Agencies fear Venezuela “collapse”
December 17, 2013
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
“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 &
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.
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.
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