New York, January 13, 2015 -- Moody's Investors Service has today downgraded Venezuela's
government bond ratings to Caa3 from Caa1 and changed the outlook to stable
from negative.
The key drivers of today's rating actions are the following:
1) Default risk has increased substantially as external finances continue
to deteriorate due to a strong decline in oil prices.
2) In the event of a default, Moody's believes that the loss
given default (LGD) is likely to be greater than 50%.
The stable outlook is based on Moody's view that even if the oil price
drops further, expected losses to bondholders are likely to be consistent
with a Caa3 rating and unlikely to reach levels associated with lower
ratings.
The sovereign's senior unsecured and senior secured ratings have
also been downgraded to Caa3 from Caa1, as well as the senior unsecured
medium term note program and the senior unsecured program to (P)Caa3 from
(P)Caa1.
Venezuela's long-term local-currency country risk
ceilings were also adjusted to Caa2 from Caa1, the foreign currency
bond ceiling to Caa3 from Caa1, and the foreign-currency
bank deposit ceilings to Ca from Caa2. The short-term foreign
currency bond and deposit ceilings remain at NP. These ceilings
reflect a range of undiversifiable risks to which issuers in any jurisdiction
are exposed, including economic, legal and political risks.
These ceilings act as a cap on ratings that can be assigned to the foreign
and local-currency obligations of entities domiciled in the country.
RATINGS RATIONALE
The principal driver of Moody's decision to downgrade Venezuela's
sovereign rating is a marked increase in default risk owing to lower oil
prices. The recent oil price shock has exerted pressure on Venezuela's
balance of payments and dwindling foreign reserves. The price of
Venezuela's oil basket, which is typically priced at a modest
discount to the price of Brent, fell to an average of $54.03
per barrel in December 2014 from an average of $88.42 per
barrel in 2014. As a result, Moody's forecasts that
Venezuela's current account balance is likely to shift to a deficit
of approximately 2% of GDP in 2015 from an estimated surplus of
over 2% of GDP in 2014, the first such yearly deficit since
1998. The dramatic oil price drop, which we expect will be
sustained, will negatively affect the balance of payments and will
more than outweigh the potential benefits of future foreign investment
inflows.
Moody's believes that the key source of vulnerability for the sovereign's
credit profile is the external accounts. Given a heavy dependence
on imports, external finances remain very rigid, decreasing
the possibility of import adjustment to prevent a balance of payments
crisis. Foreign currency outflows in Venezuela are likely to decrease
only marginally in the event of policy measures to further curb import
demand and capital account outflows. Although Moody's believes
the sovereign is highly likely to honor the upcoming €1 billion Eurobond
maturing in March 2015, given the large mismatch between inflows
and outflows, the probability of a debt default occurring in the
next 1-2 years has risen from an already high level.
The second driver of the rating action is Moody's assessment that
in the event of a default, bondholder losses are likely to exceed
50% on the sovereign's external debt instruments.
Moody's believes that balance of payments outflows are likely to
exceed inflows by a significant margin at least through 2016, leading
to a significant external funding gap that would suggest material debt
reduction would be required to ensure balance of payments sustainability.
Moody's believes that the authorities are unlikely to implement
forceful policy measures to curb macroeconomic distortions and imbalances
in the near term. Even if implemented, measures that target
(1) further administrative controls to curb imports, (2) adjustments
to the multiple exchange rate regimes, or (3) raising domestic oil
prices to lower consumption and marginally increase exports, are
unlikely to materially alter the current conditions that heighten the
probability of default.
Despite the potential for increased external bilateral financing,
Moody's estimates that even under a best-case scenario the
external funding gap would not be fully covered. Moreover,
Moody's believes that the current stock of foreign currency assets,
including official reserves of $22 billion at the end of December
2014, would be insufficient to cover the country's external
financing gap.
In addition to the rising risk of a balance of payments crisis,
Venezuela is in the midst of an economic recession and has a highly discretionary
policy framework that reflects weak institutions. These challenges
more than offset its credit strengths that include low albeit rising government
debt and high income levels relative to emerging market and Latin American
countries.
WHAT COULD MOVE THE RATING UP/DOWN
The rating would face upward pressure if balance of payments prospects
improve significantly given a strong recovery in oil prices or if a sufficiently
large increase of financing flows ensures stabilization of external accounts.
Conversely, the rating would face further downward pressure if external
finances weaken in the absence of a recovery in oil prices, increasing
the risk of greater losses to bondholders.
GDP per capita (PPP basis, US$): 18,453 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.3% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 56.2%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: -1.8%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 2% (2013 Actual) (also known
as External Balance)
External debt/GDP: 30.3% (2013 Actual)
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 08 January 2015, a rating committee was called to discuss the
rating of Venezuela, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's institutional strength/framework, remains unchanged.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. An analysis of this issuer, relative
to its peers, indicates that a repositioning of its rating would
be appropriate.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy 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 rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Jaime C. Reusche
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Alastair Wilson
MD-Global Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades Venezuela's rating to Caa3 from Caa1; outlook stable
