Shy growth, high inflation

The parliamentary elections that will be realized at the end of September and the impact that the exchange measures will have,
they are two factors that, joined the electrical crisis they corner the analyses of the companies. Imelda Cisneros and Maxim Ross offer your perceptions of the situation of the country in 2010

Hugo Prieto

Recently, the profile of a Facebook user stated that the most expensive aspect of the electrical failures is not the spoiled food in the refrigerator but the paralysis of the productive apparatus, the collapse of the Internet and the closing of stores. It’s a good summary of the uncertainty we are living as a result of the Guri problems and the lack of investment in thermo-electrical generation. Never before has Venezuela depended so much on meteorological conditions. The goal is to overcome the summer but, what if there is no rain? That is the big question.

Today, there are other events in the horizon that will equally condition the life of the country and its corporations: parliament elections to be held in September, the impact of the economic measures and generally, the economic policies applied by the government in a decisive electoral year.

The two premises on which Imelda Cisneros - management consultant – has based her analysis are: one, the dependence of the Venezuelan economy on oil prices and the other, the government’s strategy to turn Venezuela into a socialist country, for which it needs to accumulate power. “At this time, the government has enormous difficulties; particularly, the electricity problem which cannot be immediately resolved. This is an issue that upsets people and affects the productive apparatus”. But it’s also an issue that gravitates in the public opinion’s agenda and therefore, has a significant political incidence. “People have realized that this is not the result of the El Niño phenomenon, but a direct result of the lack of investment in the thermo electrical generation area and PDVSA itself”. That is, there is no way to resolve this problem by simply putting up large amounts of money.  

With respect to these premises, the also consultant Maxim Ross, adds two drivers that will be present throughout the year. “I see serious restrictions on economic growth. I believe that Venezuela will not be experiencing last year’s growth and on the other hand, I see many forces, many pressures towards inflation. This means the worst of all worlds.  “Poor growth and price increases”. This will be a year of many tactical movements because legislative elections are too important for the government”. Companies will have to proceed within the short term without losing sight of the long term tendencies that Venezuela is showing.  Ross states that the country “has been losing ground to the larger countries of the region (Brazil, Mexico, Colombia and Chile); so the question that many will be asking is: how to survive an environment like this?” says Ross.

The first 2009 quarter is crucial. While the government is betting on the rain, “it cannot afford the luxury of making a blunder in the handling of devaluation” adds Cisneros. Otherwise, two additional, but not less pressing problems could arise in the horizon: shortages and inflation. In fact, shortages were a key factor in the defeat of the constitutional amendment attempted by the government in 2007. Thus, their lethal effect on the urns has been proved. 

The scenario is not necessarily catastrophic. If the government is right, Cisneros believes that “this devaluation will not be a big deal” and even dares to say that “it could even turn out to be beneficial”. Her claim is based on the fact that the government has a “good platform”. That is, oil prices have recovered and has stayed high ($75 per barrel), the payments balance is positive, there are no major tax problems and the reserve amounts are high.

Cisneros gives an additional reading to the exchange agreement executed between the National Executive and Central Bank of Venezuela: “I believe that this was dome to give some order and to designate a sole exchange authority: the Central Bank”. “The bonds issuance mess, sometimes by the Finance Ministry or by PDVSA itself is over, and it is being handled by Merentes”.

Regarding the effects of the exchange policies, Maxim Ross has a very different appreciation: “Say what you will, this devaluation will exert tremendous pressure on prices”. The environment will be entirely different, “because it was relatively easy to answer the question: how to survive?, when there were restrictions and a number of dollar related problems with Cadivi, labor issues, but there was a huge incentive factor for companies to register a 20% to 25% real sales growth, like that of  2006, 2007, 2008 and even 2009, when the large fall was registered and as everyone well knows, Venezuela is a country that is far too dependent on oil prices”. Ross affirms that the oil impact on the Venezuelan economy “is not and will not be the same”. Plus, the growing difficulties, the “brutal” transaction costs and the attacks that will be coming from Indepabis and other entities, “to show that the results of the proclaimed revolution are being noticed”. Corporations will have to start budgeting “as they have in the past”, says Ross, for three to six months terms, “adjusting their behavior the government’s conduct, because this is a political year”.

