A recent experience of Telefonica, the Spanish telecoms giant that owns O2 in the UK, should stand as a stark reminder that emerging markets remain a lot more risky than many investors perceive. In addition to its range of domestic and other European businesses, Telefonica has extensive interests in Latin America that, as well as Brazil and Argentina, includes a very large operation in Venezuela.
Venezuela officially operates a fixed currency rate against the euro and so, reasonably enough, that is the rate Telefonica uses in its accounts. However, as the Venezuelan government has tried to sort out its finances, it has devalued the bolivar by some 85% in total, which has seen Telefonica’s profits from the country also fall by 85% in euro terms. This has hit group profits by around 7%.
To make matters worse, the devaluation has also reduced the value of a significant amount of cash Telefonica has had stuck in Venezuela. The cash is there because, like many emerging markets, Venezuela has capital controls and so Telefonica could not bring it back to Europe. The Venezuelan cash had at least been helping with the company’s net debt number but now its value has fallen by 85% as well.
Emerging markets bring risks in terms of both the currency in which companies operating there earn their profits and the freedom with which they can access those profits. In the context of Telefonica’s overall business empire, Venezuela did not pose a big risk but it was still a real risk – and one few people considered until the day it all happened.