BEIJING -- Dagong Global Credit Rating Co., Ltd. has downgraded both the local and foreign currency sovereign credit ratings of the Bolivarian Republic of Venezuela from B to CCC, each with a negative outlook.
The hyperinflation triggered by improper economic policies and excessive currency issuance have exacerbated the country’s economic imbalance and stoked ongoing social conflicts. Additionally, its high fiscal deficit, heavy debt burden, seriously scant international reserves, and continuing devaluation pressure upon the local currency have significantly dragged down government solvency in both local and foreign currencies.
The principal reasons for downgrading the sovereign credit ratings of Venezuela are as follows:
1. Venezuela’s debt payment environment has deteriorated sharply along with its intensified domestic social contradictions and salient credit risks. Revolving around the recall referendum of the incumbent president, conflicts between the ruling party and the opposition have escalated during 2016. Although there is a strong possibility that the referendum will be put off until 2017 as is thwarted by the ruling party, the intensified social contradictions caused by Venezuela’s economic recession and scarce goods supplies have significantly weakened the government’s ruling foundation, thereby threatening social security and political stability. In the short term, the risk of an escalation of domestic political conflicts will rise significantly. At the same time, excessive currency issuance under the government’s interference leads Venezuela into hyperinflation, and its credit environment will therefore continuously deteriorate.
2. There will be a deep recession in the short term, while economic vulnerabilities remain serious in the medium and long terms. In the short term, limited by social unrest and the country’s declining domestic oil productivity, the slow recovery of international oil prices remain insufficient to aid Venezuela out of its economic crisis. Venezuela will continue to suffer from hyperinflation and a grave mismatch between supply and demand. It is projected that Venezuela’s economy in 2016 and 2017 will decline by 9.0% and 4.5% respectively. Under its unstable domestic situation, in the medium term, there will be considerable uncertainty in Venezuela’s economic structural reforms and the reduction of its high dependence upon the oil industry, thereby rendering economic vulnerability persistently significant.
3. The country’s fiscal deficit remains elevated, while a high dependence upon external support and excessive currency issuance renders the government’s repayment resources extremely vulnerable. In the short term, a deep recession and drops in oil income pose massive pressure upon Venezuela’s fiscal revenues. To ease intensified social conflicts and stabilize its ruling position, the government will maintain its fiscal policies which emphasize high welfare and subsidies. It is estimated that the general government fiscal deficit of 2016 and 2017 will expand to 24.5% and 25.0% respectively, and that the ratio of government financing need to GDP will reach 28.2% and 28.9% during the same periods. The significant rise in financing costs makes the government highly dependent upon loans from China and financial support from the Venezuelan central bank, which indicates the serious insecurity of repayment resources.
4. The government’s debt burden continues to increase, while the depreciation of local currency and severely inadequate international reserves reveal an extremely high risk of government insolvency. The general government debt burden ratio of 2016 and 2017 is estimated to be around 54.5% and 58.1% respectively. Considering the dilution effect of hyperinflation upon local currency debt, the actual solvency of the government has sharply declined. Meanwhile, by the end of 2015, the coverage ratio of Venezuela’s total external debt and short-term external debt by international reserves has dropped respectively to 11.3% and 51.7%. Although the state oil company PDVSA has actively promoted debt swaps to ease debt repayment pressure in 2017 and has renegotiated with China for debt extension, the default risk to the government’s foreign-currency debt will remain very high, given the devaluation pressure upon the local currency and waning international reserves.
In the short term, the slow recovery of oil prices cannot reverse the situation of deep recession and social unrest in Venezuela. Rising financing costs, heavy depreciation pressure upon the Venezuelan bolívar, and nearly exhausted reserves are pushing up the default risk faced by the government with extremely vulnerable solvency. In this case, Dagong has decided to maintain a negative outlook for both local and foreign currency sovereign credit ratings for Venezuela for the next one to two years.
Dagong's lowest rating is C, so CCC is 2 notches above its lowest rating. Dagong also rates the Congo, Ethiopia, Pakistan and Madagaskar as CCC. The Sudan has Dagong's lowest rating of C.