Post by, Antonio Martinez & Christine Herlihy
On October 7th, Venezuelan president Hugo Chávez was re-elected with 54% of the vote. While opposition candidate Henrique Capriles did manage to unite Venezuela’s historically fragmented opposition and garner a significant percentage of the vote, Chávez’s populist policies and mass-mobilization tactics ultimately allowed him to win a sizable victory. What this means in real terms is that Chávez and his macroeconomic tools of choice—namely, price controls, capital controls, expropriation, and populist social programs— will be around for another six years, barring health-related complications. As if bellicose rhetoric and a tendency to expropriate at will while belittling executives and political leaders alike on national television weren’t enough to look forward to, consider this: in addition to calling the election for Chávez, Frontier Strategy Group also expects significant currency devaluation sometime in early 2013 as well as a slowdown in government spending, with overwhelmingly negative implications for consumer spending.
This degree of pessimism may surprise many executives—after all, among FSG’s client base, especially among consumer goods companies, 2012 has been an extremely strong year in terms of revenue growth. However, the combination of government policies which have helped facilitate this success by bolstering consumer purchasing power through relatively low inflation, loose credit conditions, and robust government spending, are unsustainable over the medium-term. It is important to emphasize the extent to which the ‘health’ of the Venezuelan economy in 2012 has been driven by political, rather than macroeconomic fundamentals: not only is the current lending rate negative relative to inflation, but high levels of government spending are unsustainable given Venezuela’s growing debt burden and inability to capitalize on higher oil prices due to pre-existing oil-for-loans agreements with the Chinese.
Venezuela’s monetary policy has depleted foreign exchange reserves, and given that a large portion of the country’s outstanding loans come due in early 2013, FSG expects a devaluation of at least 32%, which will most likely take place after regional elections and the Christmas holidays, sometime between January and March 2013. Furthermore, as the spread between Venezuela’s official ‘non-essential’ exchange rate and the black market exchange rate continues to grow, there’s an increasing chance that the devaluation may be as high as 55-60%.
This devaluation will have a tremendously negative impact on consumer purchasing power, and CPG companies will be especially hard hit. Healthcare companies and luxury goods manufacturers are likely to continue bearing the brunt of price controls, and the risk of expropriation looms as large as ever. Of particular note—time is of the essence: multinationals have long struggled to access dollars and repatriate their profits in Venezuela, and these challenges will only increase in the wake of both an expected devaluation, and a government dealing with severe debt obligations. Multinationals need to plan ahead for a rocky 2013 in Venezuela.