Venezuela Hits Another Downgrade

from CNBC

Standard & Poor's on Friday downgraded Venezuela's credit ratings as it implemented a new methodology more heavily focused on political risk—a key weakness in the oil-producing country.

S&P cut Venezuela's long-term sovereign rating to B-plus from BB-minus. The outlook on the new rating is stable. The agency's new methodology was published on June 30, a little more than a month before it invoked political concerns to downgrade U.S. credit ratings.

Political risk has been a constant issue in Venezuela, where change in economic rules and nationalization of companies are common. Uncertainty about the health of President Hugo Chavez, who had surgery in Cuba earlier this summer to remove a cancerous tumor followed by chemotherapy treatment, has added to those risks, S&P said in a statement.

"In our opinion, changing and arbitrary laws, price and exchange controls, and other distorting and unpredictable economic measures have undermined private-sector investment and hurt productivity, weakening Venezuela's domestic economy," S&P analyst Roberto Sifon Arevalo wrote in a report.

Venezuela's vast oil and gas reserves "somewhat" offset the policy uncertainty, S&P said. The country posts steady current account surpluses which, combined with strict capital controls, result in positive net asset positions.

However, S&P expressed concern about the actual level of Venezuela's gold and foreign exchange reserves after reports that the country plans to repatriate them.

"When you have the reserves held abroad, you do have some level of confidence," Arevalo told Reuters in an interview. "That is not going to be the case anymore. They are going to be held at the central bank domestically, then you fall in the same circle of lack of transparency that everything else has in Venezuela."