Standard & Poor's on Wednesday lifted its outlook on Venezuela's sovereign debt to "positive" from "stable," saying high oil prices continue to improve the country's debt profile.
The revision "reflects continuing sharp improvements in Venezuela's external and public debt indicators, with high oil prices generating large current account surpluses that, in turn, have boosted the external assets of the public sector," S&P credit analyst Richard Francis said in a statement.
Net general government debt is expected to fall to below 10 percent of gross domestic product in 2006 from nearly 20 percent in 2005, S&P said. The interest burden also is expected to decline to below 7 percent of revenue in 2006 from 10 percent in 2005, it said.
Francis said an upgrade could follow if the government trims its spending, which is driving up inflation, or if it carries out a significant buyback operation.
Alberto Ramos, an economist at Goldman Sachs, said in a research note: "In our view it is highly unlikely that the government will soon rein in on fast growing spending, but a buyback is possible given the over $30 billion cash cushion the government has accumulated."
S&P and Fitch Ratings both rate Venezuela at a junk-grade double-B-minus, while Moody's Investors Service has the country two notches lower at B2.
For now, spending remains a concern for S&P.
"Fiscal expenditure is expected to rise by nearly 40 percent in 2006, interest rates are sharply negative in real terms, administrative controls on the economy have become more pervasive, and government operations are increasingly opaque," S&P's Francis said.
The rise in spending "puts the government at greater risk of a swift reversal of its much-improved debt position if oil prices should fall sharply," he said.
For Goldman Sachs' Ramos, the government is "creating serious imbalances and dislocations in the economy which could come to the fore if oil prices come down on permanent basis or even if they stay stable for a long period of time."
"Rather than paving the way for a major fiscal crisis, we see the current unconventional policies as capping the credit's upside through growing efficiency costs," he said.
"Hence, even if at current oil prices the current policies should not lead to a major fiscal flare-up, this is a developing story of missed opportunities and large inefficiencies," Ramos said.
Wednesday afternoon, Venezuela's spread on JPMorgan's Emerging Markets Bond Index Plus was 0.07 percentage point tighter at 2.42 percentage points over U.S. Treasurys, while the broad index was 0.01 percentage point wider.