Fitch Ratings has today affirmed the Bolivarian Republic of Venezuela's Long-term Foreign and Local currency Issuer Default Ratings (IDRs) at 'B+'. The Rating Outlook for both IDRs is Stable. Fitch has also affirmed the Country Ceiling rating at 'B+' and the Short-term foreign currency IDR at 'B'.
Venezuela's ratings reflect the sovereign's volatile macroeconomic environment and its tenuous policy framework in the context of still favorable external and fiscal solvency indicators relative to peers following the devaluation in January 2010, and its manageable debt service profile.
Oil accounts for 93% of total exports, while the central government's revenue volatility is high even compared with other non-investment-grade oil-exporters, thus leaving Venezuela highly vulnerable to a prolonged decline in international oil prices.
A more stable oil price outlook and the positive fiscal effects of devaluation could limit deterioration in fiscal and external balance sheets in 2010. Nevertheless, 'macroeconomic performance is likely to remain weak as inflation continues to accelerate, and growth could remain negative (at -0.5%) in 2010 due to energy shortages, the deterioration of consumers' purchasing power, and low investment,' said Erich Arispe, Director in Fitch's Sovereign Group.
'The devaluation of the VEF will not be sufficient to address macroeconomic distortions present in the economy, reflected in high inflation and a wide spread between the parallel and official exchange rates, in the absence of complimentary measures on the fiscal and monetary front, as well as a radical improvement in the country's business environment to address the structural component of inflation,' added Arispe.
Inflation, at 31% on average in 2010, is likely to remain as the highest among sovereigns rated by Fitch, due to increased fiscal spending, the government's heterodox anti-inflationary policy response and the growing indexation of the economy to the parallel market exchange rate.
Fitch is concerned that Venezuela could turn into a net sovereign external debtor as early as 2010 if the government issues USD-denominated debt in the local market to mop up liquidity temporarily and manage depreciating pressures on the parallel exchange rate, and, at the same time, transfers 'excess international reserves' from the central bank to the National Development Fund (FONDEN). Most non-investment-grade oil exporters have solid net sovereign external creditor positions.
Venezuela's external liquidity ratio, at 190% in 2010, is in line with the 10-year 'B' median. Nevertheless, in Fitch's view, the country should maintain higher levels of liquidity to support creditworthiness, given Venezuela's oil dependency, which causes an elevated degree of balance of payments volatility relative to peers.
While the January 2010 devaluation will benefit oil-derived central government revenue, spending is also likely to accelerate significantly in the run-up to September 2010 legislative elections. Hence, the budget deficit could still reach 3.2% of GDP, since Fitch expects the government to over-execute the officially announced 2010 budget by about 49%.Government debt, though, at 115% of government revenues, is lower than the projected 2010 'B' median.
Venezuela's debt profile and payment capacity remain strengths for the credit. Government amortization will remain close to 1% of GDP over our forecast horizon, while the government's non-reserve liquid FX assets amounted to about 3.7% of GDP in October 2009, thus supporting the sovereign's current ratings levels. Moreover, the sovereign has a recent record of servicing its obligations even during times of stress.
Venezuela's creditworthiness could improve if a sustainable and coherent policy response were implemented to reduce its vulnerability to oil price fluctuations and macroeconomic volatility. Conversely, macroeconomic pressures, underpinned by oil price volatility, high inflation and the management of a multiple exchange rate regime, could result in a severe and disorderly economic adjustment if not addressed, which could affect the sovereign's capacity to service its debt. Finally, a greater-than-anticipated deterioration of the country's fiscal and external position could also put downward pressure on Venezuela's ratings.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following report:
--'Sovereign Rating Methodology' (Oct. 16, 2009).
Additional information is available at 'www.fitchratings.com'.
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Contacts:
Fitch Ratings, New York
Erich Arispe, 212-908-9165
Theresa
Paiz Fredel, 212-908-0534
or
Media Relations:
Cindy
Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com
