Telefonica SA (TEF) plans to boost spending in Venezuela to avoid sitting on cash that may lose a third of its value as speculation mounts that the government may devalue the bolivar for a second time this year, according to a person familiar with the matter.
The Spanish phone company’s headquarters in Madrid will be asked this week to sign off on additional spending of 1.3 billion bolivars ($207 million) this year on its mobile-phone network in Venezuela, said the person, asking not to be identified because the proposal is confidential. Telefonica earlier this year approved a 78 percent increase in its budget to 3.9 billion bolivars with an additional 600 million bolivars earmarked for acquiring high-speed wireless spectrum.
Telefonica wants to spend as much as possible of an estimated $3 billion that it can’t take out of Venezuela amid speculation of a devaluation of the bolivar to 9.3 per dollar from 6.3, the person said. Overseas companies may hold $12 billion in dividends in Venezuela that they can’t repatriate, according to an April estimate by Caracas-based researcher Ecoanalitica. Venezuela devalued the bolivar from 4.3 per dollar on Feb. 8.
“To increase costs from 4.3 bolivars per dollar to 9.3 bolivars per dollar in a year would be truly explosive,” said Asdrubal Oliveros, a director at Ecoanalitica. “I’ve got clients, multinationals calling but it doesn’t make any sense.”
The yield on the government’s benchmark 9.25 percent dollar bonds due in 2027 climbed 33 basis points, or 0.33 percentage point, to 11.25 percent yesterday in New York, the highest level on a closing basis since Sept. 20, according to data compiled by Bloomberg. The price fell 2.13 cents to 85.94 cents, the biggest daily decline since April 16.
Miguel Angel Garzon, a Telefonica spokesman, declined to comment and referred questions to the company’s Venezuela unit. Douglas Ochoa, a spokesman in Caracas, didn’t return calls and an e-mail seeking comment.
Venezuela’s President Nicolas Maduro, speaking on state television yesterday, said the country isn’t preparing for a devaluation.
“What’s coming is a strengthening of the Venezuelan currency, strengthening of the economy,” Maduro said. Venezuela is overcoming shortages, Maduro said, asking Venezuelans to resist rumors of bolivar devaluation.
The February move has hurt international companies from Procter & Gamble Co. (PG:US) and Merck & Co. to Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender.
Most foreign businesses operating in the country “are stuck with cash they can’t repatriate and they end up having to carry out accounting adjustments after a devaluation for the loss in value,” said Juan Carlos Martinez Lazaro, a professor at IE Business School in Madrid.
President Maduro whom Hugo Chavez anointed as his successor three months before dying of cancer in March, has seen support for his government wane as the devaluation cuts into Venezuelans’ purchasing power and stokes inflation that was already the region’s highest.
While the February devaluation narrowed an estimated fiscal deficit in 2012 for the government and state oil company Petroleos de Venezuela SA of 14.5 percent, it didn’t close it, according to estimates by Francisco Rodriguez, an analyst at Bank of America Corp.
Venezuela still faces a budget gap of 9.7 percent, according to Rodriguez, whose calculations are based on the government reviving a dollar-auction system that sold $200 million in March.
Devaluing the currency would boost the government’s cash flow by increasing the amount of bolivars it receives from oil exports.
Telefonica, which expanded in Venezuela with the 2004 takeover of BellSouth Corp.’s Latin American wireless business, has seen the value of its dividend accumulated in the country slashed by about $1.3 billion since February, according to an April company presentation seen by Bloomberg News. Telefonica is the second-largest wireless carrier in the country after CA Nacional Telefonos de Venezuela.
Telefonica shares rose 2 percent to 10.61 euros at 1:50 p.m. in Madrid. The carrier has a market value of 48 billion euros ($63 billion).
To be sure, some investors in the country aren’t bracing for another devaluation. Duro Felguera SA (MDF), a Spanish builder of power plants, doesn’t expect a change in the value of the bolivar soon, according to a spokesman, Federico Alvarez de la Ballina. To hedge from any currency fluctuation, the company has contracts in euros, dollars and bolivars, he said.
“The government’s need right now is for dollars,” said Ricardo Villasmil, an economist at the Universidad Catolica Andres Bello. “They have some delays in debt payments in bolivars but the primary necessity at the moment is for foreign currency and a devaluation won’t necessarily solve that.”
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