Moody’s has downgraded Venezuela’s government bond ratings to Caa3, one step above default, as the sudden drop in global oil prices has begun pushing the socialist administration into an economic whirlwind.
The downgrade comes after the country’s central bank stated that the decline in oil prices had widened trade deficits and reduced the foreign currency reserve to less than US$20 billion.
Moody’s believes that the current stock of foreign currency assets would be insufficient to cover the country’s external financing gap and, therefore, there is a possibility of the country defaulting on bond repayments.
In a desperate bid to see oil prices rise, President Nicolas Maduro toured the OPEC countries, calling on member states to cut back on production. But they refused, thereby allowing oil prices to slide further downwards.
According to reports, reduced oil revenue has created a food crunch in the socialist country, where food grains are sold through state-run shops. Rising inflation, which is currently hovering over 65%, is worsening the situation.
Oil accounts for 90% of Venezuela’s export earnings, and it is the chief financier for the country’s numerous social welfare schemes. Due to high expenses incurred during excavation, some reports say Venezuela cannot afford to sell oil at below $80 a barrel.
In addition to the rising risk of a balance of payments crisis, Venezuela is in the midst of an economic recession.
In December, according to Moody’s, Venezuela began to sell oil at an average of $54.03 per barrel, down from an average of $88.42 per barrel earlier in 2014.
This dramatic drop in oil prices, which Moody’s expects to be sustained for several months to come, will negatively affect the balance of payments and outweigh the potential benefits of future foreign investment inflows.