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Despite sitting atop the world’s largest oil reserves, Venezuela’s government is facing mounting concerns about its solvency, prompting a downgrade that has added to Latin America’s recent economic bad news. |
Venezuela owes more than $6.4bn in debt payments in October, equal to one-third of its total declared hard currency reserves.
The overall economic picture is also bleak, with Venezuelans hit by chronic shortages of basic goods, annual inflation of more than 60% and a stricken economy that S&P said risked shrinking up to 3.5% this year.
That prompted the ratings agency to lower Venezuela’s rating one notch on Tuesday, to CCC+, taking the South American country deep into “speculative grade” territory.
S&P warned investors that Venezuela faced “at least a one-in-two likelihood of default over the next two years.”
It gave the country a negative outlook, indicating the strong possibility of a new downgrade over the medium term.
“Economic recession, high inflation and growing external liquidity pressures will continue to erode the government’s capacity to pay external obligations over the next two years,” it said.
Critics accuse the socialist government of President Nicolas Maduro, the political heir to late leftist firebrand Hugo Chavez, of distorting the economy by spending lavishly on subsidies, imposing strict foreign exchange controls and recklessly printing the bolivar currency to pay a deficit estimated at 1% of GDP.
The economy has been hit by stagnant oil exports - which bring in 96% of its foreign currency reserves - and falling output, forcing it to import more and more food and other goods.
The central bank says its foreign reserves have fallen 25% in 18 months.
Maduro, keen to soothe markets, vowed last week the government would pay its debts “down to the last dollar.”
“In 15 years of revolution (since Chavez came to power), Venezuela has shown that it keeps its promises,” Maduro said.
But analysts say badly needed economic reforms have been stalled because of the strength of a radical political faction in Maduro’s government.
Rafael Ramirez, a powerful oil minister who had promised to reform the government’s strict currency controls, was recently replaced in a cabinet shake-up and made foreign minister in what many saw as a sidelining.
“That has made the market very nervous and volatile,” said David Alayon, director of Caracas-based consultancy Kapital Consultores.
Venezuela’s downgrade adds to the bad economic news that has troubled much of Latin America in recent months. Central American tourism darling Costa Rica was also hit by a downgrade on Tuesday. Moody’s lowered the country’s rating a notch to Ba1, saying a growing deficit and failure to undertake key fiscal reforms were damaging its creditworthiness.
The ratings agency forecast Costa Rica’s deficit would grow to 5.8% of GDP this year and 6% next year, up from 4.5% today.
Overall debt will reach nearly 40% this year, up from 25% in 2008, it predicted. That came after Brazil, the region’s largest economy, announced late last month that it had slid into recession, shrinking 0.6% in the second quarter after a revised-down contraction of 0.2% in the first three months of the year.
