Fitch Cuts Venezuela to 'B'; Reflects Heightened Macroeconomic Instability
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Fitch Ratings has downgraded Venezuela's ratings as follows:
--Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'; Outlook Negative;
--Senior unsecured foreign and local currency bonds to 'B' from 'B+';
--Country Ceiling to 'B' from 'B+';
Fitch has affirmed the short-term foreign currency IDR at 'B'.
KEY RATING DRIVERS
The downgrade reflects heightened macroeconomic instability and delays in the implementation of policies to address rising inflation and distortions in the foreign exchange (FX) market and the deterioration in Venezuela's external accounts. The Negative Outlook signals that the lack of sustained and coherent policy adjustments could lead to further erosion in external buffers, macroeconomic and financial instability, and exacerbate the risk of social unrest given the high level of political polarization.
Macroeconomic instability has increased in Venezuela as highlighted by spiraling inflation and recessionary conditions in the economy. Growth has declined rapidly after the 2012 electoral year to 1.3% in 2013, down from 5.6% in 2012 with Fitch forecasting an economic contraction of 1% in 2014. Inflation reached 52.7% by the end of 2013. The deterioration in macroeconomic stability reflected FX rationing, increasing shortages, increased state intervention and rapid growth in financing by the BCV to the non-financial public sector. Divisions within the government of President Nicolas Maduro and weak political capital have delayed necessary policy adjustments to address rising macroeconomic imbalances.
Heightened social unrest, most notably the ongoing wave of demonstrations, highlights the high degree of political polarization. Additionally, continued high inflation or shortages as well as increasing crime could exacerbate political instability. However, these developments do not presently threaten the main sources of FX for the economy.
The progressive reduction of the current account surplus and deterioration of the international reserves position amid high oil prices and access to Chinese funds highlight the underlying vulnerability of external accounts. International reserves dropped by USD8 billion to USD21.4 billion in 2013 reflecting lower gold prices and continued transfers to the National Development Fund (FONDEN). Gold accounted for approximately 70% of international reserves at the end of 2013. The sovereign is a net external debtor at 30% of current external receipts (CXR), while external liquidity has fallen below 100% in 2014, significantly below rating peers and increasing the country's vulnerability given its high oil dependence for fiscal revenues and exports.
The Maduro administration has recently put in place a new FX policy framework that could potentially increase exchange rate flexibility and hence the average depreciation of the VEF. While this development could help to ease public sector financing by the central bank, provide a greater flow of FX to the economy and rein in the depreciation in the black market, uncertainties remain regarding the regime's efficiency and credibility as well as the government's willingness to adjust monetary and fiscal policies.
Venezuela's central government deficit fell to an estimated 1.2% of GDP in 2013 from 4.9% in 2012 driven by the 'devaluation windfall' and lower than planned expenditure execution in the early part of the year. Given expenditure pressures, the deficit could rise again in 2014 above 4% of GDP and increase further in 2015 in the run-up to elections for the National Assembly. The sovereign's debt burden remains below similarly rated peers at 31.5% of GDP. This measure is reduced by use of the official exchange rate of VEF6.3, but its nominal growth has averaged a vertiginous 52% since 2009. The wider public sector is estimated to have a significantly larger deficit.
High oil prices and financing agreements with China mitigate external financing constraints. Venezuela has received a total of USD41 billion from China through Joint China Venezuela Fund (FCCV) and the China-Venezuela Long-Term Financing Agreement (FGLVP) since 2007. Sovereign amortizations are manageable, averaging 1% of GDP in 2014-2015 with external debt repayments at 0.5% of GDP. Moreover, FX assets in government-managed funds (i.e. FONDEN, FCCV and FGLVP), a captive domestic market and government deposits mitigate imminent financing risks.
Transparency of fiscal and external accounts, most notably the management and execution of extra-budgetary funds and public sector FX outside international reserves, remains weak. Moreover, there are no official figures for the consolidated public sector, and timely reporting of public finances has faced delays since 2011, thus posing limits to assess the overall fiscal and external strength of the sovereign. The official exchange rate is overvalued and swells the USD value of GDP.
RATING SENSITIVITIES
The Negative Outlook reflects the risk factors that may, individually or collectively, result in a downgrade of the ratings by up to one notch:
--Further deterioration in Venezuela's external accounts and international reserves position;
--Increased external and fiscal financing constraints;
--Deepening of political instability that compromises Venezuela's FX revenues and results in further deterioration of Venezuela's policy environment;
--A sustained decline in international oil prices;
Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade in the near term.
However, future developments that may, individually or collectively, lead to a stabilization of the Outlook include:
--Strengthening of Venezuela's external and fiscal buffers and increased data transparency;
--Improvements in the coherence and credibility of the government's policy mix to address macroeconomic distortions;
--Higher growth prospects in the context of improved macroeconomic stability.
KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of assumptions:
--Fitch assumes that international oil prices will average USD105 (Brent) in 2014 and USD100 in 2015;
--Notwithstanding increased social unrest in Venezuela, Fitch considers that the risk of social and political unrest leading to disruption in oil-derived revenues remains presently low.
--Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'; Outlook Negative;
--Senior unsecured foreign and local currency bonds to 'B' from 'B+';
--Country Ceiling to 'B' from 'B+';
Fitch has affirmed the short-term foreign currency IDR at 'B'.
KEY RATING DRIVERS
The downgrade reflects heightened macroeconomic instability and delays in the implementation of policies to address rising inflation and distortions in the foreign exchange (FX) market and the deterioration in Venezuela's external accounts. The Negative Outlook signals that the lack of sustained and coherent policy adjustments could lead to further erosion in external buffers, macroeconomic and financial instability, and exacerbate the risk of social unrest given the high level of political polarization.
Macroeconomic instability has increased in Venezuela as highlighted by spiraling inflation and recessionary conditions in the economy. Growth has declined rapidly after the 2012 electoral year to 1.3% in 2013, down from 5.6% in 2012 with Fitch forecasting an economic contraction of 1% in 2014. Inflation reached 52.7% by the end of 2013. The deterioration in macroeconomic stability reflected FX rationing, increasing shortages, increased state intervention and rapid growth in financing by the BCV to the non-financial public sector. Divisions within the government of President Nicolas Maduro and weak political capital have delayed necessary policy adjustments to address rising macroeconomic imbalances.
Heightened social unrest, most notably the ongoing wave of demonstrations, highlights the high degree of political polarization. Additionally, continued high inflation or shortages as well as increasing crime could exacerbate political instability. However, these developments do not presently threaten the main sources of FX for the economy.
The progressive reduction of the current account surplus and deterioration of the international reserves position amid high oil prices and access to Chinese funds highlight the underlying vulnerability of external accounts. International reserves dropped by USD8 billion to USD21.4 billion in 2013 reflecting lower gold prices and continued transfers to the National Development Fund (FONDEN). Gold accounted for approximately 70% of international reserves at the end of 2013. The sovereign is a net external debtor at 30% of current external receipts (CXR), while external liquidity has fallen below 100% in 2014, significantly below rating peers and increasing the country's vulnerability given its high oil dependence for fiscal revenues and exports.
The Maduro administration has recently put in place a new FX policy framework that could potentially increase exchange rate flexibility and hence the average depreciation of the VEF. While this development could help to ease public sector financing by the central bank, provide a greater flow of FX to the economy and rein in the depreciation in the black market, uncertainties remain regarding the regime's efficiency and credibility as well as the government's willingness to adjust monetary and fiscal policies.
Venezuela's central government deficit fell to an estimated 1.2% of GDP in 2013 from 4.9% in 2012 driven by the 'devaluation windfall' and lower than planned expenditure execution in the early part of the year. Given expenditure pressures, the deficit could rise again in 2014 above 4% of GDP and increase further in 2015 in the run-up to elections for the National Assembly. The sovereign's debt burden remains below similarly rated peers at 31.5% of GDP. This measure is reduced by use of the official exchange rate of VEF6.3, but its nominal growth has averaged a vertiginous 52% since 2009. The wider public sector is estimated to have a significantly larger deficit.
High oil prices and financing agreements with China mitigate external financing constraints. Venezuela has received a total of USD41 billion from China through Joint China Venezuela Fund (FCCV) and the China-Venezuela Long-Term Financing Agreement (FGLVP) since 2007. Sovereign amortizations are manageable, averaging 1% of GDP in 2014-2015 with external debt repayments at 0.5% of GDP. Moreover, FX assets in government-managed funds (i.e. FONDEN, FCCV and FGLVP), a captive domestic market and government deposits mitigate imminent financing risks.
Transparency of fiscal and external accounts, most notably the management and execution of extra-budgetary funds and public sector FX outside international reserves, remains weak. Moreover, there are no official figures for the consolidated public sector, and timely reporting of public finances has faced delays since 2011, thus posing limits to assess the overall fiscal and external strength of the sovereign. The official exchange rate is overvalued and swells the USD value of GDP.
RATING SENSITIVITIES
The Negative Outlook reflects the risk factors that may, individually or collectively, result in a downgrade of the ratings by up to one notch:
--Further deterioration in Venezuela's external accounts and international reserves position;
--Increased external and fiscal financing constraints;
--Deepening of political instability that compromises Venezuela's FX revenues and results in further deterioration of Venezuela's policy environment;
--A sustained decline in international oil prices;
Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade in the near term.
However, future developments that may, individually or collectively, lead to a stabilization of the Outlook include:
--Strengthening of Venezuela's external and fiscal buffers and increased data transparency;
--Improvements in the coherence and credibility of the government's policy mix to address macroeconomic distortions;
--Higher growth prospects in the context of improved macroeconomic stability.
KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to a number of assumptions:
--Fitch assumes that international oil prices will average USD105 (Brent) in 2014 and USD100 in 2015;
--Notwithstanding increased social unrest in Venezuela, Fitch considers that the risk of social and political unrest leading to disruption in oil-derived revenues remains presently low.
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