S&P Downgrades Venezuela, Cites Political Turmoil

Monday, 17 Jun 2013 05:53 PM

 

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Standard & Poor's downgraded Venezuela's sovereign foreign currency credit rating by one notch on Monday, citing political turmoil as an impediment to enacting meaningful reforms in order to stop a slide in economic activity.

S&P's move to a B rating from B-plus on the OPEC nation brings it in line with Moody's Investors Service's current rating of B2, while Fitch Ratings remains one notch higher at B-plus. Both Moody's and Fitch have negative outlooks on the credit.

"Growing political uncertainty is weakening the implementation of economic policies and may possibly undermine governability," S&P said in a statement. The outlook on the credit is negative, meaning another downgrade could occur between six months to two years.

S&P said the narrow election victory of President Nicolas Maduro, the ensuing challenge by opposition lawmakers and signs of internal government disagreement make it more difficult to contain inflation and ease inflationary pressures.

Maduro, successor to the late Hugo Chavez, faces a complex economic panorama of slowing growth, widespread shortages of basic products, and the highest inflation rate in the Americas.

Economic growth slowed sharply to 0.7 percent during the first quarter of this year, from 5.9 percent in the same period in 2012, while a lack of hard currency means businesses are struggling to import key consumer products.

"GDP (gross domestic product) growth is decelerating sharply in 2013 and we expect it to approach zero. Inflation is increasing and may reach close to 40 percent by year-end," S&P said.

"Growing restrictions on external liquidity as a result of (state oil company) PDVSA's lower oil production and a more uncertain outlook for oil prices will continue to limit Venezuela's ability to deal with growing domestic political and economic challenges," it added.

Maduro's administration is targeting 6 percent growth this year - although most local economists have predicted a slowdown as government spending drops off following the sky-high outlays in 2012 that helped Chavez win re-election.

Meanwhile, inflation hit a record monthly high of 6.1 percent in May, bringing the annualized rate to 35.2 percent.

Opposition leaders want to see a gradual transition away from the Chavez-era policies of frequent nationalizations and rigid price controls to convince private businesses to resume investment in the South American country.

But Maduro's slim election victory in April gives him little room to reverse the main planks of his predecessor's self-styled socialist revolution, which included dramatic state takeovers and confrontations with businesses.

Last week Venezuela's election council confirmed its audit of votes from April's election, declaring Maduro won by 1.5 percentage points over opposition leader Henrique Capriles.

Capriles, the 40-year-old governor of Miranda state, accuses the electoral authority of being under the thumb of the ruling Socialist Party. But he has told his supporters to continue working toward municipal elections scheduled for December.

Government officials say Capriles failed to present evidence of election-day irregularities, and accuse him of fomenting post-vote violence that the government says killed 11 people.

© 2014 Thomson/Reuters. All rights reserved.

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