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ICYMI: Venezuela Credit Rating May Be Cut by Fitch on Oil Reliance

Bloomberg
April 4, 2012
By Daniel Cancel

Venezuela’s credit rating may be cut by Fitch Ratings, which cited higher spending, increased dependence on oil and the use of off-budget funds in reducing the outlook for the country to negative from stable.

A jump in government outlays may push the central government budget deficit to 6.8 percent of gross domestic product this year and make the South American country more vulnerable to a slump in commodities, Fitch director Erich Arispe said today in a statement. A drop in crude or gold prices could negatively affect the rating, he wrote.

Venezuelan President Hugo Chavez, who is receiving radiation therapy to treat cancer in Cuba and plans to seek re- election in October, has diverted at least $80 billion to off- budget development fund Fonden since it was created in 2005 and accelerated borrowing in U.S. dollars amid record crude prices. The 57-year-old also decreed a change to the public finance law on March 29 that allows him to issue debt beyond the budgeted amount without seeking congressional approval.

“A markedly expansionary fiscal policy and the transfer of the country’s oil-windfall to opaque off-budget funds have weakened Venezuela‘s external and fiscal credit metrics as well as increased its dependence on high oil prices,” Arispe said in the statement.

The yield on Venezuela’s 9.25 percent benchmark bonds due in 2027 rose 15 basis points, or 0.15 percentage points, to 10.98 percent today at 11:10 a.m. in Caracas, according to data compiled by Bloomberg. The bond’s price fell 0.99 cent to 87.25 cents on the dollar.

Rating Affirmed

Fitch affirmed it’s B+ credit rating for Venezuela, which is four levels below investment grade and in line with the ratings of Bolivia, Ghana, Kenya, Vietnam and Zambia.

Fitch also changed its outlook for Venezuelan state oil company Petroleos de Venezuela SA and government-run utility company Electricidad de Caracas to negative, according to a separate statement.

PDVSA, as the Caracas-based oil company is known, has about $19.5 billion of dollar bonds outstanding while the state utility has about $663 million of bonds due in 2014 and 2018, Fitch said in the statement.

Venezuela depends on oil for 95 percent of export revenue and about 66.7 percent of its international reserves were in gold at the end of 2011, Fitch said.

Borrowing Costs

While Venezuela’s debt-to-GDP ratio of 25.2 percent is lower than peers, interest payments are rising as the country sells more bonds at high borrowing costs, Fitch said. Venezuela sold $7.2 billion of bonds in 2011.

The extra yield that investors demand to hold Venezuelan debt instead of U.S. Treasuries widened 11 basis points to 943, according to JPMorgan Chase & Co.’s EMBI Global index.

Recent polls show Chavez maintains a lead on opposition candidate Henrique Capriles Radonski six months before the Oct. 7 election. Chavez has ruled Venezuela since 1999.

“The risk for political and social instability remains present due to the high concentration of power in the hands of the president, weak institutional framework and the high degree of political polarization in Venezuela,” Fitch wrote. “The likelihood of a close presidential election and concerns about President Chavez’s health add further uncertainty to the political environment.”

To contact the reporter on this story: Daniel Cancel in Caracas at dcancel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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