CHICAGO--()--The next Venezuelan government will face challenges in quickly moving to establish a more balanced and sustainable policy mix that would support improved sovereign credit quality, according to Fitch. Due to the magnitude of the political transition at hand, uncertainty over politics and future policy will continue to represent a key factor influencing the performance of Venezuela's economy.
The next government will face a host of economic problems, including the reduction of fiscal imbalances. The central government's budget deficit rose to unsustainably high levels in 2012, even as high oil prices supported government revenues. A rationalization of heavy pre-election spending levels will be critical in reducing the rapid pace of debt buildup. We estimate that the central government's fiscal deficit exceeded 7% of GDP in 2012.
In addition, we believe that a focus on the creation of a more efficient and transparent foreign exchange system would represent a positive step. Such a system would limit the need for government FX debt issuance in the domestic market, reduce macroeconomic distortions and allow more transparent and efficient access to FX by the private sector. February's devaluation of the bolivar was an important but insufficient step towards reducing the Venezuelan currency's overvaluation. Even after the devaluation, heavy demand for dollars in the Venezuelan economy remains unmet, thus increasing the risk of greater inflation and shortages.
Over the medium term, a successful transition to improved growth performance and reduced vulnerabilities in the Venezuelan economy will partly depend on the next government's willingness to increase the coherence and credibility of monetary, fiscal and exchange rate policies. In addition to the changes outlined above, improved management of the country's vital oil sector will be critical for a stabilization of external and fiscal accounts.
Regardless of the outcome of the upcoming elections, we expect political considerations to factor heavily into economic policymaking.
Over the near term, policymakers will retain a degree of flexibility in confronting Venezuela's economic challenges. Oil prices remain at a level that limits destabilizing fiscal pressures. In addition, government financing needs will be supported by a captive local market, and the sovereigns' debt amortization schedule will remain manageable over the next few years.
The outlook on Venezuela's 'B+' sovereign rating remains negative. This reflects the country's weakened policy framework, which could lead to increased vulnerability to commodity price shocks and deterioration in fiscal and external credit metrics -- and ongoing political uncertainty. We remain focused on potential policy changes that could lead to a more balanced, transparent and sustainable policy mix as the key to improvement in macroeconomic fundamentals and stronger credit quality.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.