Moody’s Investors Services downgraded last night Venezuela’s dollar denominated debt to Caa1, the equivalent of a CCC level for other credit raters. This is the first credit rater to downgrade Venezuela to this level, which means the debt has gone from having “substantial” risks to being “highly speculative”. To add insult to injury, the company keeps Venezuela on “negative watch”, suggesting it may downgrade it further at any time.
Moody’s cites increasingly unsustainable macroeconomic imbalances, as well as a higher risk of an economic collapse.
While I am not on the economic collapse side of things, I think the Government still has a lot of leeway in what it can do, I do think that the country’s debt will go lower than where it has been. Since the Mayoral election, bond prices have risen because analysts really think that the Government will become more pragmatic. I disagree, the Government will devalue and raise the price of gasoline a bit and that will be the end of the “adjustment”, but it will continue on its radical agenda, spending money like there is no tomorrow and controlling more the private sector. I will write more on what I think will happen in a post before the end of the year.
While some of these credit raters are usually late to the game and people tend to ignore the news, they are important. In particular, this lowering to CCC or Caa1 in Moody’s system, represents the first time Venezuela goes this low since when oil production went down right after the 2002-2003 oil strike. Investors will take notice and this will reflect in higher interest rates for the country and fewer investors being interested.
As I said, I think prices of the debt will go lower as investors realize there will be little pragmatism and more radicalism. To start, the inflation number, which by law has to be released in the first ten days of the month, has yet to be released and it is Dec. 17th. I hear that it is not the inflation number that looks bad, but the scarcity number which went up 50%. Thus, while investors want to hear the good news, they seem to be ignoring the bad ones. While inflation numbers have been doctored in the past, they have been manipulated using new formulas and weights, but this time we don’t even know the number and whatever is announced will have less credibility.
So, hold on to your seats, the movie gets interesting. Never a dull moment in Venezuela!
The Devil's Excrement 
December 21, 2013 at 7:30 am
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December 17, 2013 at 9:29 pm
I always had though that the BCV does its very best to estimate the inflation rate. But the problem is that, since few years ago, the INE is actually the institution that performs most of the stuff for the INPC calculation and the BCV has a reducing role in this task. I do believe the inflation has been largely underestimated since distortions have been more intense. And this would also probably happen in other countries where people have to spend so much waiting time in lines to buy at controlled prices. If you find something at Bs.10 but you had to go to several grocery stores and then wait in line for hours and even possibly get nothing. Does the item really cost Bs.10 to you? … I am sure this is not reflected in the inflation statistics. And scarcity is also underestimated because when an item exit the estimation sample permanently, which can happen even when is demanded but there is no supply of it for a long time, the item scarcity is 100% but it does not enter in the computation of general scarcity because it was dropped from the sample. In addition to that, the INE and even the BCV, does not include black market prices in the sample though this is probably true in other countries. I know these issues because I have had to get to know the methodologies in depth for research purposes, which not only included looking at technical manuals but also meeting with BCV technicians for undocumented details. Even so, I don’t blame the BCV professionals because I still believe they continue try to do their very best, but the extreme circumstances are forcing biased estimations of these statistics.
December 17, 2013 at 11:30 am
I did not want to say the number since it was told to me in confidence, it is an increase of 50% over the last number, which was 20%, you do the math.
December 17, 2013 at 11:56 am
Maduro, Cabello, Raoul, and other high ranking Chavistas do not pay attention to scarcity indices. They get all they want even if it means a trip to Milan.
The government will be “controlling more the private sector”. It is becoming clearer every day that Maduro’s long term strategy is to not just control the private sector but to eliminate the private sector. The Cuba model is being built for Venezuela.
Investors will not favor ill run government run business over the always more efficient private business.
The S&P and Moody’s downgrades have not hit bottom. Maduro is still digging deeper.
December 17, 2013 at 3:53 pm
“The Cuba model is being built for Venezuela.”
I would agree with that view. The Dollar receipts for oil exports is the item that is different.
December 18, 2013 at 1:18 am
30-something then, thanks 🙂
December 17, 2013 at 11:29 am
Did the scarcity number go up 50% to from 20 to 30%-ish or 50 percentage points to 70%-ish? Or did it go up to 50%?
The first and the third are plausible …
December 17, 2013 at 11:24 am
The S&P downgrade had little impact. At this hour bonds are about 2% down, but if you try to sell volume there are no buyers. I think that the fact it was to C has had an impact, it is a different message.
December 17, 2013 at 10:54 am
…and not only Moody’s downgraded Venezuelan bonds, on December 13, S&P did so from “B” to “B-” with a negative outlook, based on “growing radicalization of economic policy over the last two months in the context of a sustained decline in international reserves and the continued high levels of political polarization,” …y en Venezuela no pasa nada.
December 17, 2013 at 9:07 am
What is clear is that they are one stubborn bunch. I thought that the economic realities would make them reconsider or soften their agenda. Nothing further from the truth.
December 17, 2013 at 9:59 am
>>>I thought that the economic realities would make them reconsider or soften their agenda.<<<
My time machine rewinds to 1997 and the presidential election won by Chavez. I'm listening to TV at the corner grocery store and a member of some communist party is being interviewed. Asked about the economic policies put forward by the candidate from Carabobo he says: "Governing is not about economics but about politics."
We got what we voted for, politics over the economy! We were not lied to. We were stupid.
December 17, 2013 at 10:35 am
To be a it more accurate, he said “Governing was about politics, not administration. Administration is something companies do, not governments.”
December 17, 2013 at 8:50 am
If I were a rating agency I would give Maduro’s Venezuelan debt a “Crap7” rating.
Today is the 183rd anniversary of Simon Bolivar’s demise and for the past 15 years the chavistas have been killing his namesake currency. Yesterday I paid Bs. 30,000 for an avocado. As a young man I could have bought an apartment for less or two cars.