The NeuGroup’s LatAm treasurers discuss ongoing challenges in the region then get new test after Venezuela devalues the bolivar.
Corporate treasury practitioners with responsibility for LatAm spend a disproportionate amount of their time attending to Venezuela challenges. Certainly that time was increased significantly this weekend after the Chávez-led Venezuelan government devalued the bolivar (VEF) in an attempt to rein in the deficit and bring dollars to the country. Other challenges loom, however, most notably the future of President Hugo Chávez.
At a recent NeuGroup LatAm Treasury Managers’ Peer Group (LATMPG) event members concluded it was likely that President Hugo Chávez, who has been ill the past several months, might be declared unable to physically lead; after which an election will have to be called – predicting when this will happen has led to continued uncertainty. For the man currently in charge (depending on one’s view on the constitutionality of the president’s postponed swearing-in, currently Chávez’s former vice president Nicolás Maduro), to be elected president, some fiscal spending to gin up Chavista support will undoubtedly be required; it is bad for the incumbent when the “scarcity index” is high as it currently is (the black market for corn flour, recently highlighted in a Feb. 3 Wall Street Journal article, is an example of this).
A few of the takeaways from the LATMPG Venezuela discussions as well as feedback from a blog posting include:
- The devaluation. As many members predicted at the meeting, Venezuela devalued its currency from 4.30 to 6.30. One member of the LATMPG noted that for those companies that record their P/L rate for their financials at the SITME rate, Friday’s announcement was noteworthy because it said the government will do away with a second-tier rate of 5.30 bolivars to the dollar through a bond market administered by Venezuela’s central bank. This is problematic since some companies cannot take out US dollars at the official rate (via CADIVI) and have relied on SITME (Venezuela’s transaction system for FX-denominated securities) exchange to convert VEF for USD at a pace of no more than $350,000 per month. This member’s auditors always gave the company guidance that the USD/VEF rate should be used in its financials and that it should record revenue and expenses at whatever rate the company was able to covert VEF for USD. Absent SITME and not being able to use the official rate, they will need to wait and see what (if any) conversion rate they can exchange VEF for USD.
- At least one bond issue is coming (we hope). To the surprise of many, there were no dollar-denominated bond issues in 2012 (which turned out to be because cash balances in banks were so high), so there is hope that at least one will come this year to fuel CADIVI. A member observed that the government appears to prefer to issue PDVSA instead of government bonds.
- CADIVI payments are smaller – and late. Regarding CADIVI approvals (ALD) for imports, the government has said that CADIVI approvals continue (even above the prior-year levels) and if CADIVI approvals are not received, companies should use SITME. Anecdotal member observations from 2012, however, were that second-half payments were substantially lower than in the first half, and approvals, although received, could not always be turned around into payments in a timely manner.
- Continued delays in royalties and dividends. If CADIVI approvals for imports are bad, it’s even worse – as LATMPG members have lamented for a long time – when it comes to royalties and dividends: after years of no approvals (with very few exceptions) on this front, at this point there is so much money owed to corporations that they fear the government will not be able to honor any of this type of payments, and foreign MNCs are not a prioritized segment anyway, which lessens the chances further. VAT withholdings is another trouble point for non-exporters as refunds take a long time or are not given.
- Base Venezuela imports on actual payments, not CADIVI approvals. To cope with the approval-to-payments gap, companies should consider importing goods and materials only in line with actual payments effected instead of on approvals so cash does not build up excessively in the country. It’s bad enough that the outlook is bleak to ever repatriate any dollars from royalties and dividends, as noted above. There is no need to exacerbate the situation on the operational/sales side.
Going forward, most companies have not gone as far as giving up on the country but are taking precautions to limit exposure while looking for opportunities to deploy cash. Meanwhile, keep following the written rule of law as closely as you can and maintain open communications with government and agency officials.