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Fitch Downgrades Venezuelan IDRs to 'B '; Outlook Stable
Fitch Ratings-New York-15 December 2008: Fitch Ratings has today downgraded the Bolivarian Republic of Venezuela's Long-term Foreign and Local currency Issuer Default Ratings (IDRs) to 'B ' from 'BB-'. The Ratings Outlook for both IDRs is Stable. Fitch has also lowered the Country Ceiling rating to 'B ' from 'BB-'. The Short-term foreign currency IDR is affirmed at 'B'. In addition, the following individual bond ratings are downgraded: --Global uncollateralized foreign currency bonds to 'B /RR4' from 'BB-'; --Local currency uncollateralized bonds to 'B /RR4' from 'BB-'; --Collateralized USD Par and Discount Brady bonds to 'BB-/RR3' from 'BB/RR3'; --Collateralized foreign currency (DEM) Discount Brady bonds to 'BB/RR2' from 'BB /RR2'; --Collateralized foreign currency (DEM, FRF, CHF) Par Brady bonds to 'BB/RR2' from 'BB /RR2'; --Collateralized foreign currency (ITL) Par Brady bonds to 'BB-/RR3' from 'BB/RR3'. The downgrade reflects an increased risk of financial and economic crisis in Venezuela due to its tenuous macroeconomic policy framework and Fitch's concerns that a timely adjustment may not be forthcoming, particularly within the context of upcoming electoral events. As political considerations have guided economic policy choice in recent years, Fitch is concerned that electoral processes in 2009 and 2010 will deter the government from making difficult policy choices to address current macroeconomic imbalances. 'The economy's dependence on oil revenues, high inflation and an overvalued fixed exchange rate increase the challenges for authorities to adjust to a low oil price environment,' said Erich Arispe, Associate Director in Fitch's Sovereign Group. In light of increased fiscal and quasi-fiscal expenditures as well as over-execution of central government expenditures, which has averaged 30% since 2006, the government's ability to implement counter-cyclical policies under a low oil price scenario without using its considerable financial assets is limited. Moreover, oil-revenues account for 50% of central government revenues and 'the volatility of fiscal revenues is high even when compared to oil exporters such as Azerbaijan and Nigeria, thus, increasing the risk of a severe fiscal account deterioration in the absence of expenditure adjustments,' said Arispe. Venezuela has the highest inflation rate among non-investment sovereigns rated by Fitch, in part reflecting the government's heterodox anti-inflationary policy response, the growing mismatch between aggregate demand and domestic supply, as well as the spread between the official and parallel market exchange rate. In addition to negatively affecting medium-and long-term growth prospects, the already high level of inflation, forecast to reach 31% by year-end, could delay the use of devaluation as a tool to improve fiscal accounts due to its economic and political costs. On the external front, lower oil prices, increased inelasticity of imports to cover shortages of basic products, devaluation and the transfer of reserves to discretionary and opaque funds could lead to a rapid deterioration of external solvency and liquidity indicators despite capital controls. Fitch expects Venezuela to revert to a net public external debtor in 2009, while most 'BB' credits will remain net creditors. In addition, the country's international liquidity could fall below the 'BB' median by 2010. In Fitch's view, the country should maintain higher levels of liquidity to support creditworthiness, given Venezuela's oil dependency, which causes an elevated degree of balance of payments volatility relative to peers. However, Venezuela's comparatively low government debt burden and manageable government debt maturity profile, as well as an accumulated USD18 billion in liquid external financial assets in addition to international reserves of USD38 billion, provide near-term cushion to lower oil prices and support Venezuela's 'B ' ratings. Government debt maturities, at 2% of GDP in 2008, are forecast to decline to less than 1% of GDP over our forecast horizon. Mounting macroeconomic pressures, if not addressed, could result in a severe and disorderly economic adjustment, thus, adversely affecting the sovereign's capacity to service debt. A greater than anticipated deterioration of the country's fiscal and balance of payments position could also put downward pressure on Venezuela's ratings. Conversely, Venezuela's creditworthiness could strengthen if a sustainable and coherent policy response were implemented to reduce its vulnerability to oil price fluctuations and thus the volatility of overall macroeconomic performance.