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Feb
15
2013
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ICYMI: Why Venezuela’s Devaluation is Biting

CNBC
February 14, 2013
By Kelley Holland

20130216 amp501 e1360958533813 ICYMI: Why Venezuelas Devaluation is Biting

Courtesy of: Agence France Presse

First came Colgate-Palmolive, but it wasn’t alone for long. Halliburton, Avon, and Merck soon joined a rapidly growing list.

These companies and more have announced that they will take an earnings hit in the wake of Venezuela’s latest devaluation of its currency, the bolivar fuerte, last Friday. And there is talk that more companies could join the crowd: just for starters, among U.S. multinationals, Goodyear is evaluating the impact of Venezuela’s move, but has lowered its operating income guidance. Among consumer consumer-oriented companies, Heinz, Clorox, Procter & Gamble, and Arcos Dorados Holding, the world’s largest McDonald’s franchisee, are quite active in Venezuela, and in the energy sector, Chevron participates in six energy-related projects in the country.

At least in some quarters, the devaluation appears to have been expected – which raises the question of why these companies weren’t better prepared. Shouldn’t they have hedged against this possibility?

Apparently, it’s complicated.

In Venezuela, “there is very little a company can do to hedge their exposure,” Willie Williams, director of institutional derivative sales at Societe Generale, told CNBC.com. “There is no non-deliverable forward market like in Brazil to hedge exposures. The best many companies can do is have expenses denominated in bolivars as well.”

Even if a company could find a way to hedge bolivar exposure, it could be very costly, says Eduardo Suarez, a currency strategist at Scotiabank. Trading volume in the “formal market” for the bolivar is usually less than $100 million per day, he says, and “such a small formal market would probably mean very high costs for the large transactions multinationals would require.”

There would be carrying costs for a hedge as well, he said. “Unless you time the hedge very well, you would be forced to pay a large negative carry to keep the hedges on for a prolonged period due to rate differentials.”

True – but those weren’t the only problems. “I think part of the issue is that many people became complacent into thinking that Venezuela would postpone any currency action until Chavez came back,” says Gustavo Arteta, an emerging markets FX strategist at UBS.

So far the announced earnings hits have been relatively minor – but this was not the first time Venezuela has devalued the bolivar, and the companies who took hits do have significant exposure to Venezuela. Arteta wrote in a note to clients that “our initial reading is that the devaluation is not large enough,” adding that the official rate is still not in sync with the black market rate. “We think that another devaluation to bring the official rate close to 9 or 10 should not be ruled out in Q2 or Q3.”

Hopefully, multinationals will find that one less of a surprise.

To read this article at CNBC, please click here.

 
May
18
2012
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In Case You Missed It… Articles Roundup Week of 5/18/12

This week: As Venezuela’s October 7 elections approach, opposition candidate Henrique Capriles spends time speaking to Venezuela’s poorest, a demographic that Chávez has long dominated; Hugo Chávez’s prolonged illness and absence from the spotlight has some wondering whether his party is preparing contingency plans for the elections, including delaying or canceling them entirely, and possibly an alternative candidate, such as Foreign Minister Nicolas Maduro. Similarities between Chávez and Putin prompt a columnist to wonder why the Venezuelan president receives less international criticism. Meanwhile, investors continue to devalue Venezuela’s debt, which is increasing at record pace due to Chávez’s election-year spending. The increased spending has also helped hide the shrinking private sector in recent GDP numbers. Venezuelan carmakers expect production to decline for the fourth consecutive year due to a lack of dollars available from the government. Finally, recent violence in a Caracas prison exposes deeply rooted corruption, violence, and drugs within Venezuela’s prison system.

Hugo Chávez’s Enemy No. 1, Businessweek

In the ramshackle town of Anaco in eastern Venezuela’s oil-rich Anzoátegui state, three yellow-shirted bodyguards rush a trim, perspiring, boyishly handsome 39-year-old in a baseball cap from house to shabby brick house through 500 cheering, flag-waving fans. Most in the throng are visibly poor, some are young women with tears of joy running down their cheeks. All are sweaty under a hot April sun.

Chavez opponent wants to be a uniter, CNN

He is running against one of the world’s most recognized presidential strongmen, but Henrique Capriles, the governor of the Venezuelan state of Miranda, exudes confidence.

Venezuela analysts cast doubt on presidential election, The Miami Herald

Is the Venezuelan government laying the groundwork to delay or even suspend the Oct. 7 presidential elections due to President Hugo Chávez’s failing health?

In Venezuela, top diplomat steps into the void while cancer forces lower profile for Chavez, The Washington Post

After nearly a year of cancer treatment that has forced President Hugo Chavez to step back from the spotlight, a burly former bus driver with a dark mustache and affable smile is emerging more than ever as the president’s stand-in.

