Agencies fear Venezuela “collapse”

Agencies fear Venezuela “collapse”

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 & Poor’s said.

Devaluation talk

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 gold.

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.

“Despite the 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