

    • m_astera Says:

      “What more can we ask?”

      Toilet paper. At any price.

    • xp Says:

      Another idyllic business EPA
      [Stocks ample selection of toilets
      needed by sitting Penseurs*],
      is going down the drain –

      EPA, la red de tiendas para construir, decorar y remodelar, anuncia el cese de operaciones de sus canales comerciales no presenciales a partir del 1° de enero de 2014.

      *The Thinker (French: Le Penseur) is a bronze sculpture by Auguste Rodin,

    • xp Says:

      Anatoly Kurmanaev and Corina Pons
      Dec 23, 2013 7:44 AM
      Venezuela devalued its currency for foreign tourists
      by 44 percent today after the bolivar slumped
      to a record low on the black market.

      • Yes, officially that is now the first devaluation, as the Sicad rate is no longer secret. This means that accounting will now at least be done at 11.3. If they devalue again and Sicad is moved, then it gets worse for these companies.

        • Kepler Says:

          Really, Miguel?
          As far as I read, this is only for foreign tourists (the millions of tourists we get, apparently).
          A company cannot use that same rate to transform their Bs into dollars, can they?

          • moctavio Says:

            It depends what you have access for foreign currency. If you dont get Cadivi dollars and only Sicad, then now you will have to do the accounting at the Sicad rate, for example. If you have dividends, but have no access to capital goods then you have two rates, one for the cash for the dividends, another for your assets. Before, because the Sicad rate was not public, this could not apply. Accountants always make you take the most conservative path.

            • Glenn Says:

              Well the news article says transactions are limited to 10,000 USD. Doesn’t sound like it’s in use for businesses but no doubt that day is coming. Tourist aren’t going to give the gov any measurable relief.

  14. Morpheous Says:

    It looks like Venezuela will never have free currency convertibility for many years to come. I even don’t see an opposition government lifting exchange controls either. Cause in the end nobody wants to accept that having free convertibility is only feasible with an exchange rate much higher than SICAD rate at 17-18. But the pain and damage in the long run is even harder by forcing and ever overvalued real exchange rate; and people understand this even less. The worse part will be for their children and grand children.

  15. glenn Says:

    Bravo and thanks for the update. Do you think 12 is a number that will settle the economy for a little while or is it too little too late?

  16. Reblogged this on danmillerinpanama and commented:
    Good for Venezuelan consistency!

    Virtual profits, virtual currency, virtual toilet tissue and virtual media access for the opposition. It’s a great place for virtual economists and for virtual consumers .

    • Caracas Canadian Says:

      When ever my I showed my friends in Canada a video of a Chavez cadena where he always waved around the little blue book which he said was the Venezuelan constitution I said to my friends that Chavez was one of the smartest assholes in Venezuela, Because he knew, when you traveled on the autopista in Venezuela wherever you stopped there was never any toilet paper, therefore he always had this little blue book which he said was the constitution, but in reality it was some of the smoothest toilet paper known to mankind.
      For the record, to get to Toronto from Caracas this coming week I have to fly Caracas to Rome, to Paris to Toronto. Such a sweet stupid revolution.

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