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!