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  HOME | Venezuela (Click here for more Venezuela news)

China's Dagong Downgrades Venezuela to BB-

BEIJING -- Dagong Global Credit Rating Co., Ltd. has downgraded the local and foreign currency sovereign credit ratings of the Bolivarian Republic of Venezuela from BB+ to BB-, each with a negative outlook.

"Serious macroeconomic imbalance will drag Venezuela into recession in the short term, and exacerbate the risk of social unrest. Its large fiscal deficit, insufficient international reserves and the pressure of significant devaluation of the local currency contribute to an evident trend of decrease in the local and foreign currency solvency of the government," says Dagong.

According to Dagong, one of the top four rating agencies of China, the major reasons for downgrading the sovereign credit ratings of Venezuela are:

1. Escalating economic risks will threaten Venezuela’s political stability, and the repayment environment tends to deteriorate. After the pass-away of the former president Hugo Chavez in 2013, Nicolas Maduro won the presidential election by a narrow margin. The smooth transition of political power stabilizes the domestic situation for the time being. However, the ineffectiveness that the government shows while dealing with the economic structural imbalance and deteriorating social security results in ever-growing public discontent with the government, which weakens the governance foundation to some extent. Consequently, the risk of future political instability increases.

2. The damage to the wealth creation capacity caused by economic imbalance will drag economy into recession in the short term, and the long-term economic development lacks momentum. Structural problems accumulated over the long term such as overvalued exchange rates and high inflation were highlighted in 2013. Though the government makes efforts to stimulate the economy by comprehensive regulation and large-scale fiscal expansion, the subsequent hyperinflation and currency devaluation pressure will further distort the macroeconomic structure. Moreover, the declining oil production and fluctuating international oil prices will make it difficult to boost export conspicuously. Consequently, Venezuela is expected to see an economic contraction of 2.3% in 2014. In the medium term, inadequate investment in the oil industry will curb the exertion of Venezuela’s competitive edge endowed by its oil reserves, while the persistent macroeconomic imbalance will further undermine its endogenous impetus for economic growth. In this sense, Venezuela’s economy is estimated to grow at a slow pace in the medium term.

3. The elevated fiscal deficit adds to the government debt burden. Subject to the short-term economic recession and intensified social contradiction, the welfare expenditure will continue to expand fast, posing greater pressure to the government finances. In 2014, the general government deficit is projected to account for 14.7% of GDP. With the financing need from the large-scale deficit, the government’s debt burden rises rapidly. The general government debt is expected to reach 52.2% of GDP, and possibly exceed 60% in 2018. Since the deep-seated structural problems residing in the economy and government finances, it is difficult to fundamentally improve the fiscal status in the medium term, and the government solvency will be significantly impaired.

4. The BOP deficit and inadequate international reserves add more pressure on international payments, and the risk of external debt repayment rises significantly. Due to the declining revenue from oil exports as well as severe capital flight, Venezuela’s balance of payments showed a minor deficit in 2013, and the deficit can hardly be curtailed in the short term considering the soaring economic risks. In 2013, the international reserves dropped to 5.7% of GDP, merely covering 95.6% of short-term external debts and 19.4% of total external debts. In the short term, risks on the external debt solvency tend to escalate in light of the deterioration in external balance which poses more pressure on the devaluation of the local currency, as well as the shortage of international reserves.

In the short term, such policy measures as direct administrative intervention and fiscal expansion can barely solve the domestic structural imbalance, and the prolonged recession would incur political uncertainty. High fiscal deficit augments the pressure over the government in terms of financing, pushing up its debts. Furthermore, in view of outstanding devaluation risks of local currency and serious shortage of international reserves, the government solvency of both local and foreign currency is confronted with great downside risks. Therefore, Dagong maintains a negative outlook for both the local and foreign currency sovereign credit ratings of Venezuela for the next one to two years.

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