In spite of the measures to relieve Venezuela’s financial stress, lower oil prices, the lack of material foreign financing and political uncertainty will continue to weigh on Venezuela’s rating.
The decline (and lack of meaningful recovery) of oil prices continues to pressure Venezuela’s finances. Oil accounts for around 95% of total exports and close to 45% of central government revenues. International reserves have fallen by USD7 billion since 2014 and by USD1.7 billion YTD to USD14.5 billion or roughly 3 months of 2015 current external payments. Moreover, the operational liquidity of international reserves is constrained, as approximately two-thirds are held in gold, directly by the sovereign. Venezuela’s sources of FX financing are also limited. It last issued a global bond in 2011. We do not expect significant FX funding to materialize this year beyond the roll-over of existing oil facilities with China, said Fitch Ratings.
President Maduro announced a series of economic measures that include a devaluation of the official subsidized CENCOEX rate, an exchange rate used for imports, including food and medications. The rate will go from 6.3 bolivares to 10 per USD without reducing balance of payments pressures. One US dollar buys over 1000 bolivares on the parallel market. The government also announced the first increase in gasoline prices in 17 years. Despite rising by over 6,000%, gasoline remains cheaper in Venezuela than in most countries. More importantly, the announced measures have not been accompanied by a broader set of adjustments that would lead to increased consistency between FX and fiscal policies. Hence, recession, inflation and fiscal imbalances are likely to deepen.
The sovereign’s payment records and public pronouncements signal continued willingness to service debt, but the economic and social costs from import compression continue to rise. Venezuela made a USD1.5 billion bond amortization on Friday, Feb. 26. No sovereign external market payments are due in 2017. However, current oil prices would mean that external financing requirements (current account deficit plus external debt amortizations) could reach USD32 billion in 2016.
Venezuela’s political uncertainty will continue to hamper the adoption of a credible and sustainable strategy intended to adapt to lower oil prices and reduce macroeconomic instability. The opposition party won a majority in the National Assembly election in December. Since then President Maduro’s party has sought to bypass the legislature with the support of other state institutions such as the Supreme Court. The opposition is considering strategies to shorten President Maduro’s term, either through a constitutional amendment or through a recall referendum. Hence, political calculations could continue to be the determinant factor guiding economic policy decisions, thus deepening polarization and increasing the risk of social unrest due to the deep economic crisis.
Year-end 2015 government figures showed that inflation had risen to 180.9% and the economy shrank 5.7% by the end of last year.