Venezuela’s economic and political crisis is unlikely to become top of mind for Latin America regional executives and corporate centers, at least from a iness stanoint. Most multinationals have fled the Venezuelan market over the last three years, amid growing difficulties to repatriate profits, import raw materials and finished goods into the market, get paid by local pners and the Venezuelan government, and more recently due to full-fledged expropriations and factory confiscations — all problems stemming from the abrupt reduction of U.S. dollars in the Venezuelan economy since prices sted to plunge in April 2014. A return to growth will likely be long and painful. Companies should hope for the and prepare for the worst.
The crisis in Venezuela has been escalating over the last few years as product shortages, social unrest, and political clashes have grown more severe. Then, in August, Venezuela’s president Nicolás Maduro formed a constituent embly to rewrite Venezuela’s constitution (against the will of an opposition-controlled and dcratically elected legislative), receiving the condemnation of several countries in Latin America and the European Union, which have refused to recognize the legitimacy of the embly. President Trump remarked that he would not rule out the possility of a military option in Venezuela, and his administration has recently imposed economic sanctions on the South American country.
However, the country’s crisis is unlikely to become top of mind for Latin America regional executives and corporate centers, at least from a iness stanoint. This is because most multinationals have fled the Venezuelan market over the last three years, amid growing difficulties to repatriate profits; import raw materials and finished goods into the market; get paid by local pners and the Venezuelan government, and more recently due to full-fledged expropriations and factory confiscations — all problems stemming from the abrupt reduction of U.S. dollars in the Venezuelan economy since prices sted to plunge in April 2014.
Indeed, represents 96% of Venezuela’s export basket, constituting the country’s main source of U.S. dollar inflows. Since 1958, the Venezuelan government has failed to diversify the country’s production matrix, attaching the nation’s future to windfalls. Moreover, mismanagement of the state-owned company PDVSA led to additional production cuts, leaving foreign reserves dwindling.
Our company, Frontier Strategy Group, recently polled 20 Latin America general managers about Venezuela’s contributions to their regional revenues. Venezuela represented only 1% of total revenues. It is the second smallest market in Latin America — a sharp difference compared with only a few years ago, when it used to compete with markets such as Argentina, Chile, and Coloma as the third largest market in the region, after Brazil and Mexico. P of the decline can be explained by the sharp depreciation of the bolivar, but for the most p it reflects proactive decisions by multinationals to exit the market.
Venezuela’s corporate exodus has taken different forms. It includes full-fledged exits by corporations like Clorox, one of the corporations to cease its operations in the market in 2014 (to later be seized by the Venezuelan government), and companies like Bridgestone and General Mills, which s their Venezuela inesses to local industrial s and te investors, respectively, in 2016. But it also includes companies that significantly downsized their Venezuelan operations and those that have written their Venezuela iness off their Latin America commercial and financial results. The reas for this include Venezuela’s plummeting currency, which has resulted in losses in the llions of U.S. dollars for companies such as Pepsi, political meddling and price controls, supply chain disruptions, and inality to repatriate profits.
By the end of last year, at least 64 companies of the S&P 500 — about 13% of the total — posted regulatory filings informing investors about write-offs or exposure to et devaluations as the bolivar continued to lose value against the U.S. dollar. ust looking at American firms, the list of companies that since 2014 have exited the Venezuelan market for good, temporarily halted production, or written off their Venezuela operations includes corporations such as Mondelez, Liberty Mutual, Colgate, Procter & Gamble, Ford, Kimberly Clark, General Motors, Ford, Coca-Cola, the aforementioned Clorox, Bridgestone, Pepsi, and General Mills, and airlines such as Delta, United, and American.
U.S. companies have led the exodus of multinationals from Venezuela, but companies from other key trading and investment pner countries are likely to follow suit if operating conditions in the country do not improve soon. Spain alone has an estimated 5 llion euros at stake, from investments made from 1993 to 2017 by 100 different companies in sectors ranging from banking and insurance to telecom, construction, and gas, reable energy, els, clothing, and food and beverage. Some of these companies are g multinationals such as Repsol, Mapfre, and BBVA.
