Brink’s, an armored car company, could see about US$400 million in revenue disappear this year from its operations in Venezuela. Procter & Gamble announced a write-down of US$275 million on its Venezuela business. American Airlines and Delta Air Lines are slashing their Venezuela flights.
Venezuela, once an apparent profit center for multinational companies, increasingly looks like a financial black hole.
Despite the nation’s socialist-minded government, large US and other foreign companies thrived here for years, benefiting from limited competition, brand-hungry consumers and close commercial ties with the US. Now the country’s economic chaos is taking its toll, as currency restrictions and a major devaluation cause profits to evaporate.
The economic crisis in this major oil exporting nation has grown since former Venezuelan president Hugo Chavez died in March last year. Venezuelan President Nicolas Maduro has been unable to come up with a consistent set of policies to curb raging inflation and other ills, although there are signs that changes might be on the horizon.
“It used to be a very profitable environment for them, but I think we’re hitting the wall,” said Carlos Tejera, the general manager of the Venezuelan-American Chamber of Commerce. “All indications are these multinationals are going to have to take a really cold, hard look at what’s going on here and have to make a decision, because this is unsustainable.”
The problems are rooted in the country’s currency, the bolivar.
Under standard accounting practices, US companies have long booked sales and profit on their Venezuelan operations using the primary exchange rate set by the Venezuelan government. For years, the currency has been overvalued, allowing multinational companies to post strong numbers.
The country’s high inflation — currently about 60 percent a year — has also meant that the prices in bolivars that companies charge for many goods and services have risen sharply. That has pushed up bolivar sales figures even higher and exacerbated the distortion when they are converted to US dollars.
Such distortions can be seen in the financials of FEMSA, the largest Coca-Cola bottler in Latin America. Last year, the company reported revenue in Venezuela of US$2.4 billion, slightly greater than in Brazil, a much larger country. Yet sales volumes, which reflect the number of bottles or other units sold, were two to three times bigger in Brazil than in Venezuela, according to filings with the US Securities and Exchange Commission.
Now companies are feeling the pain from a series of currency devaluations over the past year and a half.
First, the government changed the fixed exchange rate to 6.3 bolivars to the dollar, from 4.3. Then it created a three-tier exchange rate. The primary rate of 6.3 bolivars is largely intended for importing essential goods like food and medicine. Then there is an intermediate rate of 10.5 bolivars to the dollar, available to companies invited to take part in government auctions, and another, created earlier this year, of 50 bolivars, which was intended to be open to all companies and individuals, although access has been fairly restricted. Both of those rates fluctuate slightly.
In the case of Brink’s, the company’s filings showed that Venezuelan revenues last year, measured at the government’s fixed exchange rate, were a robust US$447 million. The company said that Venezuela made up a “significant component” of its overall operating profit last year.
However, the rosy outlook changed in late March, when Brink’s started calculating its sales using the recently created exchange rate of about 50 bolivars to the dollar.
In its quarterly report in April, the company said, “We do not expect Brink’s Venezuela to be a significant component of Brink’s consolidated revenue or operating profit in the last nine months of 2014.”
If the devalued exchange rate had been applied to last year’s Venezuela revenues, the company said, they would have shrunk by 88 percent and the operating profit for the entire company would have fallen by 31 percent.
Further complicating the picture, the Venezuelan government has not allowed companies to repatriate profits for the past five years.
Companies have ways of chipping away at the locked up profits, including charging higher fees to Venezuelan subsidiaries for goods and services provided by the parent corporation. However, many foreign companies are stuck holding vast troves of bolivars that shrink in value each time there is a devaluation.
The currency controls have only tightened over the past year, making it increasingly difficult for companies to obtain the dollars they need to import goods, services, parts or other materials. The government has also failed to pay companies the hard currency it had promised them for imports bought on credit from suppliers, and in many cases suppliers are now refusing to ship more goods to Venezuela until they receive payment.
Venezuelan economic officials have said that they intend to move toward a unified exchange rate. And recently former Venezuelan Planning and Finance minister Jorge Giordani, who had strong ideas on economic policy, was pushed out of government.
After that, the intermediate exchange rate weakened slightly, a sign, for some, that changes were coming, however slowly.
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