Fitch Ratings has affirmed Venezuela's Long-Term Foreign- and Local-
Currency Issuer Default Ratings (LT FC/LC IDR) at 'CCC'. Fitch has also
affirmed the sovereign's Short-Term Foreign Currency (ST FC) IDR at 'C'
and country ceiling at 'CCC'.
KEY RATING DRIVERS
Venezuela's ratings reflect the sovereign's weak external buffers, high
commodity dependence, large and rising macroeconomic distortions,
reduced transparency in official data, and continued policy and
political uncertainty. The sovereign's strong repayment record and its
manageable amortization profile mitigate imminent risks to debt service.
The oil shock battering the Venezuelan economy has deepened in 2016. Low
oil prices have been aggravated by a decline in production in 2016, due
to planned maintenance work, electricity rationing and FX constraints
that have led to arrears with operators and suppliers. Exports are
forecast to fall to USD23.1 billion in 2016 from an estimated USD37.4
billion in 2015. The government has stepped up import contraction for a
fourth year in a row deepening the economy's recession and already
severe shortage of basic goods. The current account deficit is forecast
to reach USD14.2 billion taking external financing needs (including
external debt amortizations for the sovereign, PDVSA and China loan
repayments) to USD28 billion in 2016.
Authorities' payment record and public pronouncements signal continued
strong willingness to service debt. In February 2016, Venezuela paid a
USD1.5 billion amortization. The sovereign does not face its next
external bond amortizations until 2018; coupon payments average USD3
billion per year in 2017 - 2018. Although the 2017 CAD is forecast to
narrow to USD10 billion, external financing needs will remain elevated,
at USD24 billion in 2017, 181% of forecast end-2016 reserves.
Gross international reserves have declined by USD4.3 billion to USD12
billion between January and June. Venezuela has additional FX liquidity
in government-managed funds, but these have declined and remain opaque
in their administration and execution. Sources of external financing
remain limited beyond bilateral financing from China through roll-over
of existing loan facilities.
PDVSA faces a challenging debt repayment schedule (external bond
repayments of USD3bn in October/November 2016 and USD5bn in 2017).
PDVSA's ability to continue meeting its debt repayments or to engage in
re-profiling exercises without jeopardizing FX flows for the economy are
material for the sovereign's creditworthiness.
The economy is likely to record a third straight year of recession and
is forecast to contract by 8.7% in 2016. A recovery is constrained by
the prospect of continued tight FX financing/liquidity conditions,
supply problems in the electricity sector and political uncertainty.
Inflation rose to an average of 107% in 2015 (Caracas Inflation Index)
and Fitch expects it to end 2016 at over 400% due to FX rationing,
distortions in the FX market, monetary financing of the public sector
and price adjustments to counter scarcity.
The transparency and timely reporting of official data has deteriorated.
In addition to limited public information on the management and
execution of government parallel funds, and bilateral financing
agreements, the publication of inflation, GDP and balance of payments
data has suffered significant delays since the third quarter of 2013
with no figures available for end 2015 and 2016 YTD. The lag and limited
availability of key official economic data increase uncertainty about
the depth of the ongoing crisis in Venezuela, and detract from the
credibility of policy adjustments.
The government revamped the multi-tier FX system by consolidating the
three official exchange rates into two. Since its introduction in March,
the exchange rate for non-priority transactions has depreciated by over
66%. As in previous FX regime changes, the challenge for the new FX
regime is 1) to channel sufficient FX resources to establish its price
as a reference, 2) to improve efficiency and transparency of FX
allocations, and 3) the capacity of authorities to align fiscal and
monetary policies.
Fiscal imbalances have been contained at the central government level,
and the indirect devaluation through the sale of public FX receipts
through the different FX markets resulted in a windfall that contributed
to an estimated 1.4% of GDP surplus in 2015, according to official data.
Fiscal spending contracted in real terms in 2015, and the government is
likely to maintain this policy stance in 2016. Central government debt,
at 17% of GDP, remains low in comparison to peers, reflecting the
exchange rate overvaluation and high inflation. Close to 68% of central
government debt is local currency denominated, 70% has been contracted
under fixed rates and almost half of domestic debt is held by public
sector institutions.
The opposition-led National Assembly has clashed with the government, as
the Maduro administration has tried to bypass the legislative body. An
opposition-led recall referendum initiative has moved at a slow pace and
it is uncertain whether it will be triggered before January 2017, the
deadline for fresh elections to take place; instead of the appointed
vice-president taking over. The outcome of this process is not likely to
end political and policy uncertainty given the deepening economic
crisis, heightened political polarization and the risk of increased
social unrest.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns a score equivalent to a rating of 'CCC'
on the LT FC IDR scale. Fitch's sovereign rating committee did not
adjust the output from the SRM to arrive at the final LT FC IDR
Fitch's SRM is the agency's proprietary multiple regression rating model
that employs 18 variables based on three year centred averages,
including one year of forecasts, to produce a score equivalent to a LT
FC IDR. Fitch's QO is a forward-looking qualitative framework designed
to allow for adjustment to the SRM output to assign the final rating,
reflecting factors within our criteria that are not fully quantifiable
and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main risk factors that, individually or collectively, could trigger
a rating action are:
Negative:
--Signs of weakening willingness to service debt;
--Concern about Venezuela's ability to service debt due to increased
external and fiscal financing constraints, potentially stemming from
economic or political shocks.
Positive:
--Policy adjustments that lead to reduced external and macroeconomic
vulnerabilities;
--A recovery in oil prices that eases financing constraints for the
economy;
--Strengthening of Venezuela's external and fiscal buffers and increased
data transparency.
KEY ASSUMPTIONS
--Fitch expects Brent oil prices to average USD35/b in 2016, USD45/b in
2017 and USD55/b in 2018.
--Fitch assumes that China will continue to provide financing to
Venezuela through the renewal of maturing oil facilities.
Additional information is available on 'www.fitchratings.com'.
Applicable Criteria
Country Ceilings (pub. 20 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869287
Sovereign Rating Criteria (pub. 26 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881782
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008343
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008343
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
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RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
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