Fitch: Venezuela Election Won't Resolve Policy Uncertainty

NEW YORK--()--The majority obtained by the Venezuelan opposition's Mesa de Unidad (MUD) in the National Assembly will not dispel uncertainty regarding the timing and nature of the government's policy response to the current economic crisis or reduce the risk of social instability and further political polarization, Fitch Ratings says.

According to results released late Monday, MUD may have obtained between 107 (a qualified majority) and 112 seats (a two-thirds majority). A qualified majority allows for the introduction of Enabling Laws, removal of Ministers, and potentially the appointment of new members to the electoral court. A two-thirds majority would give MUD the power to introduce and change some laws, submit laws for referendum, make changes to the constitution, call a constituent assembly, remove members of the Supreme Justice Tribunal and appoint electoral court members.

The Venezuelan opposition coalition's victory on Sunday represents a milestone in the recent history of Venezuelan's politics, as the Chavista government has lost a ruling majority in the legislative body for the first time in 15 years.

The risk of increased political tension and polarization is material. While the government has acknowledged the electoral outcome, it remains to be seen whether the executive will work with the new National Assembly on a common agenda or maintain the level of confrontation seen in recent years. The challenge for the opposition is to use its electoral mandate to effectively address voters' concerns, especially on economic matters, maintain a united front within National Assembly and consolidate its political position to prepare for the next electoral cycle. It is also unclear whether the electoral outcome will prompt the Maduro Administration to undertake long-needed policy changes to adjust FX policy to the current oil price, address deepening macroeconomic distortions and increase fresh sources of FX financing for the economy. Political considerations in terms of internal government policy disagreements and the electoral cycle have delayed a comprehensive and credible policy response.

Fitch's average (Brent) oil price forecast for 2015 is USD55/b and 2016. If oil prices stay in that range, Venezuela's FX liquidity position is likely to remain tight, in the absence of additional sources of FX. Reserves have declined by USD7.4 billion this year to USD14.6 billion, their lowest level since 2003. Moreover, the operational liquidity of international reserves is limited as they are mostly held in gold at Venezuela's central bank, which constrains the speed of reserve liquidity.

The sovereign's sources of FX financing are also limited. Venezuela last issued a global bond in 2011, and significant multilateral funding is not expected in 2016. Bilateral loans from China beyond the roll-over of existing oil financing facilities are unlikely.

The outcome of the election does not have an impact on Venezuela's LTFC IDR of 'CCC', which incorporates the real possibility of default. Key factors for the sovereign's creditworthiness continue to be its willingness to service debt, oil prices and access to FX financing sources.

Venezuela has historically serviced its debt through periods of high political and financial stress. Sovereign FX debt amortizations are manageable at USD1.5 billion in 2016 with no external market payments in 2017. Nevertheless, contingent liabilities such as rulings from International Centre for Settlement of Investment Disputes could increase FX commitments.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Erich Arispe, +1-212-908-9165
Director
Sovereigns
33 Whitehall Street
New York, NY
or
Rob Rowan, +1-212-908-9159
Senior Director
Fitch Wire
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Erich Arispe, +1-212-908-9165
Director
Sovereigns
33 Whitehall Street
New York, NY
or
Rob Rowan, +1-212-908-9159
Senior Director
Fitch Wire
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com