Latin American Herald Tribune

Caracas,
Friday, January 18,2013

NEW YORK – Moody’s Investors Service on Wednesday changed Venezuela’s outlook to negative from stable and affirmed the B1 local currency and B2 foreign currency government bond ratings.

The negative outlook reflects increased political uncertainty and associated risks to the Venezuelan economy and government finances following President Chavez’s failure to attend his inauguration ceremony on January 10. Notwithstanding the government’s decision not to call new elections, as was arguably required by the Constitution, a political transition appears to be imminent – if it is not underway already.

Ratings Rationale

Venezuela is heavily exposed to transition risk because of the weakness of its institutions coupled with the concentration of power in the person of President Chavez. While this risk is already incorporated in the current ratings, the negative outlook reflects the increased likelihood of a downward rating migration should transition risks crystallize, resulting in a deterioration of other credit fundamentals.

The current situation has revived the possibility that an opposition candidate may take over the presidency and with it begin to usher in economic reforms that could improve Venezuela’s credit picture in the medium term. However, regardless of who succeeds Chavez, and which part of the political spectrum they represent, this potential opportunity is outweighed in the shorter term by risks associated with the political transition.

The transition comes at a particularly challenging time for the Venezuelan economy, which experienced a marked deterioration in a number of key macroeconomic indicators last year, particularly the fiscal deficit. Increased spending in advance of last year’s presidential and regional elections has left the government highly overextended.

Moody’s estimates that the 2012 fiscal deficit equaled nearly 11% of GDP, up from 4% in 2011. While GDP grew by 5.5%, this was driven in large part by the increase in spending. In addition, the currency is increasingly overvalued, as reflected in the sharp rise in the black market exchange rate. With Chavez’ successor, whoever he may be, likely to face significant challenges to his authority, Moody’s believes it will be difficult for him to make the economic policy adjustments necessary to address these growing imbalances.

The negative outlook also considers the risk of civil unrest. The longer the current impasse remains, the more likely this becomes. The opposition will not stand idly by if they perceive the Chavistas to be attempting to solidify their grasp on power through extra-constitutional means.

Depending upon the pace at which events unfold going forward, the rating and outlook could potentially be revisited well before the expiration of the 12-18 month time horizon normally associated with an outlook. The rating could face further downward pressure if the next president fails to implement meaningful policy adjustments to reduce macroeconomic imbalances and distortions, or if civil unrest threatens the stability of the government. The outlook could be stabilized if the new president demonstrates that he has firmly established his authority and implements changes to current policies sufficient to stabilize the economy.