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Monday, May 29 2017 @ 03:07 PM AST

Venezuela’s economic measures do little to stave off threat of default: Moody's



* Assumes Venezuela mix discounted 10% from Brent (US$55 for 2015, US$65 for 2016, and US$72 for 2017)
All dollar figures in USD.
Sources: Haver Analytics and Moody’s Investors Service From Credit Outlook:

Last Wednesday, Venezuela (Caa3 stable) President Nicolas Maduro, during his annual message to the National Assembly, unveiled a handful of measures aimed at stabilizing the country’s economy. The proposed measures are credit negative because they are unlikely to materially alter the current conditions that heighten the probability of default and losses and drove our recent downgrade of the sovereign’s rating to Caa3 from Caa1.

Mr. Maduro conceded that economic conditions require adjustments to the country’s economic model. We expect that the economy will contract 1.5% in 2015 following our estimate of a 3.3% contraction in 2014. But despite market expectations, Mr. Maduro announced few concrete measures and suggested that the current situation did not warrant drastic changes.

During his nearly three-hour speech, Mr. Maduro proposed limited changes to the country’s three-tiered exchange rate regime, increased government supervision of distribution chains to curb smuggling and shortages and called for a national debate on raising domestic fuel prices. Mr. Maduro also announced a 15% increase to the minimum wage as of 1 February, along with promises to expand social spending including pensions.

Mr. Maduro made brief mention of the domestic fuel price hike, for which the government would likely propose as a series of gradual increases. He said that Vice President Jorge Arreaza will discuss the government's strategy with the National Assembly, and invited students and the general population to participate in the debate. Although market participants will likely view the move as positive because it would support a marginal decrease in the fiscal deficit, the fiscal adjustments will not materially reduce the shortage of dollars in the economy.

In this regard, the markets also expected a devaluation of the Venezuelan currency, the bolivar, through adjustments or a partial unification of the three rates at which Venezuelans can buy a limited amount of dollars that are critical for purchasing already scarce imported goods. Nevertheless, the government will maintain the lowest exchange rate of 6.3 bolivares per dollar in order to guarantee a subsidized cost of food and medicine, which are largely imported.

The government is likely to alter two other rates, but the president delegated this responsibility to the monetary authorities.

Limiting imports and exchange rate adjustments would be an important step in stabilizing the country’s rapidly deteriorating balance of payments. Underpinning our assessment of a heightened probability of default is our estimate that there will be a substantial financing gap of nearly US$40 billion in 2015 (see exhibit below), highlighting the dollar shortages in Venezuela.

More importantly, Mr. Maduro did not elaborate further on the nature of any financing that he secured during a recent foreign tour. Despite the government’s recent announcements that Mr. Maduro had secured US$20 billion of investments from China and “various billions” from Qatari banks, we estimate that even under a best-case scenario the external funding gap would not be fully covered through 2017. Moreover, in the absence of greater details about the nature of this financing and the possible hesitation and delays in implementing the recently announced measures, low oil prices continue to be the main driver of the external funding gap in Venezuela’s balance of payments.

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