UPDATE 1-Venezuela currency regime weighs on credit - Fitch

Published: 28 Feb 2010 19:30:56 PST

NEW YORK, Feb 26 - Fitch Ratings said on Friday that Venezuela's fixed exchange rate regime remains a weight on the nation's creditworthiness and last month's devaluation of the country's official currency rate is unlikely to correct distortions in the economy.

"The exchange regime has not only failed to either prevent capital flight or increase macroeconomic stability, but it has also deepened macroeconomic distortions and increased the vulnerability of the economy to the dynamics of international oil prices," Erich Arispe, sovereign credit analyst at Fitch, said in a statement.

Fitch rates Venezuela's sovereign credit at B-plus, four notches below investment-grade status, with a stable outlook.

In January, Venezuelan President Hugo Chavez ordered a devaluation of the bolivar currency, cutting the exchange rate of the currency against the U.S. dollar by half for oil income and for goods deemed nonessential.

Venezuela, an OPEC member, is South America's largest oil exporter.

"The January 2010 official devaluation is not likely to suffice permanently to correct present distortions in the absence of broader changes in terms of economic policy, i.e. rationalization of the fiscal and monetary policy mix consistent with price stability, reduced oil dependency and sustainable growth," Fitch said.

The devaluation set a dual exchange rate and means the government and state-run oil company PDVSA will receive 4.3 bolivars for every oil dollar, helping finance the OPEC member's budget and reducing borrowing needs for the year.

For basic items like food and government purchases, the new system fixes the bolivar at 2.60 per dollar. The bolivar had been fixed at 2.15 since 2005.

Chavez, in office for 11 years, has nationalized most heavy industries and expropriated large farms. The country is largely dependent on imports for consumer goods while business and finance are tightly regulated.

The economy contracted 2.9 percent, while inflation rose 25 percent last year.

Venezuela's U.S. dollar-denominated sovereign bond yield spreads are 976 basis points above comparable U.S. Treasuries, the widest margin found on the JPMorgan Emerging Markets Bond Index Plus <11EMJ><.JPMEMBIPLUS> index. That compared to 799 basis points just after the devaluation was announced.