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Ford concerned Argentina, Venezuela may bite into 2014 profit

Bernie Woodall
Tuesday, 28 Jan 2014 | 8:46 PM ET

DEARBORN, Mich., Jan 28 (Reuters) - Ford Motor Co on Tuesday joined a growing number of multinational companies expressing concern that economic turmoil in Venezuela and Argentina could spell trouble for 2014 profits.

High inflation in Argentina and Venezuela, along with concern about how the two countries' governments will try to steady their economies has Ford rethinking its annual forecasts for South America.

Consumer prices jumped more than 50 percent last year in Venezuela and private analysts say inflation reached 25 percent in 2013 in Argentina, fueled by weakening currencies in both countries that have rattled global financial markets.

Ford's financial outlook first presented six weeks ago called for the company to repeat 2013's performance in South America, when it lost $34 million before taxes, compared with a profit of $213 million in 2012. Ford's fourth-quarter losses in South America ballooned to $126 million.

"Since December, we're more concerned," about company performance in South America, Ford Chief Financial Officer Bob Shanks told reporters on Tuesday as the company reported an overall annual pretax profit of $8.57 billion.

Shanks said the company is poised to respond in "real time" to the changing economic landscape in both Venezuela and Argentina.

"I think that is an area that we will continue to watch very closely," he said. Ford will likely have plenty of company.

General Motors Co newly installed Chief Financial Officer Chuck Stevens recently said that GM's South American operations had a second straight profitable year in 2013, but that continued volatility in Argentina and Venezuela present financial risk. More details may emerge with GM reports earnings next week.

Beyond the auto industry, U.S. consumer products companies from Colgate-Palmolive to Clorox may also take a hit on the worsening crisis, in which the Argentine government's currency controls, by limiting access to dollars, has led a mad scramble for the U.S. currency on the black market.

The exchange rate on the black market is nearly twice the official exchange rate, said Guido Vildozo, IHS Automotive analyst based in Massachusetts. This led to people selling dollars on the black market and then buying cars at the official exchange rate, "an investment in a durable good that will maintain its value even if currency inflation continues," said Vildozo.

This led to a short-term gain for Ford and other automakers in the Argentine market last year, but Shanks said that the company hopes that the government institutes longer-term changes that while biting into new vehicle sales will make more sense for consumers and the companies that sell to them.

Last Friday, the day after the Argentine peso had its hardest drop against the U.S. dollar in a dozen years and in the face of an expected 30 percent hike in consumer prices in 2014, Buenos Aires said it would relax currency controls it had long defended as essential.

VENEZUELA

The situation is even worse in the smaller market of Venezuela, where Shanks told reporters on Tuesday, "the government is trying manage every aspect of the economy."

"You know that just doesn't work very effectively," he added.

New vehicles sales in Argentina by all manufacturers were about 900,000 vehicles last year, compared with 100,000 vehicles in Venezuela.

Shanks said a lack of access to foreign currency in Venezuela has caused Ford to cut auto output there "because we simply can't get the currencies that we need in order to pay for the parts that we need to bring in for production."

Last week, Venezuelan President Nicolas Maduro revamped 11-year-old currency controls under pressure to fix economic ills ranging from the highest inflation rate in the Americas to shortages of bread and milk.

However, Venezuela's benchmark bonds fell to two-year lows when investors said the moves did not go far enough to correct policies that critics say have led last year's inflation rate of 56 percent.

FORD NOT ALONE

Colgate-Palmolive Co derives more than 80 percent of its business outside of its North American base, including 50 percent from faster-growing emerging markets, and Latin America accounts for nearly 30 percent of Colgate's sales.

Last year, Colgate-Palmolive said it incurred a one-time aftertax loss of about $120 million to adjust its balance sheet in Venezuela, which Morningstar said hit earning by 13 cents per share.

Colgate was joined by Avon Products Inc and Clorox Co last year in having to slash prices for its consumer goods sold in Venezuela after the country's bolivar was devalued.

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