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 four days.
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
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
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
ambiguity in Ramírez’s speech, we believe
that [the government] has as its intention to lay the
groundwork for a future devaluation," BAML said.