Fitch Affirms Venezuela's Ratings at 'CCC'

Fitch Ratings has affirmed Venezuela's Long-Term Foreign- and Local- Currency Issuer Default Ratings (LT FC/LC IDR) at 'CCC'. Fitch has also affirmed the sovereign's Short-Term Foreign Currency (ST FC) IDR at 'C' and country ceiling at 'CCC'.

KEY RATING DRIVERS

Venezuela's ratings reflect the sovereign's weak external buffers, high commodity dependence, large and rising macroeconomic distortions, reduced transparency in official data, and continued policy and political uncertainty. The sovereign's strong repayment record and its manageable amortization profile mitigate imminent risks to debt service.

The oil shock battering the Venezuelan economy has deepened in 2016. Low oil prices have been aggravated by a decline in production in 2016, due to planned maintenance work, electricity rationing and FX constraints that have led to arrears with operators and suppliers. Exports are forecast to fall to USD23.1 billion in 2016 from an estimated USD37.4 billion in 2015. The government has stepped up import contraction for a fourth year in a row deepening the economy's recession and already severe shortage of basic goods. The current account deficit is forecast to reach USD14.2 billion taking external financing needs (including external debt amortizations for the sovereign, PDVSA and China loan repayments) to USD28 billion in 2016.

Authorities' payment record and public pronouncements signal continued strong willingness to service debt. In February 2016, Venezuela paid a USD1.5 billion amortization. The sovereign does not face its next external bond amortizations until 2018; coupon payments average USD3 billion per year in 2017 - 2018. Although the 2017 CAD is forecast to narrow to USD10 billion, external financing needs will remain elevated, at USD24 billion in 2017, 181% of forecast end-2016 reserves.

Gross international reserves have declined by USD4.3 billion to USD12 billion between January and June. Venezuela has additional FX liquidity in government-managed funds, but these have declined and remain opaque in their administration and execution. Sources of external financing remain limited beyond bilateral financing from China through roll-over of existing loan facilities.

PDVSA faces a challenging debt repayment schedule (external bond repayments of USD3bn in October/November 2016 and USD5bn in 2017). PDVSA's ability to continue meeting its debt repayments or to engage in re-profiling exercises without jeopardizing FX flows for the economy are material for the sovereign's creditworthiness.

The economy is likely to record a third straight year of recession and is forecast to contract by 8.7% in 2016. A recovery is constrained by the prospect of continued tight FX financing/liquidity conditions, supply problems in the electricity sector and political uncertainty. Inflation rose to an average of 107% in 2015 (Caracas Inflation Index) and Fitch expects it to end 2016 at over 400% due to FX rationing, distortions in the FX market, monetary financing of the public sector and price adjustments to counter scarcity.

The transparency and timely reporting of official data has deteriorated. In addition to limited public information on the management and execution of government parallel funds, and bilateral financing agreements, the publication of inflation, GDP and balance of payments data has suffered significant delays since the third quarter of 2013 with no figures available for end 2015 and 2016 YTD. The lag and limited availability of key official economic data increase uncertainty about the depth of the ongoing crisis in Venezuela, and detract from the credibility of policy adjustments.

The government revamped the multi-tier FX system by consolidating the three official exchange rates into two. Since its introduction in March, the exchange rate for non-priority transactions has depreciated by over 66%. As in previous FX regime changes, the challenge for the new FX regime is 1) to channel sufficient FX resources to establish its price as a reference, 2) to improve efficiency and transparency of FX allocations, and 3) the capacity of authorities to align fiscal and monetary policies.

Fiscal imbalances have been contained at the central government level, and the indirect devaluation through the sale of public FX receipts through the different FX markets resulted in a windfall that contributed to an estimated 1.4% of GDP surplus in 2015, according to official data. Fiscal spending contracted in real terms in 2015, and the government is likely to maintain this policy stance in 2016. Central government debt, at 17% of GDP, remains low in comparison to peers, reflecting the exchange rate overvaluation and high inflation. Close to 68% of central government debt is local currency denominated, 70% has been contracted under fixed rates and almost half of domestic debt is held by public sector institutions.

The opposition-led National Assembly has clashed with the government, as the Maduro administration has tried to bypass the legislative body. An opposition-led recall referendum initiative has moved at a slow pace and it is uncertain whether it will be triggered before January 2017, the deadline for fresh elections to take place; instead of the appointed vice-president taking over. The outcome of this process is not likely to end political and policy uncertainty given the deepening economic crisis, heightened political polarization and the risk of increased social unrest.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns a score equivalent to a rating of 'CCC' on the LT FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES

The main risk factors that, individually or collectively, could trigger a rating action are:

Negative:

--Signs of weakening willingness to service debt;

--Concern about Venezuela's ability to service debt due to increased external and fiscal financing constraints, potentially stemming from economic or political shocks.

Positive:

--Policy adjustments that lead to reduced external and macroeconomic vulnerabilities;

--A recovery in oil prices that eases financing constraints for the economy;

--Strengthening of Venezuela's external and fiscal buffers and increased data transparency.

KEY ASSUMPTIONS

--Fitch expects Brent oil prices to average USD35/b in 2016, USD45/b in 2017 and USD55/b in 2018.

--Fitch assumes that China will continue to provide financing to Venezuela through the renewal of maturing oil facilities.

Additional information is available on 'www.fitchratings.com'.

Applicable Criteria

Country Ceilings (pub. 20 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869287

Sovereign Rating Criteria (pub. 26 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881782

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008343

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008343

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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