Fitch Affirms Venezuela's Ratings at 'CCC'

NEW YORK--()--Fitch Ratings has affirmed Venezuela's Long-term foreign and local currency IDRs at 'CCC'. Fitch has also affirmed the sovereign's Short-term foreign currency IDR at 'C' and the country ceiling at 'CCC'.

KEY RATING DRIVERS

Venezuela's ratings reflect the sovereign's weakened external buffers, high commodity dependence, rising macroeconomic distortions, reduced transparency in official data, and continued policy and political uncertainty. The sovereign's strong repayment record and a relatively low debt amortization profile mitigate imminent risks to debt service.

In spite of monetization of FX assets, international reserves have declined by USD5.7 billion since the beginning of the year to USD16.4 billion, their lowest level since 2003. The external liquidity ratio, at 67%, remains substantially below peers. Moreover, operational liquidity of international reserves is constrained, as 72% are held in gold and most of these are held at Venezuela's central bank.

Oil accounts for about 95% of total exports and represents the main source of FX for the economy. Oil export revenues could fall to USD46 billion in 2015 (each USD1/b decline shaves USD785 million) from estimated USD73 billion in 2014. Import contraction continues for a third year in a row in 2015 as the main adjustment tool. When adjusted for oil exports related to diplomacy (Petrocaribe) and China debt repayments, Fitch expects external financing needs (current account balance plus external amortizations) to equal USD14.9 billion in 2015.

Venezuela's sources of FX financing are limited, the sovereign last issued a global bond in 2011, and significant multilateral funding is not expected in 2015 - 2016. Bilateral loans from the roll-over of existing oil financing facilities with China, improved oil prices in H215 and sovereign FX liquidity in off-budget funds could slow the decline in international reserves. Nevertheless, Venezuela is likely to remain highly vulnerable to oil price volatility and greater-than-anticipated public sector FX demand.

Macroeconomic instability has been exacerbated by the oil price shock and a policy response characterized by the postponement of exchange rate adjustments, increased controls and rationing of FX for the economy. Inflation, averaging 57.3% in 2014, reportedly continues to increase and approach three-digits. The spread between the official and parallel exchange rates continues to widen at a rapid pace, further fuelling inflation and currency pressures.

The economy could contract by 6.1% in 2015 (following a 3.9% contraction in 2014) weighed down by the rationing of FX for inputs and capital goods, which amplify the terms of trade shock. In spite of the expected slow oil price recovery, the government is likely to continue limiting FX allocations to the private sector, hampering the possibility of growth recovering in 2016-17.

The transparency and timely reporting of official data has deteriorated. In addition to limited public information on the management and execution of government parallel funds, as well as bilateral financing agreements, the publication of inflation, GDP and balance of payments data has suffered significant delays since the third quarter of 2013 with no figures available for end 2014 and 2015 YTD.

Authorities' payment record and public pronouncements signal continued strong willingness to service debt. In March 2015, Venezuela paid a USD1.3 billion Euro bond amortization. Sovereign FX debt amortizations are manageable with USD1.5 billion in 2016 and no external market payments in 2017. Moreover, the sovereign has additional sources of FX liquidity in parallel funds. Nevertheless, possible ICSID arbitration awards could increase FX financing needs for the sovereign. PDVSA faces a more demanding debt repayment schedule. Total public debt amortizations average USD7.5 billion in 2015 - 2017 or 45% of current international reserves.

Legislative elections are scheduled to take place in early December 2015. As opposition parties could increase its legislative representation, political polarisation, marked divisions within the government in terms of economic policy and the ongoing economic crisis create risks for already delayed policy adjustments post-election and social stability.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are broadly balanced. The main risk factors that, individually or collectively, could trigger a rating action are:

Negative:

--Signs of weakening willingness to service debt;

--Concern about Venezuela's ability to service debt due to increased external and fiscal financing constraints, potentially stemming from economic or political shocks.

Positive:

--Policy adjustments that lead to reduced external and macroeconomic vulnerabilities;

--A recovery in oil prices that eases financing constraints for the economy;

--Strengthening of Venezuela's external and fiscal buffers and increased data transparency.

KEY ASSUMPTIONS

--Fitch expects Brent oil prices to average USD65 in 2015, USD75 in 2016 and USD80 in 2017.

--Fitch assumes that China will continue to provide financing to Venezuela through the renewal of maturing oil facilities.

Additional information is available on www.fitchratings.com

Applicable Criteria

Country Ceilings (pub. 28 Aug 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752194

Sovereign Rating Criteria (pub. 12 Aug 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987362

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987362

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Erich Arispe
Director
+1-212-908-9165
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Cesar Arias
Director
+1-212-908-0328
or
Committee Chairperson
Paul Gamble
Senior Director
+44-20-3530-1623
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Erich Arispe
Director
+1-212-908-9165
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Cesar Arias
Director
+1-212-908-0328
or
Committee Chairperson
Paul Gamble
Senior Director
+44-20-3530-1623
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com