Fitch: Venezuela Payment Delay Underscores Debt Management Concerns

Business Wire, Jan 20, 2005

NEW YORK -- 'The Venezuelan government's apparent delay in payment on oil-indexed payment obligations and its failure to cure the problem more promptly are evidence of deficiencies in its debt management capacity,' according to Morgan C. Harting, Senior Director and Sovereign analyst for Fitch Ratings. 'The situation also underscores general concerns about willingness to pay.'

These risks are factored into Fitch's 'B ' rating and Stable Outlook on the Republic's long-term foreign currency debt and will continue to constrain the ratings. The establishment of a special account to meet obligations related to the oil-indexed instrument is viewed favorably and bolsters the credibility of the government's stated intention to pay once the amount owed is determined. Officials estimate that the final determination will take one to two months. In Fitch's view, administrative shortcomings that contributed to the payment delay on the oil obligations are not expected to bear directly on the republic's capacity to make payments on bonds because principal and interest payments owed on bonds are more clearly defined and do not depend on assessments by third parties.

The Venezuelan Ministry of Finance reported yesterday that it would set aside US$30 million in a special account with its fiscal agent for late payments plus interest owed in respect of its oil-indexed payment obligations. The obligations were issued in 1990, together with discount and par bonds as part of the Brady restructuring. Fitch rates the discounts and pars 'B ', consistent with Venezuela's long-term foreign currency rating. Holders of the obligations are entitled to a payment of up to US$3 per obligation on the 15th of October when Venezuela's oil export price exceeds a reference price during the preceding year through Aug. 31. The amount owed is determined by an independent calculation agent, based on information received from state-owned oil company Petroleos de Venezuela (PDVSA) and other sources. Delays in the provision of relevant information by PDVSA may have prevented the calculation agent from reporting its determination of whether a payment is owed and, if so, in what amount. Ministry of Finance officials have acknowledged that it expects the calculation agent to report that some amount was owed but not paid on Oct. 15, 2004.

These concerns notwithstanding, Venezuela's creditworthiness was supported once political uncertainty subsided, following a presidential recall referendum in August. International liquidity has also improved as a result of higher oil prices. International reserves now stand at US$23.5 billion, well in excess of this year's estimated $5.4 billion in interest and principal obligations on the central government's external debt.

Longer term, credit risk remains quite high because of volatility in government revenues, half of which are directly related to oil. The structural fiscal balance has clearly deteriorated over the past year: rapid increases in public revenues, most of them either directly or indirectly oil-related, have been matched by similar boosts in spending, preventing the government from erasing its deficit during a bonanza year. As oil prices decline in the future, it will likely prove difficult to reduce government expenditures commensurately, so the nominal deficit could increase unless there is a devaluation to increase the local currency value of oil revenues. Such moves raise the value of public debt relative to GDP and could have political costs because they reduce purchasing power. Fitch believes that policymakers would nonetheless choose to devalue in the event of stress from lower oil prices or wide misalignment of the official and parallel exchange rates, although this might come only after significant depletion in international reserves.

Compared with other 'B' range sovereigns, Venezuela stands out for its very low net public external debt position and its superior external liquidity. Public debt is also below average and contracted at relatively low interest rates, keeping current financing requirements lower than most peers. These strengths should allow the government to weather considerable revenue shocks over the next two years, as it did over the past two.

In the event of a sustained decline in oil prices or a disorderly easing of capital and import controls, international reserves would come under pressure, diminishing key external strengths. Also, over the longer term, debt dynamics could deteriorate absent improvements to the significant structural deficit and meager prospects for sustainable economic growth.