Chávez vs. Putin, The New York Times

He came to power in the late 1990s, his energetic governing style ushering in an era of increasing prosperity that earned him plenty of goodwill. Luck also helped some: his rule coincided with an era of rising oil prices, and he used the petrodollars that flooded the state’s coffers to finance a dizzying consumption boom throughout the country.

As Chavez Resurfaces, Venezuela’s Debt Plunges, The Wall Street Journal

Signs that President Hugo Chavez has no intentions of backing down from Venezuela’s upcoming presidential elections, despite his battle with cancer, are putting a damper on the country’s red-hot sovereign debt.

Venezuela’s GDP grows amid sustainability worries, The Financial Times

If men are from Mars and women are from Venus, then “chavistas” (followers of Hugo Chávez) are from Mercury and their opponents are from Neptune.

Domestic debt up USD 40.6 billion in four months, El Universal

A Venezuelan government immersed in the election campaign has resorted to the largest spending ever over the past five years.

Outlook of automotive industry cools, El Universal

Growth expectations in the automotive industry were revised downward in 2012. Once again, delays in authorizations of US dollars by the Foreign Exchange Administration Commission (Cadivi) are present.

In Venezuela’s prisons, inmates are the wardens, Global Post

A cloud of marijuana bounces along with the bass line from a stack of six-foot high speakers in the corner of this large hall, its smell infused with that of urine.

 
May
11
2012
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In Case You Missed It… Articles Roundup Week of 5/11/12

This week: It’s been a year since Venezuelans first learned that Hugo Chávez was ill; his increasingly-long absences, along with his naming of a six member Council of State, have fueled rumors that he will pick a successor to run in the October elections; the increasing uncertainty over his health is also leading to warnings about potential civil unrest and even violence; investors are bullish on the state oil company PDVSA’s bonds in hopes that the Chávez era appears to be coming to close, but analysts warn that Venezuela’s economy is in need of serious help—no matter who wins the October election. Meanwhile, PDVSA continues to struggle with oil spills, Chávez’s new prescription-drug plan is denounced as a populist ploy, new reports place Venezuela almost last in the world in economic freedom, and Venezuela finds itself on the U.S. Commerce Department’s watch list for intellectual property infringements.

For Venezuela’s president, a year of health struggles, CNN

It started with an unscheduled phone call to an evening TV show. The voice of Venezuelan President Hugo Chavez crackled over the state television speakers.

Chavez reelection bid in doubt, AFP

President Hugo Chavez’s repeated trips to Cuba for cancer treatment and the government’s silence about his health are fueling rumors that he will name a successor to run in October presidential elections.

Warnings of civil unrest in Venezuela, The Financial Times

Politicians across the spectrum in Venezuela are trading dire predictions of impending violence in the vacuum left by uncertainty about the health of President Hugo Chávez.

A modest concession to reality, The Economist

Ever since Hugo Chávez, Venezuela’s president, admitted nearly a year ago that he was suffering from cancer, his spokespeople have insisted that no substitute would be required.

Chavez Cancer Fight Ignites PDVSA Bond Rally, Businessweek

Debt traders are pushing up the bonds of state-owned Petroleos de Venezuela SA as they envision a nation without President Hugo Chavez that may free the oil producer from a tax rate as high as 95 percent.

A post-Chavez Venezuela is no investment bonanza, Reuters

The health of Hugo Chavez has piqued the market’s interest. Long stretches of silence from the cancer-stricken Venezuelan president have brought a certain morbid optimism to investors, who have sent the country’s debt to highs not seen in years.

Venezuela’s PdVSA Reports Oil Leak In Anzoategui State, The Wall Street Journal

Venezuelan state oil company Petroleos de Venezuela SA said Wednesday it has activated a contingency plan to tackle an oil leak at a crude production facility in the eastern state of Anzoategui.

Venezuela: subsidised drugs for all, The Financial Times

While many will praise the noble intentions behind the Venezuelan government’s inauguration of a nationwide network of subsidised pharmacies on Monday, just as many will reject it as a populist stunt ahead of October’s presidential elections.

Venezuela ranks 174 in the Index of Economic Freedom, El Universal

Economic restrictions in Venezuela keep on causing poor results in trade freedom, rule of law, competitiveness and entrepreneurship. This is mirrored in the country score under the 2012 Index of Economic Freedom.

Venezuela among countries with high “piracy” levels, El Universal

Venezuela is among the 12 countries included in the priority watch list of Intellectual Property Right (IPR) violations, according to a report of the United States Department of Commerce.