Venezuelan President Nicolas Maduro outlined plans in mid-December for a weaker exchange rate to boost oil sector prospects and stave off a worsening economic crisis as foreign exchange reserves dip to a new low. But this measure, designed for oil transactions, may not be enough.
The economic turmoil gripping Venezuela’s citizens and business community has now attracted the attention of foreign investors. In the past month, two prominent credit ratings agencies downgraded the credit rating of Venezuela, reflecting the negative outlook that is growing more common among financial observers, our partners at Southern Pulse caution this week.
On 13 December, Standard & Poor’s dropped the country’s rating from B to B-, citing unstable economic policies, political polarization, and a increasing sense of financial vulnerability. On 17 December, ratings agency Moody’s followed suit, reducing the grade for Venezuelan bonds held in Bolivars from B1 to Caa1 and those held in dollars from B2 to Caa1. Moody’s concerns echoed S&P’s: unsustainable economic disequilibrium, a soaring inflation rate, and a depreciating currency value. Each agency maintains a negative outlook.
Some commentators see the ratings agencies’ actions as a consequence long in the making. Asdrúbal Oliveros, an economist and financial analyst, posits that the devaluations are a sign that outsiders are beginning to perceive the high risks developing in the Venezuelan economy, and anticipating a difficult year ahead. Elaborating on these economic woes, Oliveros referred to Venezuela’s gas prices. Calling current prices an ‘embarrassment,’ Oliveros said a price increase was needed to correct fiscal imbalances, but stressed that a holistic approach was necessary to address the country’s myriad economic malfunctions.
Not only has the current situation sparked unease in economists and spooked credit agencies, but also on 18 December Ford Motors predicted concrete losses in 2014 from political and financial volatility. Citing the difficult and unpredictable nature of doing business in the country, the automaker predicted it could lose as much as US$350 million from its operations in the coming year.
Ford’s concern stems mainly from an anticipated currency devaluation, one that Bloomberg analysts estimate could come as soon as March. The bolivar will likely be weakened from 6.3 per dollar to 10.3 per dollar, allowing the government to boost domestic currency revenue from each foreign dollar used to purchase oil exports. In spite of the officially stated rate, the bolivar has fallen to a rate of about 64 per dollar on the black market this year.
The government has already implemented an alternative exchange system to allow investment and tourism dollars to enter the country at an undisclosed rate lower than the official exchange rate. This measure, coupled with an official devaluation in the future, could help mitigate Venezuela’s cratering foreign reserves. However optimistic these predictions may be, for the Venezuelans spending hours a day scouring barren shelves for basics like milk and toilet paper, they remain predictions.
Also this week, be sure to check out our latest edition of the premium Oil & Energy Insider, which includes an executive report on Algeria, the latest trading tip from Dan Dicker (there is a very small window for this trade so DON’T MISS IT), Dave Forest looks at more reasons to invest in coal and analyzes a very interesting company set to make huge profits from the coming coal boom and as always our market forecaster takes a look as what we can expect over the coming week.
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That’s it from us this week.
James Stafford
Editor, Oilprice.com
