Venezuela’s credit rating was cut by Standard & Poor’s due to 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 gave it a negative outlook.
Venezuela’s borrowing costs are the highest among the major emerging markets, with its US dollar bonds yielding 11.12 percentage points more than Treasuries, according to JPMorgan Chase & Co indices.
Venezuelan President Nicolas Maduro, whose party won mayoral elections on Sunday last week, used troops to enforce price cuts in electronics stores and temporarily seized an Irish-owned packaging plant last month, saying companies are overcharging consumers.
The country’s international reserves fell to US$20.4 billion on Tuesday — the lowest level in nine years — while annual inflation exceeds 50 percent.
S&P last cut the country’s rating in June and has also cut its rating for state oil firm PDVSA to “B-” from “B,” with a negative outlook.
About half the time, government bond yields move in the opposite direction suggested by new ratings, data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back to 1974 show.
The yield on the Venezuelan government’s benchmark 9.25 percent US dollar bonds due in 2027 fell 15 basis points, or 0.15 percentage point, to 12.62 percent at 4:29pm in New York on Friday, data compiled by Bloomberg indicate.
JPMorgan on Thursday raised its recommendation on Venezuelan bonds to “tactical overweight” from “neutral,” adding that Maduro was strengthened by the polls and that diminished political uncertainty and lack of elections next year open a window for economic adjustments.
Maduro will likely use the powers he was granted on 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,” the ratings agency said.