Global Companies Hit as Venezuela Devalues Bolivar

US and European companies operating in Latin America and their treasury departments face decisions on how to respond to Venezuela’s latest devaluation of its currency the bolivar fuerte (VEF).

Venezuela, whose budget deficit has been swollen by government-led heavy spending, announced on 8 February that the currency was being devalued by 32%, the fifth such move in the past decade, reducing the rate from VEF4.3 per US dollar to VEF6.3.

The impact is expected to fall most heavily on companies in the oil/energy, telecommunications and consumer products sectors. State-imposed price controls imposed on a range of products in 2011 make it difficult for multinational corporations (MNCs) selling to consumers in Venezuela to protect their profits. Colgate-Palmolive has already said that it will take a one-time charge of US$120m in Q113 to reflect the effect on its balance sheet. The earnings of Spanish companies with exposure in the country, such as Telefonica, insurer Mapfre and banking group Banco Bilbao Vizcaya Argentaria (BBVA) are also vulnerable.

The most recent devaluation takes place against a background of increased political instability, as Venezuela’s president, Hugo Chavez, is suffering from cancer and has been convalescing from surgery for two months, making his return to power appear unlikely.

Venezuelan bonds rose following the devaluation announcement; investors greeting the news as a sign that the interim government is taking overdue action to reduce the country’s budget deficit although further devaluations are regarded as likely. Despite the country’s abundant oil resources and strong oil industry, inflation started the year at 22% and is likely to rise to over 30% while reports suggest that there are growing shortages of many essential food items.

Bank of America (BoA) said on 8 February that the devaluation will reduce the country’s fiscal gap for 2013 to 5.3% of gross domestic product (GDP) from the previously forecast 9.7% and that it expects a further devaluation to 8 bolivars per dollar in Q114.

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