Venezuela Reissues Bolivar to Fight Inflation

Venezuela has revalued its inflation-heavy currency with a hope of containing runaway inflation, which has led to an imploding economic situation. The new bolivar Soberano or sovereign bolívar, slated for immanent issue under President Nicolás Maduro, will be five zeros slimmer than the preceding bolivar. This hopefully may prevent inflation from hitting an International Monetary Fund projection of 1,000,000 percent by year’s end. Prior to the move, the bolivar was reported to be trading at 3.5 million per U.S. dollar.

The government announced that the new sovereign bolivar will be backed by the petro, a cryptocurrency that in turn, is backed by Venezuela’s oil reserves. This and other economic recovery measures apparently have not satiated those whom are calling for Maduro’s replacement: on August 4, two drones exploded in the air above a military parade attended in which Maduro was present.

The chaotic situation has led Axalta to write off its Venezuelan assets. On July 25, Axalta released earnings with the disclosure that “in conjunction with the deconsolidation of our Venezuelan subsidiary during the three and six months ended June 30, 2017, we recorded a loss on deconsolidation of $70.9 million. During the (same months) we recorded non-cash impairment charges related to a manufacturing facility previously announced for closure of $3.2 million. We do not consider these to be indicative of our ongoing operating performance.”

Venezuela’s economy is reliant on oil exports, but production has declined radically from a high of 3.4 billion BOPD in 1999 to close to 1.4 billion BOPD today. The United States is the largest importer of Venezuelan oil, but those exports have decreased by approximately 30 percent this year.

As oil revenues decline, Venezuela has defaulted on its foreign debt obligations, leading it to cut oil futures deals with Russia’s Rosneft oil giant and with Chinese state entities. At the same time, U.S. relations have deteriorated, since the Trump administration imposed sanctions in August 2017 that restrict the Venezuelan government access to new international debt issuance. Last year, Trump went so far as to suggest a U.S. invasion of Venezuela, but that idea has faded, according to Washington press reports.

The drama does not stop there. Several Venezuelan officials and businessmen were charged in Miami federal court with operating a $1.2 billion international money-laundering racket, funded with stolen government money that was invested in South Florida real estate and other assets, the Miami Herald reported in late July.

The newspaper cited a Homeland Security affidavit that said, “Venezuela’s state of social, political and economic crisis, in which multibillion-dollar corrupt and criminal ecosystems thrive, drives rivers of criminal proceeds through South Florida.”

Venezuela should be a strong market for consumer goods including paint and coatings. The country of 32 million has a GDP of $540 billion, corresponding to a $17,700 per capita GDP level. This is higher than the $16,000 level in Brazil or the $15,600 average in the region, suggesting that consumption of architectural lines should be high in a stable economic situation.

The close relations between Venezuela and Colombia also could point to a contrarian opportunity for paint companies active in Colombia – like Lanco, Pintuco, Sherwin-Williams, and others – to strengthen investments or prepare strategic options in Venezuela while the exchange rate is still low. Grupo Orbis, the parent company of Pintuco, announced plans in April to invest $45 million in new capacity in Cartagena.