Multinationals in Venezuela prioritize managing liabilities

Venezuela’s worsening business environment is creating significant challenges for multinational corporations with any real presence in the market. I recently travelled to Venezuela where I was able to meet with local country managers and their teams to discuss how they are adapting to Venezuela’s deepening economic crisis. What I learned was that nearly every multinational has had to significantly restructure its local presence, and that while corporate commitment to a presence in the market has remained relatively strong for most companies, balancing corporate guidelines and processes against the flexibility and speed required to mitigate risk remains a challenge for local country teams.

For those who have received clear guidance from the corporate center, the major directive to local managers has increasingly been to limit the company’s in-market liabilities above all else. Unfortunately, this is easier said than done.

The key challenges senior executives mentioned were:

  • Capping debt liabilities and continuing to supply the local market: Most corporate headquarters have put strict limitations on how much product local subsidiaries may import into Venezuela for as long as the government continues to deny foreign exchange allocations for previous imports, particularly 2013 and 2014 debts.
  • Engaging the government effectively on regulations and foreign exchange allocations: Particularly for strategically important companies, developing an appropriate government relations strategy while avoiding increasing compliance risk remains a particularly thorny challenge.
  • Shielding local currency assets from inflation and devaluations: Accelerating inflation and exchange rate pressures, along with restrictions on capital repatriation and FX supply, is creating greater incentive for companies to spend their bolivares quickly. However, long delays on approvals from corporate have made it impossible for local country managers to make the necessary purchases of fixed assets in time to prevent an erosion in the value of their cash assets.
  • Accelerating talent flight: While companies have been reducing head count proactively given the reality in Venezuela, a very strong sense of urgency is felt by Venezuela country managers whose local teams are suffering from a severe collapse in their earning power, such that even multiple salary increases throughout the year have not been able to counteract inflation. All of which is leading talented individuals to seek employment outside of Venezuela.
  • Developing realistic scenarios for 2016 and beyond: Companies are largely resigned to the fact that the situation through the rest of the year is unlikely to improve significantly, given elections scheduled for December 6. However, the outlook for 2016, while on the whole grim, remains highly uncertain, with both the corporate center and local teams uncertain over whether the government will pursue more of the same policies or begin implementing necessary fiscal, monetary and foreign exchange adjustments.

I will be exploring the solutions multinationals are implementing to confront these challenges in forthcoming reports on Managing Risk in Venezuela and Planning for an Exit from Venezuela.

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