Venezuela’s credit rating was cut by Standard & Poor’s on concern that “erratic” economic policies will boost the government’s dependence on oil revenue and weaken its ability to manage shocks as foreign reserves decline.
S&P lowered the rating one step to B-, six levels below investment grade and in line with Egypt, Jamaica and Pakistan, and gave it a negative outlook. Venezuela’s borrowing costs are the highest in the world among major emerging markets, with its dollar bonds yielding 11.12 percentage points more than Treasuries, according to JPMorgan Chase & Co. indexes.
President Nicolas Maduro, whose party won the most votes in a national election for mayors on Dec. 8, used troops to enforce price cuts in electronic stores ahead of the vote and temporarily seized an Irish-owned packaging plant last month, saying companies are overcharging consumers. The South American country’s international reserves fell to $20.4 billion Dec. 10, the lowest level in nine years, while annual inflation exceeds 50 percent.
“We expect the results of the Dec. 8 municipal elections to reinforce the recent trend toward more government intervention in the economy, creating greater uncertainty,” S&P said in a statement today.
The ratings company last cut the South American country in June. S&P also cut its rating for PDVSA, the state oil company, to B- from B with a negative outlook. About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back to 1974.
The yield on the Venezuelan government’s benchmark 9.25 percent dollar bonds due in 2027 fell 15 basis points, or 0.15 percentage point, to 12.62 percent at 4:29 p.m. in New York, according to data compiled by Bloomberg.
The notes have lost investors 13 percent this year, and yields soared to a two-year high of 13.8 percent on Dec. 3. Average borrowing costs for the country have jumped about 4 percentage points since Maduro was elected on April 14.
JPMorgan raised its recommendation on Venezuelan bonds yesterday to “tactical overweight” from neutral, adding that Maduro was strengthened by the result of the Dec. 8 election and that diminished political uncertainty and the lack of elections next year open a window for economic adjustments including devaluation of the bolivar and “some fiscal and monetary rationalization.”
Maduro will likely use powers he was granted Nov. 19 to pass economic laws by decree to increase the public sector’s participation in the economy, S&P said.
“Even if the government attempts to take adjustment measures - such as a devaluation or fiscal adjustment - it may not be able to implement them effectively because of the difficult political environment as a result of still strong political opposition as well as disagreements within the government coalitions,” S&P said.
Maduro has pledged to lower prices for cars and commercial rent, warning business owners that he is “going all the way” after lawmakers gave him the power to rule by decree last month.
The government devalued the bolivar by 32 percent in February to an official rate of 6.3 per dollar as it sought to narrow the budget deficit by bolstering the local-currency proceeds it gets from each dollar of oil exports.
The bolivar has fallen 73 percent this year in black market trading to about 64 per dollar, according to dolartoday.com, a website that tracks the rate.
Annual inflation quickened to 54 percent in October, the fastest pace in 16 years. At the same time, the central bank’s scarcity index, which measures the amount of goods out of stock at any given time, rose to 22.4 percent as customers searched for milk, antibiotics and tires.
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