GM Write Down On Currency Weakness
US-based General Motors Company (GM) is to take a charge of some USD400mn from its operations in Venezuela on the back of changes in how it values the currency. BMI is increasingly bearish on the Venezuelan autos industry, and we expect companies operating in the sector to sustain large losses on the back of ongoing weakness in the currency, declining sales volumes, and deterioration in the business environment.
In December 2013, the government introduced the Sicad 1 rate as a supplementary source of foreign exchange for certain industries, in what BMI maintains was essentially an unofficial devaluation ( see 'Mounting Pressures To Spur Bolívar Devaluation', February 5). The official rate is reserved for goods deemed by the government as 'essential'. GM is now using the Sicad 1 rate (which currently stands at VEF10.7/USD), compared with the official exchange rate (which stands at VEF6.3/USD). This weaker currency will reduce the profits in USD terms the company can repatriate, and also raises the price (in local currency terms) of imported parts.
Similarly, US carmaker Ford Motor recently announced that it is to take a charge of some USD350mn from its operations in Venezuela on the back of these currency changes ( see 'Currency Weakness To Add To Ford's Woes', April 2).
GM said the Venezuela currency rate issue will be treated as a special charge, and warned that its results in Venezuela may be impacted in future quarters. BMI believes that further currency weakness in the country is likely in 2014, further weighing on companies' profitability in the coming months.
The government continues to restrict access to foreign currency, and has previously implemented import restrictions on vehicle components. This, combined with the weaker exchange rate being adopted by carmakers and a very poor business environment more generally, makes autos manufacturing in the country very challenging. Indeed, BMI forecasts a 75% drop in vehicle output in 2014.