Default history: At least one default event (on bonds and/or loans) has been recorded since 1983
Moody's changes outlook on Venezuela's Caa3 rating to negative from stable; Caa3 rating affirmed
Global Credit Research - 04 Mar 2016
New York, March 04, 2016 -- Moody's Investors Service has today affirmed Venezuela's Caa3 issuer and government bond ratings and changed the outlook to negative from stable. The government's senior secured and senior unsecured government bond ratings were affirmed at Caa3, as were the senior unsecured shelf and MTN program ratings at (P)Caa3.
The negative outlook reflects Moody's view that increased uncertainty surrounding economic and political events in Venezuela could increase the loss severity bondholders could face in the event of a default, a development to which we assign a high probability of occurrence.
RATIONALE FOR NEGATIVE OUTLOOK
Venezuela is highly dependent on hydrocarbons to drive economic growth and to finance government expenditure. Oil and gas account for over 90% of goods exports and roughly 32% of GDP. It also provides around 45% of consolidated government revenues.
Between September 2014 and September 2015, the oil price roughly halved. Since then, it has fallen a further 40%. Moody's recently revised its oil price assumptions for Brent to US$33 per barrel in 2016 and US$38 per barrel in 2017, rising only slowly thereafter to US$48 by 2019.
The government balance sheet remains under intense pressure as the sovereign continues to draw down its assets at an accelerated pace. Between 2013 and 2015, Moody's estimates that revenue as a percentage of GDP declined by 4.1 percentage points and the fiscal deficit increased from 1.8 % in 2013 to 3.0% last year. These figures pertain to central government finances, although when consolidating Petroleos de Venezuela's (PDVSA) finances, fiscal deficits reach levels above 15% of GDP. However, it is challenging to pinpoint the exact level as the government ceased publishing fiscal statistics in 2014. During the same period the country's current account balance relative to GDP moved from a surplus of 0.2% to a deficit of 6.6%.
Given the authorities' weak policy response, and other factors being equal, the depressed oil prices for the coming years would eventually precipitate a credit event. The widening gap between the official exchange rate (VEF10 per dollar) and the "market" exchange rate (VEF1,050 per dollar), denotes higher inflation, which has risen from 68.5% in 2014 to 180.9% in 2015. In its efforts to manage pressure on the exchange rate and cover its external funding gap, Venezuela has run down its international reserves from US$22.1 billion in 2014 to an estimated US$13.5 billion today, reducing its external buffers against future shocks. Similarly, the reduction in government assets from an estimated US$17 billion to some US$5 billion over the same period has significantly eroded the government's financial buffers. Meanwhile, the economy is expected to contract by an average of 1.9% annually over the next four years, a fall of 1.2 percentage points from the average level in the same period up to end-2015.
The negative outlook reflects Moody's view that while the loss bondholders would have to bear in the event of a default -- a credit development to which we assign a very high probability of occurrence -- is extremely difficult to assess with precision given Venezuela' highly volatile economic and political environment, Moody's anticipates that it could exceed 35%.
WHAT COULD RESULT IN A DOWNGRADE
Given that the current Caa3 rating incorporates a very high risk of default, Moody's would downgrade Venezuela's rating if it concluded that losses in the event of a default would probably exceed 35%, or if such losses were to materialise.
WHAT COULD STABILIZE THE RATING AT THE CURRENT LEVEL
Although currently less likely, Moody's would move the outlook back to stable if the likelihood of a credit event were to decrease over the next 12-18 months due to a strong recovery in oil prices. Although unlikely in the near future, the rating would face upward pressure if balance of payments prospects were to improve significantly provided that a sufficiently large increase of financing flows ensures a stabilization of external accounts, further decreasing the likelihood of a credit event.
GDP per capita (PPP basis, US$): 17,759 (2014 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -5.7% (2015 Actual) (also known as GDP Growth)
Gen. Gov. Financial Balance/GDP: -3% (2015 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.6% (2015 Estimate) (also known as External Balance)
External debt/GDP: 118.6% (2015 Estimate)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 01 March 2016, a rating committee was called to discuss the rating of Venezuela, Government of. The main points raised during the discussion were: The systemic risk in which the issuer operates has materially increased. The issuer has become increasingly susceptible to event risks. Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in Deember 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.