Understanding the American economy, and all its associated laws, regulations, and political structures, is hard enough. Understanding how domestic economic practices hold up on the international stage is even harder. But imagine a country in which the government mandates prices for everything you buy on a whim and employs an elaborate system of exchange rates to control corporate profits. For citizens of Venezuela, no imagination is necessary.
An Unstable Economy
Conditions aren’t easy for people of this South American country. There is an increasing web of price controls and economic restrictions that show no sign of slowing under the new governance of President Nicolas Maduro. The state caps corporate profits at 30% and regulates how much businesses can charge for everything from butter to televisions. Spiraling inflation, coupled with shortages of a host of essential goods, have led many to riot in the streets. What’s more, the government’s foreign exchange rate system sets up a tiered approach, with the most valuable businesses, namely those that import essential goods, getting the best deal.
Multi-tiered Exchange Rate Puts Stress on Business
If you’re lucky enough to be one of these importers, you can take advantage of a rate at which one US dollar is 6.3 bolivars. If you participate at the middle tier rate, you are subject to the slightly less favorable rate of 1:10. At the newest tier, companies that supposedly manufacture or supply less valuable goods get crippled by an exchange rate where it takes 50 bolivars to purchase a single dollar. This is only trumped by the 1:70 rate at which black market dealers must work. For business owners, it’s hard to break free from this system; the Venezuelan economy, which imports 80% of its products and is a huge exporter of petroleum products, relies intensely on the US dollar.
What This Means for the International Community
None of this spells profit for international businesses hoping to maintain a presence in the country. For accounting purposes, many corporations cling to older, more favorable exchange rates, but time is running out to make the switch. And one thing’s for sure – it’s going to be expensive for any company that succumbs to Maduro’s newest laws. Two cosmetic companies – Avon Products and Estee Lauder – both recently made the adjustment, and as a result took $42 and $30 million hits, respectively. Other corporations’ reluctance to recalculate has not been due to ignorance or stubbornness; the math has simply shown that for the more than 100 companies that have run the numbers, the Venezuelan economy already poses a “drag” on earnings. In fact, companies like Goodyear and Herbalife estimate write-downs ranging from $100 to $235 million because of new exchange rates.
As of late, multinational corporations have run into even more reasons to avoid business with the South American nation. Namely, there aren’t enough dollars to go around. The government owes millions of dollars to industry leaders, a debt that Venezuelan companies pass on to suppliers. This translates to less business for corporations that would otherwise find loyal consumers in the nation. For example, a New York-based producer of fuel systems for cars finds the Venezuelan market stagnating as automakers in the country grow increasingly strapped for dollars and can’t afford to purchase its products.
To Commit or Get Out – That is the Frustrating Question
Speaking of automakers, American companies like Ford, General Motors, and Chrysler have already taken the plunge into the new exchange rate system, to the tune of hundreds of millions in write-downs. What’s worse, GM shared that every 10% devaluation of the bolivar from the mid-tier rate would force another $100 million in damage to earnings. Many aren’t so willing to suffer the financial consequences of economic instability in the country. Companies like Air Canada and Alitalia have both begun pulling out, stating that they will stop flying to Venezuela altogether in the coming months.
While some corporations, like Ford, are committed to working it out with the government, many aren’t so sure. Past trends don’t suggest that the country will get a handle on things any time in the immediate future, so the question is whether or not businesses are willing to play the long game. Those who aren’t are trading in uncertainty in Venezuela for clarity in other markets.