Thursday, January 10,2013

By Aaron Freedman
& Bart Oosterveld

NEW YORK -- With Venezuela's President Hugo Chavez unable to attend the inauguration for his next Presidential term originally scheduled to take place on Thursday, January 10 due to his seemingly terminal cancer, Venezuela faces a period of heightened political uncertainty. The current situation appears to revive the possibility that an opposition candidate could take over the presidency and with it begin to usher in economic reforms that could improve Venezuela's credit picture in the medium term. Regardless of who succeeds Chavez and which part of the political spectrum they represent, however, this potential opportunity is outweighed in the shorter term by risks associated with the political transition that could negatively impact Venezuela's rating if they crystallize.

While the Constitution seemingly requires that elections be called within 30 days if Chavez is unable to attend the inauguration, the Chavistas are currently arguing that this is in fact not the case. The longer the current situation persists the greater the likelihood of social and political unrest. The opposition would not stand idly by if they perceive the Chavistas to be attempting to solidify their grasp on power through extra-constitutional means.

Even if elections are called promptly, Moody's believes the likelihood of an opposition victory is limited. The recent Presidential and regional elections have re-legitimized the Chavista movement while calling the level of support for the opposition into question. Although the expected Chavista candidate, Vice President Nicolas Maduro, is generally not regarded as a very strong candidate on his own, he will likely benefit from a large sympathy vote.

Although the Chavista movement is in fact a coalition of fairly disparate interest groups that has been held together by Chavez, we do not think it is likely to fall apart simply due to his absence. Most likely there will be a behind --the-scenes power struggle, notwithstanding Maduro's recent public anointment as Chavez's preferred successor. As long as it retains power, however, the movement is expected to present an external image of unity, as it has been doing since Chavez's most recent bout of illness began.

That said, Chavez's successor will be challenged to establish his authority over rivals, which may prevent him from making urgently needed adjustments to the exchange rate and government spending levels -- adjustments that would be painful for significant portions of the population. A related risk given the country's very weak public institutions is that without the discipline provided by Chavez' presence, corruption may spiral out of control as individuals within the government could be tempted into a race for spoils before increasing macroeconomic imbalances cause the economy to collapse. If assets in the government's various off-budget funds, or even actual oil shipments, start to go missing as a result, this would have a direct negative impact on credit quality.

Even if the opposition manages to win the elections, it will lack the mandate that it would have had if Capriles had defeated Chavez head-to-head in October, which will make it more difficult to implement any meaningful but likely disruptive reforms. There is the risk of civil unrest in this circumstance as well as the Chavistas most assuredly will not go gently into the night. Moody's

Aaron Freedman is Senior Credit Officer and Vice President of the Sovereign Risk Group at Moody's Investors Service, Inc. in New York, where Bart Oosterveld is the Managing Director for Sovereign Risk.