Venezuelan Economic Crash Devalues Manufacturer Assets

The implosion of  Venezuela’s economy and the accompanying crash in foreign exchange has had a choking effect on manufacturers like paint and coatings leader Axalta, which was compelled to write down $70.9 million in local assets as of the end of first quarter.

Sales eroded rapidly for Axalta in Venezuela over the past year. “Prior to the deconsolidation, for the three and six months ended June 30, 2017, our Venezuelan subsidiary’s net sales represented $0.7 million and $2.5 million of our consolidated net sales, respectively, compared to net sales for the three and six months ended June 30, 2016 of $19.3 million and $29.2 million, respectively,” Axalta reported.

Part of the impact was from foreign exchange devaluation. “Due to the challenging economic conditions and political unrest in Venezuela, which have resulted in increasingly restrictive foreign exchange control regulations and reduced access to U.S. dollars through official currency exchange markets, during the three months ended June 30, 2017, we concluded there was an other-than-temporary lack of exchangeability between the Venezuelan bolivar and the U.S. dollar,” Axalta reported.

“We recorded a loss of $70.9 million on our condensed consolidated statement of operations. This loss was comprised of the subsidiary’s net assets for $30.0 million, counterparty intercompany receivables with our Venezuela subsidiary for $35.0 million and unrealized actuarial losses associated with pension plans in accumulated other comprehensive income of $5.9 million, the company detailed.

Political Crisis Deepening

Presidential elections on July 30 were marred by clashes between police and rioters, and deaths were reported. U.S. President Donald Trump reacted to the alleged irregularities in the election process, instituting sanctions on Venezuelan President Nicolás Maduro, who was re-elected. Meanwhile, Russia’s Rosneft delivered Venezuela’s state-owned PDVSA over $1 billion in April in exchange for a promise of oil shipments later, Reuters has reported.

The economy is predicted to contract another 12 percent this year, following last year’s contraction of 18 percent, according to a July IMF prediction. Inflation over the first seven months of the year has been reported at nearly 250 percent, and in April, IMF predicted 2017 inflation at 720 percent and and 2018 inflation at 2,068 percent. Clearly domestic sales have flat-lined.

Perhaps even more damaging to local manufacturing has been the meteoric plunge in the value of the bolivar relative to the U.S. dollar, down close to 100 percent over the past three years. The official exchange rate is around 2,000 bolivars to the dollar, but the black market value of one U.S. dollar is reportedly in the 10,000 to 15,000 bolivars range and rising.

Post-Recovery?

Venezuela is a country of 32 million with a GDP of $540 billion, potentially making it one of the largest markets in Latin America. The economy is largely dependent on petroleum production and downstream refining, which represent 96 percent of all exports, according to the World Bank. As such, the demand for industrial coatings, especially protective coatings, should normally be robust.

Similarly, the country’s $17,700 per capita GDP level also means the country has a fairly affluent lower- and middle-class population,compared to $16,000 in Brazil or to $15,600 in the region as an average, suggesting that consumption of architectural lines should be high in a stable economic situation.