January 13, 2015 / 4:16 PM / 5 years ago

Moody's cuts Venezuela's debt rating as oil prices fall

(Reuters) - Moody’s Investors Service cut its rating on Venezuela by two notches to the agency’s third lowest on Tuesday, citing a high risk of the country defaulting on its debt due to lower oil prices.

Moody’s cut the rating to Caa3 from Caa1 while raising its outlook to “stable” from “negative” on the view that even if the oil prices drop further, the losses to bondholders would be consistent with the current Caa3 rating.

“The dramatic oil price drop, which we expect will be sustained, will negatively affect the balance of payments and will more than outweigh the potential benefits of future foreign investment inflows,” Moody’s said.

Moody’s said bondholder losses, which are likely to exceed 50 percent on the sovereign’s external debt instruments, are also one of the key reasons for the downgrade.

The rating agency also forecast that Venezuela’s estimated current account surplus of more than 2 percent of gross domestic product in 2014 would likely shift to a deficit of about 2 percent of GDP in 2015.

Yields on Venezuela’s global bonds, which move inversely to prices, rose on Tuesday. The yield on Venezuela’s benchmark sovereign bond due 2027 was last near a one-month high at 25.98 percent. Its bid price was down almost two cents at 38.449 cents on the dollar.

Crude oil prices hit their lowest in almost six years on Tuesday as a big OPEC producer stood by the group’s decision not to cut output to tackle a supply glut. On Monday Goldman Sachs slashed its oil forecasts. [O/R]

Brent slid 3.4 percent on Tuesday while U.S. crude futures eased from an early decline.

Venezuela, an OPEC member whose economy relies heavily on oil exports, has the world’s largest proven oil reserves totaling more than 298 billion barrels, or nearly 18 percent of global reserves, according to BP.

A diplomatic push by Venezuela and Iran for an OPEC oil output cut has failed to soften the refusal of the group’s Gulf members to do so for now, delegates said on Monday.

Reporting by Rishika Sadam in Bengaluru and Sam Forgione in New York; Editing by Kirti Pandey and Jeffrey Benkoe

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