Ratings agency Standard and Poor’s downgraded Venezuelan long-term credit earlier this month from CCC+ to CCC.
S&P cited low oil prices and the government’s economic mismanagement as reasons for the move. It also estimates that Venezuela’s economy will shrink by as much as 7% in 2015 and that annual inflation could reach 100%. A one-in-two chance was given that the status would be further downgraded to “selective default” sometime in the next two years.
“We expect political polarization, erratic economic policymaking that exacerbates both the economy’s oil dependence and the prevailing macroeconomic inconsistencies, and weakening external liquidity to remain the main constraints to the ratings on Venezuela,” S&P said in a statement.
S&P’s last review of Venezuela in September 2014 also resulted in a downgrade and relied on assumptions of US$105-per-barrel oil prices for 2015. The most recent review assumes US$55 per barrel.
In January of 2015, Moody’s Investors Service also downgraded Venezuela’s credit rating, dropping it two levels to Caa3—on par with Ukraine and Jamaica. In late 2014, Fitch Ratings downgraded Venezuela’s foreign-currency bonds to CCC.
Venezuela is extremely reliant on oil production, and a 60% drop in oil prices since July 2014 has hurt the nation’s economic outlook. About 15% of Venezuela’s GDP comes from the oil sector, along with 50% of government revenue and 90% of exports.
The risk of a Venezuelan debt default doesn’t sit well in Panama. Panama’s Colon Free Trade Zone’s principal debtor is Venezuela. Venezuela accounts for more than 30% of business in the free trade zone.
During the administration of Panama’s former President Ricardo Martinelli, Venezuela severed both diplomatic and economic ties with Panama. Venezuelan President Nicolas Maduro claimed that Panama had been working with the United States in a conspiracy against him during antigovernment protests that left thousands of people arrested, hundreds injured, and dozens killed. Venezuela’s foreign minister claimed that the debt owed to Panama was fraudulent and that 90% of it wouldn’t be paid.
In November, with a new president in Panama, Venezuela reached a deal on payment of more than US$1 billion owed to Panama.
Maduro has promised to respect debt obligations and rejected default talk as rumor-mongering by adversaries.