The diagnosis for corporations with products that are within the 2,60 exchange rate –previously 2,15– is not good: “they are in trouble”, says Cisneros, an opinion that is shared by Maxim Ross. The food and pharmaceutical sector are in red alert. Prices are under control and political discretion is very high. The best scenario would arrive “if the government relaxes the prices”. One possibility that Cisneros does not entirely dismiss, when pondering about the gravitation of the electoral consultation and the electrical crisis in the government’s agenda is “the possibility of negotiations with the private sector”.  But, according to Ross, corporations can do one thing: they can model their costs and prices scenarios according to eventual changes to the exchange or price policies, which could result advantageous. Ross sustains that there were companies that foresaw the recent exchange measures because they had an efficient analysis and information team and were able to do so “without guessing”.

From 2009, an important number of corporations decided to sell their products at the swap dollar exchange rate. That is, at the free exchange rate.  “If there is a good exchange management, then the prices will have to go down” says Cisneros. What’s interesting is that president Chávez made a similar comment in the National Assembly on that same day.  

If the Central Bank, pursuant to an Executive’s request, has an aggressive intervention in the free market and maintains the 4,30 exchange rate, then “those corporations that were not receiving dollars will also be benefited”, added the consultant. “More than a devaluation, what will happen here is a revaluation, you see?. What moves Chávez and this government is the political issue”. Without a doubt, it was a double and rare coincidence.

In effect, some companies are less sensitive to the government’s regulations, whose products refer to the oil dollar or the free dollar. In this case, “the strategy is more about becoming informed than being defensive” says Ross. An additional, and perfectly suited action, is to exclude the manufacturing and commerce sectors into subsectors to observe their behavior in time, “Because some have suffered more than others” adds the consultant. For example, the telecommunications sector had the most movement, like the construction sector in 2008, but not in 2009. The strategy will have to be different because market penetration has reached its limits. “A telecommunications or cellular phone company, knowing that the curve is going flat, will have to differentiate and look for a market niche”. Use a known tool.    
The contacts with the private sector have begun as a result of the electrical crisis. But this must not necessarily be read as a relaxed climate. From now and until September 26, the date set for the elections, there are specific issues to resolve. The conflict remains latent.

In only 72 hours, president Chávez placed two of those issues on the public opinion’s agenda. On one hand, he announced the increase of minimum wages and on the other, he decided to nationalize Éxito, the hypermarket chain. It’s the old carrot and stick strategy.
Another issue where the government has a limited action margin, is the availability of resources at the National Treasury because PDVSA’s sales are negotiated on 90 days terms. This means that during a good part of the first semester, the state owned oil company will deposit with the tax authorities the income corresponding to the oil barrel prices during the months of October and November. That is, during skinny cows times. The availability for expenses will be limited while the enormous electrical concern for this year remains latent…. and, what if it doesn’t rain?  

If the immediate future scenario is one of modest growth of the Venezuelan economy, there will be two drivers to take into account in corporate management. Maxim Ross believes that the reasoning to be imposed by the headquarters and even by large local companies is that investors “will not see Venezuela alone, instead, they will look at other countries and will ask themselves : what is opportunity cost of getting in one place or in another? Venezuela used to be very favorable because economic growth always allowed corporations as well as consumers to reach into our pockets”.

In the midst of a moderate growth for the upcoming years – a variable on which Ross is willing to bet, dismissing a new economy boom – what could happen, taking for granted that investors will establish the required comparisons in order to decide? The local management should implement instruments – strategic thinking and monitoring of the government’s performance– to get ahead of the decision that may be taken by the headquarters, “I believe that some corporations are doing it, proving that there is resolution capacity”. The second matter is that the crisis management will become much more complicated, among other things, because there will be growing costs. So, what does that management require? It requires much more brains, much more talent, strategic vision and the ability to solve large problems. Something that swims against the tide, because management in Venezuela moves day to day, acting as a problem solver. “The abilities will have to move to the brain, to strategic information, on the basis of accurate information”, affirms Ross.