Venezuela has emerged as one of the most significant downside risks to 2013 performance for multinationals operating in Latin America. A devaluation in February and prolonged dollar shortages have not only hammered the value of Venezuelan business units, but in many instances have rendered their operating models unfeasible.
While a minority of FSG clients are considering exiting Venezuela, some are asking whether a change in their operating model could position them to capture more opportunities over the medium-to-long term, especially given Venezuela’s recent history as one of the most profitable consumer markets in Latin America. Indeed, some companies, particularly in the consumer goods and healthcare space have been considering increasing their direct presence in the market, including opening up local offices with marketing and sales teams in order to capitalize on the struggles of competitors. The benefits of establishing
a local office include allowing distributors to pay multinationals in local currency, to better capture local opportunities, through stronger direct management of distributors or through a more robust direct presence.
For companies who already have a long established presence in Venezuela, the biggest challenge is how to best shield their local revenues from additional devaluation over the next twelve months. Meanwhile, the inability to repatriate currency after the shutdown of SITME and the inoperability of SICAD has only further compounded the situation. As such, companies such as Telefonica and Kimberly-Clark have decided to increase their capital expenditures over the short term and invest in their local production facilities, thus shielding cash assets from further devaluation while putting them to productive use. Other companies have considered investing in commercial real estate or other fixed assets only marginally related to their business models.
Regardless of their current operating model, multinationals should be cautious about the timing of any change in their strategy in Venezuela. The economic and business environment in the country is as likely as not to worsen over the next six months, and the Venezuelan government has thus far failed to pursue a coherent strategy to returning the economy to a period of relative stability, let alone high growth. Prospects for political and economic destabilization remain high, and companies should continue to prioritize contingency planning over growth strategies over the coming months.