Venezuela's Sovereign Credit Risk Fails PBC - 1037771 PDF

SOVEREIGN AND SUPRANATIONAL
SECTOR IN-DEPTH
8 August 2016
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Irina Baron
Asst Dir-Research
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Xian Li
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212-553-1404
ABOUT CAPITAL MARKETS RESEARCH

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Sovereign Risk Report
Venezuela's Sovereign Credit Risk Fails

to Improve on Recent Oil Price Gains
The price of crude oil bounced from $39.72 to $42.58 in the week ended August 5, as the
US Energy Information Administration reported that total gasoline inventories fell by a
larger-than-expected 3.3 million barrels. Some of the major oil exporters Saudi Arabia,
Qatar, Russia, Colombia and Mexico have either shown a small decline or no change
in their five-year Sovereign EDFTM (Expected Default Frequency)1 metrics. The limited
improvement in the credit profiles of these countries can be explained by lingering concerns
about the slowing Asian economy, post-Brexit uncertainties in Europe, and sluggish growth
in the US. All of these factors put additional pressure on already weak demand. This is
particularly troublesome as the Organization of the Petroleum Exporting Countries (OPEC)
oil production rose by 100,000 barrels per day to 33.41 million barrels per day in July 2016,
the highest level since 1997.
The declines in the five-year Sovereign EDF measures for Colombia and Russia have exceeded
30% since January 21, 2016 (Exhibit 1), when oil prices plunged below $30 per barrel. This
means, for example, the probability of default for Russia over a five-year horizon has dropped
from 0.73% on January 21 to 0.44% on August 5, indicating improvement in its credit
profile.
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MOODY'S ANALYTICS
Exhibit 1
Five-year sovereign EDF measures for seven major oil exporters (%)
Source: CreditEdge
Despite falling sharply from their recent highs, measures of credit risk in Venezuela still suggest it is the likeliest sovereign defaulter by
a wide margin. The five-year Sovereign EDF measure for the oil-rich country nearly-doubled since the beginning of the year from 17%
to 32% as of April 17, before declining to its current 13.99% (Figure 1). The country is challenged by consumer prices increasing 180.9%
year-on-year in December, strict currency controls, and shortages of basic goods. Venezuelas Sovereign EDF measure is higher than
the 69 other sovereign entities in our dataset, ahead of Iraqs second riskiest EDF measure of 3.34% and Greeces 3.01%. Venezuelas
elevated Sovereign EDF measure is in line with where Greece was three months prior to its March 2012 distressed-debt exchange.
Low crude oil prices have hit Venezuelas economy, where oil accounts for 95% of the countrys exports and nearly half of the
governments revenue. As the price of West Texas Intermediate dropped to a three-month-low of $29.67 per barrel on February 10,
the countrys market-based measures of credit risk rapidly deteriorated (Figure 2). Venezuelas probability of default has had a high
(-0.85) negative correlation with the price of oil since 2013. Oil prices have since rebounded to their current level of $41.30 per barrel,
as top global producers from Saudi Arabia, Russia, and Qatar have sought to stabilize the market. The uptick in oil prices over the past
week had little effect on Venezuelas Sovereign EDF measure, which rose from 13.26% to 13.99%. Concerns about a liquidity crisis are
mounting. Starting in October, the countrys government will need to find $4.7 billion in a series of debt payments. Meanwhile, foreign
exchange reserves have declined from $22.5 million in January 2015 to $12.1 million in June 2016.
8 August 2016
Sovereign Risk Report: Venezuela's Sovereign Credit Risk Fails to Improve on Recent Oil Price Gains
MOODY'S ANALYTICS
Exhibit 2
Venezuelas Five-year Sovereign EDF measure vs. Crude Oil Prices
Source: Bloomberg; CreditEdge
Government debt and CDS markets are also pricing in a heightened risk of a Venezuelan default. Its US dollar-denominated notes
that mature in 2022, for example, traded as low as 50.85 this past week, yielding in excess of 33% (Figure 3). The countrys five-year
credit default swap spreads, which fell from a peak of 10,384 in February, have widened by over 140bp to 3,762bp over the week ended
August 5.
Exhibit 3
Pricing of Venezuelan Government Debt
Source: Bloomberg
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Endnotes
1 Sovereign EDFTM (Expected Default Frequency) credit measures are forward-looking probabilities of default extracted from credit default swap spreads.
Spot CDS spreads are adjusted for loss-given default and the market price of risk to arrive at estimates of actual future default risk.
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REPORT NUMBER
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1037771
MOODY'S ANALYTICS
Contacts
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8 August 2016
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