Venezuelan Exchange Rates Hurting Over 100 International Companies

Today Venezuela announced an agreement under which they would begin to pay off some of the $4 billion they owe carriers. But dozens of other major corporations are also getting stung by Venezuelan inflation.

The deal with air carriers comes weeks after Venezuela agreed in principle to repay the money it owed a host of carriers around the world. It also follows decisions by several major carriers including Air Canada pulling out of Venezuela completely. Two more airlines–Alitalia and Copa–cut service earlier this month.

The problem in Venezuela has to do with the difference between the nation’s official exchange rate (there are actually three rates now) and the black market rate which is much higher. So, for instance, air carriers charging for tickets in Bolivars must then rely on the government to change the cash back into dollars so they can take that money out of the country.

The official exchange rate has been 6.3B to the dollar, but the black market rate in Venezuela is fluctuating between 70 and 90 Bolivars to the dollar. High inflation creates a severe shortage of dollars which makes it difficult for the government to exchange money at the published rate. The Venezuelan government simply stopped paying air carriers what they were owed or tried to make them take a much less favorable exchange rate.

The currency situation affecting airlines is also impacting more than 100 major international companies according to a Wall Street Journal report Monday:

Avon Products Inc. switched to the newest government-sanctioned rate in the first quarter and took a $42 million charge, while Estée Lauder Cos. absorbed a $38 million hit. The majority of companies still are calculating asset values using more-favorable exchange rates.

Since the beginning of April, more than 100 international companies have mentioned Venezuela’s currency exchanges in their financial filings as a drag, or potential drag, on earnings, up from eight in the year-earlier period, according to data provider Morningstar.

Goodyear Tire & Rubber Co., Herbalife Ltd. and Energizer Holdings Inc., have said they would need to take write-downs of $235 million, $103 million and $62 million, respectively, if they revalued at the new rate.

In addition to the top rate, there is a second exchange rate of 10 Bolivars to the dollar. The newest rate, and closest to the real value, is 50 Bolivars to the dollar. Companies who agree to take this for past debts are getting about 1/9th what they were promised when goods were sold.

The WSJ adds that Ford Motor company and General Motors wrote off more than $700 million in the first quarter of the year because of the shifting currency rates, and they will lose even more if they agree to shift to the newest exchange rate. Going forward, companies will simply have to raise their prices substantially to adjust for the new rates. That means Venezuelans, who are already experiencing severe shortages of basic goods like bread and soap, could see the situation get much worse.