Venezuela had its credit ratings cut for the first time since 2006 by Standard & Poor’s, which cited concern over the country’s “changing and arbitrary laws” as well as the health of President Hugo Chavez.
S&P cut Venezuela’s credit rating one level to B+, or four steps below investment grade, according to a statement that said the company is now giving more weight to political risk in its evaluations. The downgrade comes after Chavez ordered the central bank to repatriate as much as $11 billion of gold reserves as he battles with an undisclosed type of cancer.
“If you think about the context of gold prices, it’s not easy to understand why you would bring them back,” Roberto Sifon Arevalo, an S&P analyst in New York, said in a phone interview. Venezuela’s international reserves held abroad were “a strength of the rating, and with this movement that situation is going to change, which adds extra uncertainty.”
Venezuela, South America’s largest oil producer, has the highest borrowing costs of major emerging-market economies because of nationalizations, a lack of transparency in government finances and billions of dollars in debt issuance a year. Chavez, who has led the OPEC nation since 1999, has said he will seek another six-year term in presidential elections in 2012 as questions about his health mount.
The extra yield investors demand to hold Venezuelan government bonds instead of U.S. Treasuries fell four basis points, or 0.04 percentage point, to 1229 at 3:20 p.m. New York time, according to JPMorgan Chase & Co. data. Ecuadorean debt has a spread of 900 basis points, while Mexico’s is 180.
Venezuela’s “changing and arbitrary” laws, price controls and other factors have hurt its domestic economy, S&P said. The outlook for the rating is stable.
Chavez, 57, had surgery in Cuba on June 20 to remove a “baseball-sized” cancerous tumor. He has since received two phases of chemotherapy treatment on the Caribbean island.
Arevalo said Chavez’s decision to repatriate the gold reserves will make it more difficult for Venezuela to sell the metal for cash if needed.
An official at the Finance Ministry said he was unable to immediately comment, and an official at the Information Ministry declined to comment on the downgrade.
Yields on the government’s benchmark 9.25 percent bonds maturing in 2027 fell nine basis points to 13.99 percent at 2:30 p.m. in New York, according to data compiled by Bloomberg. The price rose 0.45 cent on the dollar to 69.93 cents.
Venezuela joins Bolivia, Paraguay and Suriname as Latin American nations with the B+ rating. Moody’s assigns Venezuela a B2 grade, while Fitch also gives Venezuela a B+.