Agencies fear Venezuela “collapse”
Venezuela’s deteriorating economic situation could hurt its ability to service debt, say analysts
Using terms such as "collapse," analysts
are worried that Venezuela's
worsening economy may finally affect the country's ability to
service debts. Venezuela has been downgraded twice in the past
Moody's lowered the sovereign to Caa1,
following a drop to B minus by Standard & Poor's. Both
ratings are on negative outlook, as the agencies expect the
situation to get worse. The risk to the economy and the
government's finances caused by increasingly unsustainable
macroeconomic imbalances and increasingly radical policies
motivated the downgrades.
"The risk of an economic and financial
collapse has greatly increased," Moody's said. It sees
inflation, at above 50%, as "out of control". The current
account surplus shrank by 35% through the past three quarters
against the same period in 2012, and the government's liquid
financial assets continue to decline, the agency says.
A law passed last month giving President
Nicolas Maduro power to make a variety of economic decisions by
decree is particularly troubling for analysts. The government
has steadily extended control over large parts of the economy,
in part to boost the ruling party's chances in the December 6
mayoral elections. The government won the elections by 6.5% on
an aggregated basis.
"The recent political shift overturns an
earlier initiative that had taken place in mid-year to
introduce more pragmatic economic policy - such as a more
frequent dialogue with the private sector and the introduction
of more flexibility in the allocation of foreign exchange,"
Standard & Poor's said.
More government intervention in the
private sector is likely following the elections, extending
macroeconomic dislocations and further increasing the risks to
economic, fiscal, and external sustainability, Standard &
The unofficial exchange rate has reached
10 times the official rate, Moody's says. In 2014, analysts
expect the government to rely on devaluation of the official
exchange rate to improve its short term fiscal prospects.
Standard & Poor's sees the chances of a devaluation in
early 2014 as having "increased significantly."
In public remarks this week, Rafael
Ramírez, vice president for economics, said Venezuela
plans to transition to a new foreign exchange system in which
the SICAD auction mechanism will play a larger role. As a first
step, the SICAD rate would be used by the government when
buying dollars from foreign participants in oil joint ventures
and incoming tourists, and by the central bank when buying
Ramírez's remarks suggest that the
government is planning to create a system in which SICAD will
become the reference rate for all transactions, Bank of America
Merrill Lynch analysts said. However, they noted that the
official was short on specifics.
ambiguity in Ramírez's speech, we believe that [the
government] has as its intention to lay the groundwork for a
future devaluation," BAML said. LF