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Standard & Poor’s Ratings Services has raised its long-term foreign and local sovereign credit ratings on Venezuela to ‘B+’ from ‘B’. The outlook is stable.

“The upgrade reflects the continued sharp improvements in Venezuela’s external indicators,” says Standard & Poor’s credit analyst Richard Francis. “These improvements are attributable to a large current account surplus, a high level of international reserves, and lower external debt.”

“Given the improvements in external indicators and the rapid build up of international reserves, Venezuela now finds itself in a relatively good position to weather adverse external shocks,” Francis notes. “Furthermore, the public sector external debt amortisation is low over the next two years at just US$261mn in 2006 and US$528mn in 2007, which should be easily managed.”

The country’s external liquidity indicators have improved substantially over the last two years. International reserves increased to more than US$31bn as of August 12, 2005, and are expected to remain at more than US$25bn over the near term despite the transfer of nearly US$6bn in international reserves to a new special fund called the Fonden, which is to be used for public spending. This reserve increase is the result of capital controls put in place in early 2003 and higher foreign exchange earnings from oil exports. Furthermore, the public sector is expected to move from a net debtor to a net creditor position by year-end 2005.

“Failure to improve policy by implementing prudent measures will likely continue to constrain the ratings,” Francis adds. “In addition, future growth prospects will depend on foreign direct investment, diversification of the economy, and investment in the country’s oil and gas sectors to increase output.”

The stable outlook reflects the balance between increased financial flexibility because of high oil revenue on the one hand and a weak fiscal position, political polarisation and diminished economic prospects that continue to constrain Venezuela’s creditworthiness on the other. The ratings could come under renewed pressure if oil revenue plummets, capital controls are dismantled and capital flight accelerates, or increased social unrest leads to further economic and/or political turmoil.

Conversely, greater fiscal discipline coupled with stronger economic policy management along with improved prospects for the oil sector through higher levels of investment could lead to better creditworthiness.