Venezuela could get upgrade if political stability improves following referendum, says Fitch

By Reshmi Basu

New York, Aug. 17 - Fitch ratings held its rating on Venezuela at B- but said it may upgrade the country if political stability improves in the coming weeks following President Hugo Chavez's win in Sunday's recall referendum.

The motion to recall President Hugo Chavez was rejected by 58% of voters, based on 94% of the ballots counted, according to the National Electoral Council.

Fitch predicts that Chavez will finish his term in 2006 and will be likely re-elected.

But legislative elections next year could challenge this assumption.

Venezuela has seen improvement in its underlying near-term credit fundamentals, boosted by oil revenues, according to Morgan Harting, lead Fitch sovereign analyst for the country.

The finance minister has been able to improve the country's debt profile by extending maturities and lowering average interest rates.

"These favorable positions leave President Chavez with more of a cushion than would have been expected even six months ago," said Harting in teleconference call to discuss Sunday's results.

"Recall that last year the government undertook a series of domestic debt exchanges in order to refinance maturing bonds and to extend tenors because of difficulties in the local market."

While Fitch expects the economy to grow by 8.6% this year, there have been signs of a slowdown in the country's economy.

"The effectiveness of capital controls that have supported artificially high international reserves will diminish over time.

"All of these factors will surely pressure public finances," said Harting.

But Venezuela will be tackling any problems from a position of considerably greater liquidity and lower net public external debt than expectations at the beginning of the year.

In this regard, the nation's credit fundamentals have strengthened.

Venezuela's low B- rating from Fitch had reflected concerns that tensions surrounding the recall referendum could hurt the economy, public finances and oil production.

"To the extent that events over the coming weeks indicate that the recall does indeed mark a turning point towards greater political stability - this development together with the country's enhanced liquidity position could warrant an improvement in Venezuela's credit rating," said Harting.

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