Moody’s downgrades Venezuela outlook due to political uncertainty

16 Jan 13
Moody’s has changed its outlook on Venezuela from stable to negative and warned that continuing political uncertainty could put further pressure on the country’s B2 credit rating.

By Nick Mann | 16 January 2013

Moody’s has changed its outlook on Venezuela from stable to negative and warned that continuing political uncertainty could put further pressure on the country’s B2 credit rating.

The change follows the failure of President Hugo Chavez to attend his inauguration ceremony last week following his latest treatment for cancer. The ratings agency said that although the government decided not to call new elections, a political transition appeared to be imminent – if not under way already.

‘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,’ it said in a note published yesterday.

‘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 crystallise, resulting in a deterioration of other credit fundamentals.’

Moody’s noted that the transition came at a particularly challenging time for the Venezuelan economy. Increased spending in advance of last year’s presidential and regional elections had left the government ‘highly over-extended’. The agency estimates that the Venezuelan budget deficit last year was almost 11% of gross domestic product, compared with 4% in 2011.

Last year’s 5.5% increase in gross domestic product was driven largely by this spending growth, while the country’s currency, the bolivar, is increasingly overvalued.

‘With Chavez's 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 note said.

Moody’s also warned that the impasse over the presidency was increasing the risk of civil unrest, with opposition groups likely to act if they believe ‘Chavistas’ are attempting to solidify their grasp on power through extra-constitutional means.

In light of this, the agency said it could revisit its outlook and rating for Venezuela well before the usual 12–18 month period.

Further downward pressure could occur ‘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’, it said.

But, it added: ‘The outlook could be stabilised if the new president demonstrates that he has firmly established his authority and implements changes to current policies sufficient to stabilise the economy.

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