Venezuela Currency Devaluation: Risk and Opportunity.

500 Bolívares Front

500 Bolívares Front (Photo credit: abeckstrom)

How to convert $500 into $350..

While the failures of socialism and communism have been thoroughly documented, Venezuela announced a devaluation of their currency of 32% on Friday Feb 8th, 2013. In other words, if you had $100 on thursday, by friday you only had $68, an unwelcome surprise for any Venezuelan business or individuals that purchased goods on thursday in dollars and have to pay them on Friday. This from a country that has not seen their president in over 2 months (allegedly under treatment in Cuba), and a country with extensive natural resources in oil, and minerals. It seems that Bolivar dreams of the Grand Venezuela, have been utterly destroyed by the mismanagement and socialist practices of Cuban’s Dictator mini-me Hugo Chavez…

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As Cuba did in the past, Venezuela has engaged in nationalization policies, a disrespect for the democratic process, and a kingdom building strategy. The only thing missing from the Kingdom of Venezuela is the existence of a brother that could inherit the crown as it happened in Cuba just a few years ago. While as with many old european monarchies, the two brothers are similar, they still differ enough to make any forecasts difficult for companies attempting to determine if investing in either one, Venezuela and/or Cuba are worth the effort. The current devaluation of Venezuela has caused companies like Colgate-Palmolive, Avon, Procter & Gamble, and even Merck to restate their earnings from the country as their sales just lost 32% of their value. From a business standpoint, if they just had profit margins of 32% (after expenses) they just broke even.

Risk and Opportunity

Ying Yang

Ying Yang (Photo credit: Wikipedia)

As with any other calamity, individuals and business need to recognize that regardless of their own personal feelings, it is something that they need to deal with and adapt to the new realities. All business will be affected, and by extension all individuals will be severely affected by the currency devaluation since the measure affects not only their personal accounts, but the ability of the country to pay their international financial obligations with a severely devaluated currency. It even means that future growth could be slowed down, since it is easier to go down a 30%, but on the other hand that means that to recover they will need to revaluate their currency almost a 50% ( 32 = 47% of 68 ).. I know is a tricky math that the Venezuelan politicians will not like their own people to think about while they prepare their exit plan.

Opportunities

Any international currency fluctuations can create opportunities for the right investors, and as with any other business it only depends on the calculated value of the risk to be taken. The current devaluation of the Venezuelan Bolivar can open opportunities for their business and international investors willing to take a risk on the future of the country. Some of the easily identifiable opportunities are:

  • Luxury Residence in Costa RicaInvestments in Real Estate: Just think about it, if you were purchasing real estate in Venezuela today the house or condominium that you were going to purchase is suddenly 32% cheaper
  • Import/Export: Today Venezuelan companies could export their products at the same price and have an additional 32% profits, or they could just reduce their prices by the same 32% and substantially increase their sales. Good news for the well known Venezuela health and beauty, agriculture, and confections industries.
  • Outsourcing: Do you need a call center, do you need manufacturing operations, do you need consulting? If so your Venezuelan workforce just became 32% cheaper, and you could outsource your work to their local companies at a substantial discount (will any other of your providers give you a sudden 32% discount today, if not, then consider other providers).

In business there are no guarantees but import/export or international investment companies could take advantage of this measure, in order to increase their competitiveness and potentially move ahead of their competition. But of course, there are associated risks that need to be considered.

Risk(s)

Currency devaluations are a difficult trend to forecast, and the loss of 32% of their income can make the current social and political situation in Venezuela even more volatile and risky for international investors, and local companies alike. Some of the clearly identifiable risks are:

  • U.S. DollarSocial instability: Would you be happier loosing 32% of your income overnight, or would a country be happy suddenly getting a 32% unemployment figure? That is the unexpected consequence of the currency devaluation, and it could cause additional violence, strikes, and many other social challenges to the government and the country in general.
  • Financial Risk: Doing business in or with companies from Venezuela increases the financial liability for an individual investor or an import/export company since there is an additional risk for bankruptcies, or simply inability to pay for previously contracted products and services.

Even if many people consider that the financial risk is the biggest one, I will argue that the actual social instability risk is a more concerning trend for everyone, and the one that needs to be carefully considered by any international investor or import/export companies. If there are any questions about that, just remember that in a neighboring country (Cuba) social unrest culminated with a monarchy that has taken over the country for more than 50 years, and that resulted in the nationalization of all industries and business, and the destruction of the economic model that had the country at the time way ahead financially, economically, and socially than countries like Taiwan and Singapore.

The financial risks of conducting business in a country like Venezuela are not avoidable, but manageable, and a topic that will be covered in a future article. Please join us if you will like to be within the first to learn some of the potential financial tools that you can use to reduce the financial risks of the import/export business, or those of an international investor.

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