LatinFinance - November/December 2016 - 25

The IMF says Venezuela's economy could
contract by as much as 10% this year and
inflation could exceed 700%.
But even as Venezuela has defied predictions of a default since oil prices tumbled in
2014, the country's scramble to conserve
cash is coming at a steep price. Facing dwindling currency reserves, President Nicolás
Maduro has slashed critical imports, including food and medicine. The government
has stopped paying many of its commercial
partners and continued to hold back dollar disbursements to private companies to
keep up its debt payments.

SIOBHAN MORDEN, NOMURA

"THERE ISN'T GOING
TO BE ANY RELIEF IN
TERMS OF OIL PRICES
GOING TO BACK TO
2014 LEVELS, SO THE
GOVERNMENT IS
RUNNING OUT OF
OPTIONS"

Mounting challenges
Percentage of Venezuelans who say President Maduro should face a recall referendum

Source: Venebarometro, Barclays

Risky business
While bondholders focus on the prospects
of a default, transnational companies are
grappling with what to do with their investments in the country, with some potentially
impacted directly by the outcome of the
PDVSA bond swap.
Earlier this year, US personal care
products maker Kimberly-Clark halted its
operations in Venezuela because of the
deteriorating economic situation. The decision came after a string of closures or scaling
back of operations by foreign companies
such as Coca-Cola, The Kraft Heinz Company and Clorox, as well as airlines Lufthansa,
Aeroméxico and American Airlines.
Carlos Miguel Álvarez, a senior economist
at the Caracas-based consulting firm Ecoanalítica, estimates the government owes

multinational companies some $11 billion.
In 2014, the local subsidiaries of many of
the companies could obtain dollars through
parallel currency markets. But the government has since shut down that option and,
at times, offered companies payment with
government and PDVSA bonds. It is unclear
how many companies have been paid with
bonds or how much government debt the
companies might hold.
"Some companies have negotiated deals
with the government to cancel the debt
using sovereign and PDVSA bonds," Álvarez
says. "The problem is that these arrangements were made using the nominal value
of the bonds and some are new being
priced on the market close to a default rate."
With the economy in a tailspin and few
signs that an economic turnaround is near,

other companies have struggled to figure out what to do with their assets and
money in the country.
José Guerra, a former chief economist
at Venezuela's central bank, said some
companies are reinvesting their money in
real estate projects.
Other multinationals have simply
decided to sell their assets to locals, says
Álvarez.
"A finance vice president for a major
multinational company told me recently
that before he had to spend two weeks
dealing with issues in Venezuela and now
he spends two months to get through the
same work," says Álvarez. "It's a major
headache, so it's a better option to sell
their assets to locals who have a high level
of liquidity in dollars."
Earlier this year, tire maker Bridgestone sold its business in Venezuela after
six decades in the country to Grupo
Corimon, a Venezuelan industrial group
led by Carlos Gil.
Gil, president of the board of directors
of Corimon, says he is looking to invest
in companies like Bridgestone that have
a solid brand name in a bet the economy
will pick up some day.
Other companies that have sold their
Venezuelan subsidiaries to local businesses include US manufacturer General Mills
and insurance company Liberty Mutual.
Some transnational firms are exploring
other types of financial arrangements, Álvarez says, with some companies looking
to arrange repurchase agreements with
potential local buyers.
"We know that equity investors have
also started backing the managers of
some subsidiaries in Venezuela through
loan arrangements so that they can buy
the assets owned by the parent companies with the agreement being they will
sell them back down the line when the
economic situation changes," Álvarez
says.
For now, serious economic challenges
remain. According to Russ Dallen, a
strategic advisor at the Venezuelan Opportunity Fund, Venezuela and PDVSA
owe creditors $5 billion through the end
of the year and another $10 billion next
year, at time when its currency reserves
stand at around $12 billion.
"There isn't going to be any relief in
terms of oil prices going to back to 2014
levels, so the government is running out
of options," Morden says. "It's on a path
where it will hit a wall." LF

November/December2016 - L ATINFINA NCE.COM 25
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