New York, November 13, 2014 -- The imbalances in Venezuela's (Caa1 negative) fiscal accounts do not constitute a critical vulnerability for the sovereign's creditworthiness, says Moody's Investors Service in a new report, "Venezuela: Fiscal Account Imbalances Not a Critical Vulnerability."

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Announcement: 

Moody's: Venezuela's fiscal account imbalances not a critical vulnerability

Global Credit Research - 13 Nov 2014

New York, November 13, 2014 -- The imbalances in Venezuela's (Caa1 negative) fiscal accounts do not constitute a critical vulnerability for the sovereign's creditworthiness, says Moody's Investors Service in a new report, "Venezuela: Fiscal Account Imbalances Not a Critical Vulnerability."

Venezuela's central government deficit remains moderate, amounting to less than 2% of GDP in 2013, although Moody's estimates that the total public sector deficit is over 10% of GDP. Fiscal deficits of this magnitude would generally constitute a serious risk for a sovereign's creditworthiness, but persistently high inflation and highly restrictive capital and exchange rate controls have created an environment in which the sovereign can easily obtain domestic funding at highly affordable rates without leading to a debt spiral.

"Despite the elevated public sector deficits, we don't think Venezuela's fiscal imbalance poses a profound threat to debt sustainability or the sovereign's creditworthiness," says Jaime Reusche, a Moody's vice president.

The report outlines three reasons for Moody's view. First, the share of local currency debt has grown substantially. In 2008, a strong but temporary dip in oil prices led to exchange rate pressures and a decline in the availability of foreign currency owing to shrinking export receipts. Since then, the authorities have targeted a higher share of domestic over foreign currency debt in the sovereign's portfolio.

In addition, the banking system is currently awash with liquidity. Tight capital and exchange rate controls have created a captive pool of funds that the banks are necessarily channeling to the sovereign, given the lack of alternative financial instruments - a situation exacerbated by inflation.

Finally, the sovereign's real cost of borrowing and servicing local currency debt is negative when accounting for inflation, even though on a nominal basis coupon rates on government securities seem relatively high.

"In our view, so long as the rate of change of inflation doesn't accelerate precipitously, threatening a systemic collapse, Venezuela's domestic market debt is going to stay highly affordable," adds Reusche. "The real risk is that mounting pressures on the country's external finances could trigger a balance of payments crisis. The increased risk of a currency crisis remains the key vulnerability for servicing external debt."

The report is available to subscribers at:http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_177279

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Jaime Reusche
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Mauro Leos-Lopez
VP - Senior Credit Officer
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

https://www.moodys.com/research/Moodys-Venezuelas-fiscal-account-imbalances-not-a-critical-vulnerability--PR_312712?WT.mc_id=AM~RmluYW56ZW4ubmV0X1JTQl9SYXRpbmdzX05ld3NfTm9fVHJhbnNsYXRpb25z~20141113_PR_312712