Multinationals focusing on long-term scenarios for Venezuela

Multinationals are increasingly reevaluating their commitment to Venezuela given that most companies are facing deteriorating economic conditions and a worsening operating environment, regardless of whether they have a direct sales presence or are working exclusively through distributors. While conditions have been difficult over the last 18 months, due to chronic shortages of dollars and delayed payments from distributors and the government, the long-term outlook for Venezuela also remains shrouded in uncertainty.

With that in mind, FSG has built up a series of medium-to-long term scenarios that companies should be taking into account as they develop both their annual operating plans and long-term strategies for the market. These scenarios, in order of likelihood, are as follows:

  1. Gradual economic adjustment is largely ineffective: The government is ineffective at managing a gradual economic adjustment, with the triple-tier exchange rate system providing too few dollars, and price controls continuing to foster widespread shortages. The economy oscillates between small contractions and weak recoveries, with inflation remaining above 40%
  2. Gradual economic adjustment is successful: The government successfully manages an economic adjustment over the next few years, with a covert devaluation and slow contraction of stimulus bringing inflation back to pre-crisis levels and GDP growth stabilizing around 2%-3%
  3. Deepening the revolution: The government moves toward radicalization as attempts to stabilize the economy fail. The government centralizes all imports, suspends dollar debt payments to private sector companies not selling to the state, and pursues a series of even more restrictive and anti-private sector policies that makes a long-term presence for multinationals in Venezuela unviable
  4. Shock therapy:  The least likely scenario, the government moves to unify exchange rate system at a much lower exchange rate for the Bolivar, followed by a contraction in government spending and higher interest rates by the Central Bank of Venezuela, leading to a sharp recession over the short-term. The government follows by taking a more conciliatory stance toward the private sector to incentivize investment

FSG is closely monitoring developments in Venezuela and has resources to support our clients develop both short-term contingency plans as well as long-term scenarios for Venezuela and other emerging markets. FSG clients are encouraged to contact their account manager for more information.

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