Corporate Profits Roiled Around the Globe due to Venezuela Crisis

To insulate themselves from a worsening economic crisis in Venezuela that has erased more than $10 billion in profits over the past 18 months, U.S. companies operating in the South American country have escalated the use of an accounting maneuver.

Due to the plunging value of the country’s bolivar currency and their inability to set prices on products such as shampoo and laundry detergent, deconsolidating of the financial results of their Venezuelan operations has been initiated in 2015 by a growing number of U.S. companies, including Colgate-Palmolive, Procter & Gamble and PepsiCo.

Tens of thousands of Venezuelans have been forced to stream across the border for basic goods due to massive shortages due to the OPEC nation’s unprecedented economic collapse.

A U.S. parent company’s financial results could largely no longer be hurt or benefited from their Venezuela operations is the purpose of deconsolidation. To allow them to ring-fence what is left in Venezuela, often companies are taking a big one-time charge against earnings. As part of its deconsolidation move, an after-tax loss of about $120 million in the first quarter was taken by Avon Products Inc.

Hits to their income statements are being suffered by many companies from around the globe which have not yet deconsolidated their Venezuela operations. If the country’s economy remains in severe distress, such companies have signaled future writedowns.

For instance, it still has about $350 million worth of assets exposed to Venezuela’s currency, said Israel’s Teva Pharmaceutical Industries Ltd in May. following the devaluation of Venezuela’s currency, the company took a $246-million impairment charge in the first quarter.

The value of their assets using less favorable exchange rates have been marked down by Teva and a slew of other companies due to devaluations and one of the world’s highest inflation rates. The last official inflation reading was 180.9 percent in February and was released by the central bank.

The then-official exchange rate of 6.3 bolivars per dollar at the start of 2015 was used by many companies to value their assets. But amid a severe shortage of dollars it was unrealistic to hope to get that most favorable rate under a multi-tier currency system.

The creation of two new exchange rates was announced by Venezuela in March. For priority food and medicines, the country uses the so-called Dipro rate of 10 bolivars per dollar. A floating rate that adjusts based on supply and demand is the other official rate. That rate has weakened to 641 bolivars per dollar. According to currency website, one dollar costs Venezuelans more than 1,000 bolivars on the black market.

Since they are not able to exchange bolivars for dollars, several U.S., European and Asian drug companies have reduced shipments of medicine. It may not be able to operate in Venezuela as it has historically, Pfizer Inc has disclosed in regulatory filings.

Additional financial support was needed for its Venezuela operations said automaker General Motors Co.

“GM has affirmed the continued consolidation of our Venezuelan subsidiaries and the potential for additional financial support for the past four quarters,” GM spokeswoman Jenna Pearson said, declining additional comment.

Since many of the Venezuelan subsidiaries, which routinely say they cannot access hard currency, obtain raw materials, lay off workers or raise prices to compensate for inflation, deconsolidation will likely remain an attractive option for foreign companies operating in Venezuela.

(Adapted from Reuters)

Categories: Economy & Finance, Strategy

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