As US MNC exposure to Venezuelan FX rate devaluation garners increasing media attention and Venezuelan government hinted of coming changes to the FX regime, members of The NeuGroup’s Latin American Treasury Managers’ Peer Group (LATMPG) met in Miami last week to share notes on how to handle the situation, while expressing optimism that Argentina would not create even more of the same (a least for a few quarters).
According to a recent analysis by Reuters, at least 40 US companies in the S&P 500 have substantial exposure to Venezuela’s worsening economic crisis. Collectively, they could be forced to take several billion dollars in write downs.
Per Reuters:
The problem is that the dollar value of the assets as disclosed in many of the companies’ accounts is based on either the rates at 6.3 or 12 and only a limited number of transactions are allowed at those rates. The assets would be worth a lot fewer dollars at the 50 rate in the government system and the dollar value would almost be wiped out at the black market rate.
The currency system is also about to be shaken up following an announcement by Venezuela President Nicolas Maduro on Jan. 21, leading to fears of a further devaluation.
LATMPG members shared notes on how their business models allow them to translate financials at official rates, or some combination of them. There is resistance to restating until required but it is a subject of discussion with auditors. Several of their peers, meanwhile, have announced write-downs in the 100s of millions for the fourth quarter, according to Reuters, including Ford, $800 million; Kimberly Clark $462 million and Schlumberger, $472 million.
Another layer of risk and uncertainty has been added by the recent announcement of coming changes to the FX regime, which would include a merger of the two SICAD (1 and 2) rates, currently at about 12 and 50 bolivars per USD, respectively. It is still unclear about where the merged rate will end up.
Expectations for the region are dim, with no members expecting an improvement. This outlook was reinforced by HSBC, the meeting sponsor, according to bankers from the region and their Latam FX strategist.
Concerns about an “FX adjustment” in Argentina, however, are tempered by the election run up. The leading Presidential candidates for the October 25th general election appear more pragmatic and market friendly than the current government of Cristina Fernández de Kirchner. Thus, the hope is for no major devaluation until after the October election and better policy to prompt economic improvement thereafter.
Members can only hope to free more cash from repatriation restrictions and get it out before these Latam countries devalue their currencies further and the USD continues to strengthen. This surely will be on the agenda again for the group’s next meeting.