CARACAS -- General Motors, already beset by woes over its faulty ignition switches, announced that it was taking a $400 million charge because of Venezuela currency losses.
"Previously we utilized the official exchange rate of Bolivar Fuerte (BsF) 6.3 to $1.00 set by the Venezuelan government for remeasuring the net assets of our Venezuelan subsidiaries. Effective March 31, 2014 we are changing the exchange rate we use for remeasuring these amounts to the rate determined by an auction process conducted by Venezuela’s Complimentary System of Foreign Currency Administration (“SICAD I”). At March 31, 2014 the SICAD I exchange rate was BsF 10.7 to $1.00," said GM in the release. "We expect this change in exchange rate to result in a pre-tax remeasurement charge of approximately $400 million in the three months ended March 31, 2014. The remeasurement charge will be treated as special for EBIT-adjusted reporting purposes."
GM's South America operations reported a profit of $327 million in 2013 after already taking a charge of $160 million for Venezuela currency cuts last year. Today's announcement means that the $400 million charge because of Venezuela's economic troubles more than wipes out all of GM's 2013 South America profits.
GM says it had a 17.5% market share in South America in 2013, slightly down from 18% in 2012, and sold 1,037,000 cars there, down from 1,0450,000 in 2012.
Ford announced that it was taking a $350 million charge because of Venezuela losses on Tuesday, wiping out all of their Latin American profits and swinging them to a $34 million pre-tax loss even though sales and revenue were up by 8% overall in South America in 2013.
Ford is only operating 3 days a week and Toyota and Chrysler have already suspended Venezuela operations.
In February, Venezuela -- a country of 28 million -- had only 817 new car sales, according to Cavenez, the Venezuelan Automotive Association. 811 of those cars were produced in Venezuela, and the other 6 were imports.
"To give you an idea of how bad that is and how dollar and part shortages are biting in combination with an incredibly overvalued bolivar and a dollar shortage, in February of last year, 8,058 new cars were sold," said Russ Dallen, head of investment bank Caracas Capital Markets.
In February 2012, 11,637 (10,028 domestic) were purchased. In Feb 2011, 9,698 (8,391 domestic). In February 2010, 9,493 (8,616 domestic). In February 2009, 15,187 (10,786 domestic). In February 2008 -- as Venezuelan oil went on to hit its highest price ever ($126.46 a barrel on July 18, 2008) -- Venezuelans bought 28,246 new cars (12,922 domestic).
While Venezuela's currency is officially 6.3 bolivars to the dollar, it traded as low as 90 bolivars to the dollar in February in the black market. Venezuela introduced a secondary rate in December, which is currently 10.8. Last month, the oil-rich Andean nation, where inflation is officially running at over 57%, opened a third rate, Sicad 2, which is currently reported at 49.11. The black market, which is no longer strictly illegal, is now trading at 66 bolivars to the dollar.
Given the confusion that four exchange rates engenders, GM also warned that future losses may occur.
"This change in exchange rate was made as we believe the SICAD I rates are the most representative rates to be used for remeasurement, as the official rate of BsF 6.3 to $1.00 will increasingly be reserved only for the settlement of USD-denominated obligations related to purchases of “essential goods and services” and future dividends will likely not be paid at the official rate," said GM. "The net assets of our Venezuelan subsidiaries may be impacted by periodic auctions in SICAD I rates which may have a material impact to the results of operations in Venezuela in future quarters."