BOSTON (Reuters) – A massive effective devaluation of Venezuela’s bolivar currency will likely badly dent 2015 earnings at a swath of major US companies.
The decision, announced late on Thursday, would almost wipe out the $7.1 billion of Venezuelan monetary assets currently held on the books of 10 large American companies. At the new exchange rate of about 170 bolivars to the dollar, the value of those assets would drop by 93 per cent to just $421 million, according to a Reuters analysis of regulatory filings.
Currently those assets are valued based on the main official rate of 6.3 bolivars to the dollar, or a second rate at 12 bolivars. However, the Venezuelan authorities only allow a limited amount of business to be done at those rates as the country suffers from a shortage of available dollars.
Some companies, such as diapers and tissue maker Kimberly-Clark Corp, had recently taken big charges after valuing their assets at a third exchange rate of about 50 bolivars to the dollar, rather than the 6 or 12.
However, that part of the system has now been replaced with the new free-floating rate, which was last quoted on Friday at 174 (even weaker than 170 on Thursday). That puts even the companies who had started to use 50 in a position where they may have to take another hit. The move represents an effective devaluation of more than 70 per cent.
The currency move is part of President Nicolas Maduro’s efforts to shore up the OPEC (Organization of the Petroleum Exporting Countries) member’s coffers amid tumbling crude oil prices, an annual inflation rate of around 64 per cent, and a shortage of many goods in the shops.
Among the companies still using the 6.3 rate are household products maker Procter & Gamble, oil services group Halliburton Co, and drug companies Pfizer Inc and Merck & Co Inc. The drug companies may have a better argument for using this rate than most because Venezuela does allow it to be used for the purchases of some critical goods, such as medicines.
Others use the 12 rate. PepsiCo recently started valuing some of its assets in Venezuela at that rate, after being unable to repatriate money at the 6.3 rate for years.
But with this week’s further devaluation of Venezuela’s currency, even the 12 rate seems increasingly imaginary.
“6.3 is ludicrous in my view for most companies,” said Ali Dibadji, an analyst at Sanford C Bernstein & Co Inc.
The introduction of the new rate may help ease market concerns about a possible debt default and boost supplies of dollars to a currency-starved economy. But some investors see the effective devaluation as cosmetic. There continues to be the reality of runaway inflation and swelling supermarket lines.
“For the most part, the market’s view is that things will be horrendous in Venezuela for quite a while,” said David Whiston, a senior equity analyst at Morningstar Inc.
Simadi exchange rate is close to Venezuela’s black market rate of 188 bolivars per dollar, which finance industry leaders described as a sign the government is willing to allow supply and demand to set prices.
PepsiCo has one of the largest stated exposures to Venezuela with assets there valued at $1.13 billion using the 12 bolivars exchange rate, company filings show. Those assets would be worth only $79.1 million at the 170 rate.
The company said earlier this week in its annual results filing that re-measuring its Venezuela assets at a 50 bolivars rate would trigger a net charge against earnings of about $400 million. It did not respond to requests for comment on Friday.