NEW YORK: The recent devaluation of the Venezuelan bolivar was a blow to some major US companies, highlighting the importance of financial ties between the two nations despite their political disagreements.
Venezuela devalued the bolivar by 32 percent against the US dollar earlier this month, feeding public fears that prices would rise further amid already soaring inflation. The change in the official exchange rate from 4.3 bolivars to the dollar to 6.3, was published in the Official Gazette.
Economist Jose Luis Saboin of the consultancy Econalitica said consumers’ purchasing power will likely erode by 7.2 percent this year. Devaluation will make imports more expensive in Venezuela, where inflation stands at 20.1 percent — the highest in Latin America, based on official data.
President Hugo Chavez’s government put in place an exchange rate control mechanism in 2003 seeking to throw the brakes on capital flight. In January 2011 it set the rate at 4.3.
But the hunger for dollars and euros fuels a black market with a much higher exchange rate which by law cannot be published.
The United States is the main purchaser of Venezuelan oil and thus its largest trading partner.
Despite political disagreements between the two countries’ governments, trade relations between the United States and Venezuela have blossomed in recent years, thanks to rising oil prices over the past 10 years.
Some 500 US companies operate in the country, according to the US State Department. Win Thin, a senior economist at Brown Brothers Harriman, said Venezuela does not produce much of anything except oil — and imports most other products. That is why, he explained, US multinationals are broadly represented in many sectors of the economy: pharmaceuticals, energy, cosmetics, etc.
But they are not in a position to keep pace with inflation as prices of certain categories of products are strictly controlled. Because of that, economists say, the devaluation of the bolivar has negatively affected their earnings.
This was evident in financial reports published by some of these companies in recent days. Procter & Gamble lowered its earnings forecast, taking into account of the devaluation of the bolivar. P&G will have to absorb in fiscal 2012-13 an exceptional after-tax loss of $200m ro $275m, and Colgate-Palmolive announced an anticipated an exceptional after-tax loss of $120m in the first quarter.
Merck warned that its stock will be adversely affected by the devaluation of the bolivar in the first quarter. The anticipated loss—five cents a share. Ford and GM have also been affected, along with cosmetics giant Avon, among others.
Analysts point out that multinationals have been affected by other devaluations in history, citing those of the Russian ruble, Brazilian real and Asian currencies in the 1990s or the Argentine peso in the early 2000s.
Afp
