Goodyear Assessing Impact of Venezuelan Currency Devaluation
On January 8, the Venezuelan government announced the devaluation of its currency, the bolivar fuerte, and the establishment of a two-tier exchange structure. This has seen the official exchange rate against the US dollar slide from 2.15 bolivar fuerte per dollar to 4.30, except in the case of essential goods, for which the rate is 2.60. This significant currency change has impacted tyre makers active in the South American country; Goodyear Tire & Rubber reports it expects a first-quarter 2010 charge of about $150 million (62 cents a share) in connection with the devaluation.
Some of the tyres and raw materials Goodyear imports into Venezuela have been classified as essential, while others have not. The tyre maker says it is now evaluating the list of goods classified by the Venezuelan government as essential to determine the exchange rates applicable to its imports. The company will continue to evaluate the impact of these actions by the Venezuelan government.
Separately, notes Goodyear, Venezuela has been designated ‘hyper-inflationary’ effective January 1, and as such, all future foreign currency fluctuations will be recorded in income.
This $150 million charge relates to the re-measurement of Goodyear’s balance sheet, net of tax. The extent to which Goodyear imports are classified as essential could reduce this impact. As of December 31, 2009, without giving effect to the devaluation, Goodyear had approximately $370 million in cash denominated in bolivar fuerte in Venezuela. The devaluation will not have any impact on Goodyear’s 2009 results of operations or financial position.
Goodyear notes that the “future results” of its Venezuelan operations will be affected by many factors, including the company’s ability to take actions to mitigate the effect of the devaluation, further actions by the Venezuelan government, economic conditions in Venezuela such as inflation and consumer spending, and the availability of raw materials, utilities and energy.
“We have a strong business in Venezuela with an outstanding and experienced leadership team that is focused on managing through the changes taking place in the Venezuelan market,” stated Robert J. Keegan, Goodyear’s chairman and chief executive officer.