Doing business in Venezuela isn’t for the faint of heart. The country’s inflation rate last year hit 28 percent, the highest in the Americas.
Foreign exchange and price controls are part of President Hugo Chavez’s socialist revolution, further stoking price increases. Product shortages and bureaucratic red tape are de rigueur, adding to the cost of doing business. Businesses also have to anticipate possible changes in the country’s economic policies stemming from Chavez’s ongoing bout with cancer, and elections scheduled for October 7.
But while many might stand back and wait for a clearer picture to emerge, Mary Carmen Rincon and her family are taking a chance, betting that the country’s economy, the fifth-largest in South America, has plenty of potential. “We see opportunity here,” said Rincon, whose family owns an insurance agency. “We’re looking to grow by opening a car center in the southwestern city of Barinas.”
The center will offer new vehicles and post-sale service, she said. Her family broke ground on the new center in 2007 and had expected to open within a year. That deadline was pushed back to late 2012 due to inflation, several devaluations, and shortages of parts and materials.
“The projected cost of our investment has more than quintupled since we started work,” Rincon said. “That is the cost of doing business in Ve-nezuela today.”
To succeed in Venezuela, companies have to maneuver deftly around the country’s economic obstacles. This year, as the Chavez government ramps up spending before the election, they are especially daunting.
Although the Central Bank says 12-month trailing inflation has slowed to below 20 percent, few believe its figures.
Companies are expecting “a large post-election devaluation of the Venezuelan bolivar,” Procter and Gamble CFO Jon Moeller said in a conference call with analysts. That will boost inflation further.
Chavez introduced the bolivar fuerte (strong bolivar) to much fanfare five years ago, when it was pegged at 2.15 to the dollar.
Now at 4.30, analysts expect a devaluation could take it to about 6 to the dollar. On the black market, Venezuelans are already paying up to 9.5 for every dollar bought.
“We are surviving by our fingertips,” said Raul Flores, who manages a catering company in Caracas. “It is a constant struggle to keep up with inflation.”
FINDING SUPPLIES, THE REAL CHALLENGE
Flores says his company raises prices every three months to stay profitable. And finding supplies is a constant struggle given shortages.
But in one sense, Flores is lucky. He has a product to sell. Volkswagen wishes it could say the same.
The VW concession in La Victoria in the central state of Aragua opened for business in 2008. The dealership was averaging sales of 150 vehicles per month in the beginning. Those days are long gone.
“We’re selling almost nothing these days,” said Bruno Louis, who runs the company’s post sales operations. The reason is simple: VW hasn’t received permission from the Venezuelan government to import enough vehicles.
“When VW receives permission to bring cars in, they try to divide among all of the concessions in the country,’’ Louis said. “So, we received three vehicles in March and that was that.”
Inflation is a constant, he said. Parts shortages are common.
Small businessmen are especially hard-hit.
“We are raising prices every month,” said Jhonny Dos Pasos, who manages Los Monjes supermarket. “We have no choice because our suppliers are constantly adjusting prices. We have to pass those increases onto our customers.”
Calibrating inventories is also a challenge.
“If we keep too much in inventory, then the police or consumer protection agency could accuse us of hoarding or price speculation,” he explained. “It’s good to keep some stock but not too much.”
Meanwhile, efficient money management has become essential to survival.
A TIGHT ADMINISTRATION
“The key is to keep things tight, and avoid dollar debt,” said the treasurer of one multinational based in Caracas, who spoke on condition of anonymity. “We think that there will be a devaluation so it’s best to be long (on) bolivar debt.”
The company finances its operating costs out of its existing cash flow, and has cut back investments until a clearer picture emerges.
Investments are on hold for the time being, he said, as the company waits to see what happens with the election and Chavez’s health.
“If Chavez loses the election, we don’t expect (challenger Henrique) Capriles to change things overnight,” he said. “But we expect the so-called socialist revolution to be braked, to be slowed, if not stopped.”
Capriles has already hinted that he would allow an easing of foreign exchange controls, and foster a more pro-business approach. But for some businessmen, the future can only get better, regardless of short-term hiccups.
“We believe in Venezuela, and that is why we are investing here,” Rincon said. “People say that the best time to invest is when things look uncertain. Some look at this market and see only the problems. We see potential.”
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