The Venezuelan coat of arms

Stratfor Today-
Venezuela: Credit Downgrades and Trouble Ahead - Summary: Venezuela’s credit rating has been downgraded, reflecting shaky investor confidence as Venezuela faces a host of challenges. The move will threaten the country’s ability to respond to falling oil prices and a tight credit market. Analysis - Related Special Topic Page Global Energy Prices. Fitch Ratings reduced Venezuela’s credit rating from BB- to B+ on Dec. 16. The changed rating comes on the heels of a similar move by Standard & Poor’s Ratings Services, which also lowered the credit rating of Venezuelan state-owned energy company Petroleos de Venezuela (PDVSA) from stable to negative. The downgrades resulted from increasing uncertainty over Venezuela’s ongoing fiscal practices and the prospects for the country’s overall stability. They also will restrict Venezuela’s ability to access the credit it will need to sustain the high spending necessary for regime stability. The international financial crisis has sent the global economy for a loop. And as the price of oil has plummeted, so, too, has Venezuela’s economic outlook. Much of the South American country’s economy depends on the ability of the government to continue social programs and subsidies. Even more so than the economy, the political viability of the administration of Venezuelan President Hugo Chavez relies on aid distribution to the country’s poor. But as the price of oil falls — and for Venezuela, the price of oil has fallen to just more than $30 per barrel — Caracas faces some hard choices: Either social spending will need to be reduced to match falling income, or Chavez will have to find another way of financing the Venezuelan agenda. Although borrowing might normally be an option, Venezuela’s falling oil income comes at a time when capital pools are shrinking worldwide. As financing has become increasingly difficult to secure, countries around the world have had to turn to international institutions and other countries for emergency capital injections. Even in this capital-shy economic environment, however, oil-exporting economies can usually borrow against the promise of future oil exports. But Venezuela carries a unique set of risks. First, Venezuela is locked into a set of fiscal policies that do not match the reality of falling oil income. Venezuela’s 2009 government budget assumed a price of $60 per barrel and an output of 3.6 million barrels per day (bpd) of output — but the price of oil is now at half the target, and output will certainly be nearly 1 million bpd less than projected. In the face of falling prices, the government has announced that it might consider readjusting its budget outlook. But this is unlikely to happen until after a constitutional referendum to be held in February or March 2009. Chavez hopes to eliminate term limits via the passage of this referendum in a move that would allow him to remain in the president’s palace indefinitely. With his popularity already taking a hit, however, Chavez will have to use every trick he can think of to maintain sufficient support. This means he cannot cut the social spending that forms the basis of his populist rule without risking political blowback. Even if Chavez maintains current levels of funding, civic unrest is likely given the tougher economic times. And depending on the course of the political buildup to the referendum, that unrest could be significant enough to threaten the stability of Chavez’s regime. Cuts will have to be made somewhere, however. According to Stratfor sources, the energy sector is most likely to bear the brunt of such cuts. And with PDVSA at the end of the line for state resources, there is little chance the embattled energy industry will be able to maintain — much less increase — current output. The deterioration of PDVSA, Venezuela’s only source of reliable revenue, and the increasing chance of social instability make for a very volatile combination. An unstable regime less and less able to buy off the people — much less creditors — is guaranteed to make investors nervous. And this reality will reinforce itself by reducing Venezuela’s ability to secure financing to cover its intermediary costs, thus accelerating the decline.