Companies such as Chevron, Valero Energy, and Phillips 66 are still betting on Venezuela’s market for long-term profitality. Energy companies do tend to enjoy more favorable operating conditions — as the Venezuelan government tries to protect its major industry — and are locked into longer-term and gger capital investments, which are by nature less vulnerable to the cyclicality of political transitions.
Locally produced products are also rapidly gaining market share as the local currency slides and imported goods become much more expensive. Once major consumers of Scotch whiskey, Venezuelans are switching to Venezuelan-made rum, premium brands of which have become relatively more affordable than their whiskey counterps. But this trend extends to all product categories, from food to cleaning supplies. Traditional -and-pop store chains are also thriving, such as Día Día, which has found a way to maximize sales by comning the proximity of -and-pop shops with the low prices of g supermarkets.
Chinese state-owned companies are also betting on Venezuela investments, mainly in the mining sector. Although Chinese companies are fully aware of Venezuela’s inherent economic and iness risks, many continue to receive low-interest rate loans by Chinese banks, and enjoy preferential access to market and resources such as the China-Venezuela oint Fund. Chinese investments also reflect the more cordial lateral relations between both countries and the fact that Venezuela still owes China 19 llion U.S. dollars in loans that are being repaid with . Hence the Chinese have incentives to maintain the Venezuelan economy afloat.
Once an attractive and profitable market for multinationals, and given its vast resources and favorable dgraphics — in terms of a large adult population (link in Spanish) and high levels of tertiary education — we predict that Venezuela is likely to regain steam in the future.
But because of Venezuela’s current deep macroeconomic imbalances and social fracture, a return to growth will likely be long and painful and will require significant structural reforms to its economy, political system, and most basic institutions, which have been suffering from years of excessive state interventionism since 2001 with the late President Chávez. This means that even in an upside scenario, a return to growth is unlikely at least until 2020.
So when will be the right time for companies to locate corporate resources to Venezuela? We are advising our clients to consider different political and economic scenarios.
For example, in a downside scenario, in which Venezuela resembles Cuba, the current government could decide to cancel presidential elections slated for December 2018 indefinitely and take control over te sector activities with the aid of the military. In this case, civil confrontation and an embargo by the U.S. and the EU would likely follow, making it impossible for Western multinationals to trade with Venezuela for as long as the embargo persists and leaving them with no recourse other than to exit the market.
In a slightly less pessimistic scenario, President Maduro’s government would maintain presidential elections in 2018, only to allow hand-picked candidates from its own ranks and the opposition to run for the presidency. The president would then pursue pial economic reforms to regain access to capital markets — mainly th modifications to the current foreign-exchange rate system and price controls — but would avoid more painful economic measures needed to curb fiscal deficits and inflation, such as severely cutting government spending. In this case, economic recovery could still take place in 2020, but it would be weak, and operating conditions would remain challenging for multinationals.
Empowering local market access and government relations teams would be key in this scenario to encourage reform and to ensure that the Venezuelan government is considering the interests of the te sector. More amtious investments would be unwise until the economy shows signs of stalization on the back of further reforms, or if global prices were to ly rebound.
In an upside scenario, the Venezuelan government would allow for free elections, and a ly instituted government from the opposition would pursue a more orthodox and aggressive economic reform package. This could include a restructuring of Venezuela’s external debt with the help of institutions like the International Monetary Fund. In this case, economic recession would worsen in the short run but allow a stronger recovery in early 2020 on the back of investment recovery. In this scenario, multinationals would be advised to take a more proactive approach and resume investments as soon as possible, while simultaneously negotiating outstanding receivables and the recovery of expropriated ets with the government.
Recent events suggest that Venezuela is leaning more toward the downside scenario than toward the latter upside scenario. Companies should hope for the and prepare for the worst.
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