Fitch: Venezuela's Policy Delay Erodes FX Adjustment Gains
NEW YORK--(BUSINESS WIRE)--Venezuela's policy adjustments to resolve foreign exchange (FX) constraints and address macroeconomic and fiscal distortions have been limited and slow, leading to continued FX scarcity, deteriorating growth prospects and high inflation, according to a special report published today by Fitch Ratings.
'The prospects for policy adjustments to reduce in macroeconomic instability and strengthen the sovereign's balance sheet do not appear promising in spite of the introduction of a three-tier FX system and the de-facto devaluation of the VEF earlier in 2014,' said Erich Arispe, Director in Fitch's Latin America Sovereign Group. In addition, Venezuela's economic policies tend to be hard to predict, with the timing and type of future adjustments depending on the electoral calendar as well as political and social pressures.
'The lack of sustained and coherent policy adjustments could lead to further erosion in external buffers, macroeconomic and financial instability, and heightened risk of social unrest given the country's political polarization,' added Arispe. These dynamics continue to undermine the sovereign's credit profile, as reflected in Fitch's downgrade of Venezuela to 'B' in March, as well as the sovereign's continued Negative Outlook.
Expansionary fiscal policies continue to fuel inflation and reduce FX policy credibility. While the devaluation is likely to benefit Venezuela's fiscal revenues, expenditure pressures and high inflation threaten to erode any gains on the revenue side. In addition, high inflation has led to continued exchange rate overvaluation, flattering Venezuela's debt metrics and providing limited growth benefits from the exchange rate adjustments.
While Venezuela's government-control of oil-derived FX inflows have provided the authorities with some policy flexibility in the past, softer oil prices, weakening external liquidity, a fast-contracting economy and increased domestic political tensions have reduced Venezuela's ability to manage rising external and macroeconomic pressures.
Fitch's special report 'Venezuela: The Limits of Policy Gradualism - The Impact of Foreign Exchange Policy Adjustment' is available at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
Sovereign Rating Criteria (August 2014)
Applicable Criteria and Related Research: Venezuela: The Limits of Policy Gradualism
Sovereign Rating Criteria