Venezuela's currency woes an increasing threat to U.S. corporate profits

Sat Jan 24, 2015 11:52am EST
 
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By Tim McLaughlin and Svea Herbst-Bayliss

(Reuters) - Venezuela's deepening economic troubles, and in particular the weakness of the bolivar and restrictive currency controls, have hurt U.S. corporate profits for the fourth quarter of 2014 and are set to inflict further pain this year.

In a likely sign of things to come from a number of companies this results reporting season, Ford Motor Co on Friday said it was taking a pre-tax charge of $800 million for its Venezuela business. It blamed Venezuelan exchange control regulations that have restricted the ability of its operations in the country to pay dividends and obligations in U.S. dollars. Ford also said that it was unable to maintain normal production in Venezuela with the availability of vehicle parts constrained.

Also on Friday, diaper and tissue maker Kimberly-Clark Corp said it took a fourth-quarter charge of $462 million for its Venezuelan business. That was after it concluded that the appropriate rate at which it should be measuring its bolivar-denominated monetary assets should be a Venezuelan government floating exchange rate - currently at around 50 bolivars to the dollar - rather than a fixed official rate of 6.3 to the dollar that it had previously been using. Kimberly-Clark blamed increased uncertainty and lack of liquidity in Venezuela for the move.

Venezuela President Nicolas Maduro said on Wednesday he was shaking up the complex currency controls in the socialist-run country, where dollars are sold on the black market for about 184 bolivars to the U.S. dollar instead of the country's three-tiered exchange rate system that has ranged from the 6.3 official rate to two other rates, currently at about 12 and the one at around 50.

Those latter two tiers of the system would be merged, he said, though it is not immediately known at what rate that would happen. Maduro also announced that another new rate would be introduced into the system to offer dollars via private brokers to vie with the black market rate.

The latest moves may catch some companies flat-footed - particularly regarding the size of the hit they may have to take to their earnings as they revalue assets at a much weaker bolivar exchange rate.

"They may be surprised by the magnitude of the move but not by the direction," said Marc Chandler, global head of market strategy at Brown Brothers Harriman & Co. "But many shied away from hedging in the past because it is very expensive.”

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A cashier counts Venezuelan bolivar notes in a state-run supermarket in Caracas January 9, 2015. REUTERS/Carlos Garcia Rawlins