NEW YORK -- In its annual report on Venezuela, Moody's Investors Service says the country's B1 domestic currency, B2 foreign currency government bond ratings, and stable outlook reflect very weak institutions marked by an absence of checks and balances on executive authority, as well as a highly pro-cyclical fiscal policy evidenced by a rapid increase in spending and corresponding growth in debt at a time of historically high oil prices.

The Moody's report also highlights Venezuela's "lack of transparency in the government's accounts coupled with significant extra-budgetary spending and borrowing; heavy dependence of both the economy as a whole and government finances in particular on the oil sector; and a consequent vulnerability to a drop in oil prices."

In the report, "Credit Analysis: Venezuela," Moody's says the country has experienced volatile economic growth due to stagnant oil production and declining non-oil exports, and private investment levels. This is the result of the high degree of state intervention in the economy together with significant macroeconomic imbalances and economic distortions, including "runaway inflation and an increasingly overvalued currency."

According to Moody's, "the rating also considers the country's increasing external vulnerability, which is due to a sharp decline in foreign exchange reserves together with rising external debt; and significant contingent liabilities related to claims stemming from the government's many nationalizations."

The rating agency finds that these credit weaknesses are somewhat offset by important credit strengths, including a large-if-volatile current account surplus; significant external public sectors assets; and the government's control of some of the world's largest oil reserves and virtually all of the country's supply of foreign currency.

"Government debt levels remain moderate despite rapid growth in the debt stock. In addition, the rating benefits from a favorable debt structure; a captive domestic investor base; and high income levels relative to rating peers," says the Moody's report.

"These credit strengths and weaknesses are reflected in factor scores of moderate for economic and government financial strength, very low for institutional strength, and high for susceptibility to event risk," says Moody's.