Post-Chavez Venezuela as Chilly for Cos. From P&G to Coke

In his last year as president, Hugo Chavez ordered Coca-Cola Femsa SAB and other beverage makers to cut prices, seized a local steel company’s assets and tightened currency controls that may cost Procter & Gamble Co. $275 million. Doing business in Venezuela isn’t likely to get easier under his successor.

Interim President Nicolas Maduro has vowed to follow his mentor’s policies, which included the expropriation of more than 1,000 companies, price controls on consumer goods and restrictions on buying dollars. His March 5 speech hours before Chavez’s death accusing the U.S. of plotting against the “revolution” was a wake-up call to investors, said Francisco Rodriguez, senior Andes economist at Bank of America Corp.

“People were waiting for the end of the Chavez era and they got a signal that this might just be Chavez, part two,” Rodriguez, a Venezuelan national, said in a telephone interview from New York. “That led people to react more cautiously and actually scared some people off.”

Maduro, who leads polls ahead of an April 14 election, this week submitted a seven-year economic plan that would “promote socialism as the only option against the predatory and unsustainable capitalist model.” His statements leave investors little reason to think this year he’ll improve the country’s business climate, which the World Bank ranked the worst outside Africa, Alejandro Grisanti, a Latin America analyst at Barclays Plc. who is also Venezuelan, said March 6.

Bond Rally

Press officials at Venezuela’s Communications Ministry didn’t respond to a message left by Bloomberg News.

Investors betting on more market-friendly policies post-Chavez helped Venezuelan bonds return 46 percent last year, the most of any emerging market after Ivory Coast. The yield on Venezuela’s dollar bonds maturing in 2027 touched a three month-high of 9.5 percent on March 7 and there is “not a lot of upside” to them now, said Diego Ferro, co-chief investment officer at Greylock Capital Management LLC. Yields have since fallen to 9.08 percent on March 14, according to data compiled by Bloomberg.

Chavez, a former lieutenant colonel who won re-election three times in 14 years, railed against what he called “the devil of money” and didn’t discriminate between domestic and foreign companies. He nationalized the Venezuelan steelmaker Siderurgica del Turbio SA, the local unit of Spanish bank Banco Santander SA and a mine owned by Toronto-based Crystallex International Corp.

Lukoil Suspended

The self-declared socialist, who died after a two-year battle with cancer, also nationalized oil fields run by Exxon Mobil Corp. and ConocoPhillips in the name of his Bolivarian revolution.

Oil Minister Rafael Ramirez this week suspended Russia’s largest private crude producer, Lukoil, from the Junin-6 project in the Orinoco Belt for saying Venezuela didn’t provide legal certainty to investors. A spokesman with Lukoil, Grigory Volchek, declined to comment.

“Don’t risk it by making unfortunate declarations like those by Lukoil,” Ramirez said at an event in Caracas Mar. 13.

“As the government seeks to shore up its support base ahead of elections all foreign companies have come to represent a legitimate target,” Nicholas Watson, Venezuela analyst at Control Risks, said in e-mailed comments from Bogota yesterday.

P&G found itself facing as much as $275 million in after-tax charges when the government devalued the bolivar by 32 percent to 6.3 per dollar last month, the Cincinnati-based company said in a Feb. 14 statement. P&G’s press office declined to comment further.

Expensive Deodorant

“In this transition to socialism, we must twist their arms as comandante Hugo Chavez said we should,” Maduro said in a Feb. 16 speech, referring to corporations.

Venezuela will keep currency controls and continue to impose price controls in a bid to tame the fastest inflation in the region, Barclays’s Grisanti said.

Coca-Cola Femsa cut the price of a five-liter bottle by 8.9 percent after Chavez threatened in February 2012 to seize assets from companies that overcharged consumers. P&G cut some prices as much as 25 percent after Chavez, during the same televised speech, said its deodorant was too expensive.

Officials at Coca-Cola Femsa in Monterrey, in Mexico, declined to comment when contacted by Bloomberg.

The government last year regulated the price of consumer goods including toothpastes and deodorants sold by more than 300 companies. Congress is debating price caps for cars.

“We’ve seen over a two, three-year period a lot of negative news come out of this relatively small country,” Jack Russo, a consumer staples analyst for Edward Jones & Co. in St. Louis, said by phone March 7.

Currency Risks

Clorox Co.’s Chief Financial Officer Stephen Robb said in a Feb. 4 conference call that the Oakland, California-based company was facing “market instability and difficulty implementing price increases” in Venezuela that were “negatively impacting our business.”

Clorox already had taken into account the effects of a potential devaluation in their earnings outlook for the fiscal year, Robb said. Clorox press officials declined to comment further.

Automobile manufacturers such as Ford Motor Co., which at the end of 2012 had $620 million in net monetary assets denominated in bolivars, stand to lose from any new price controls and from the existing currency controls.

“Although results will benefit from new products recently launched or to be launched during the year, the competitive environment and currency risks across the region, especially in Venezuela, are expected to impact our profits adversely,” Bob Shanks, Ford’s chief financial officer, said on a Jan. 29 conference call.

Biggest Pitfall

Officials at Ford’s offices in Venezuela, Brazil and its Dearborn, Michigan headquarters didn’t respond to phone calls and e-mails requesting comment.

Venezuela ranks 174 out of 177 countries in the Heritage Foundation’s index of economic freedom, beating out only Zimbabwe, Cuba and North Korea as “prevalent” corruption and a heavier state presence in the economy hurt its standing, the Washington-based research group said in the report.

“The biggest pitfall for big multinationals operating in Venezuela is the current exchange rate control that has blocked them from repatriating earnings,” Asdrubal Oliveros, director of Caracas-based research group Ecoanalitica, said by phone.

Although Venezuela has only 0.4 percent of the world’s population, it has a disproportionate share of sales for many consumer products companies, Connie Maneaty, an analyst at BMO Capital Markets in New York, wrote in a Sept. 27 note.

Anti-U.S. Stance

Even with government measures to contain prices, Venezuela had the quickest official annual inflation in Latin America at 23 percent, while analysts polled by Bloomberg forecast its economic growth will trail the regional average by almost two percentage points in 2013.

Maduros’s anti-U.S. stance since Chavez’s death may stem from a need to rally political and military factions behind his leadership as he seeks to win the presidency next month, said Shannon O’Neil, senior fellow of Latin America studies at the Council on Foreign Relations.

Maduro, a former bus driver, had 46.4 percent of support in a Jan. 31-Feb. 20 poll by Caracas-based polling company Datanalisis. Opposition candidate Henrique Capriles Radonski has 34.3 percent. The survey had a margin of error of 2.4 percentage points.

If instability continues, some companies may decide the risks there outweigh the benefits, Russo said.

“This isn’t China, this isn’t India, where you’ll put up with anything, given the opportunities,” he said.

(Corrects 15th paragraph of March 15 story to say bottled water prices were cut by 8.9 percent. Adds in first paragraph that other beverage companies were ordered to cut prices and in 15th paragraph that Chavez threatened to seize assets from any company that defied his order.)
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