By Jens Erik Gould From The Financialist

The 60 percent decline in crude prices last year threw the finances of every oil-producing country into disarray, but few have felt it more than Venezuela. And no wonder: Oil accounts for 95 percent of the country’s exports. The results have been devastating — GDP shrank 2.8 percent last year, foreign reserves are dwindling, and the South American nation is struggling to pay for its imports. That’s especially concerning since it imports 70 percent of consumer goods.

Not surprisingly, Venezuela is looking less and less attractive to creditors. In January, Moody’s Investors Service downgraded the country’s credit rating from Caa1 to Caa3 — a “junk” rating with only two more notches below it, Ca and C, the latter of which is rarely assigned until an issuer is actually in default. The Financialist caught up with Mauro Leos, senior credit officer at Moody’s, and Andre Jakurski, founder of JGP Asset Management, at the Credit Suisse Latin America Investment Conference in São Paulo, to hear their thoughts on Venezuela’s position.

The country’s problems, Jakurski says, are compounded by the fact that heavy government controls and expropriations of private company assets have chased out many companies that could have been helping the local economy. Such heavy-handedness left the country almost entirely exposed to the price of a single commodity, and that has now gone against it. “They either retrench and establish very tight fiscal and monetary policy, or they’re going to go broke and will default,” Jakurski says. “In which case, the population will be in even more dire straits than it is today.”

Venezuela also committed the cardinal sin of fiscal impropriety: unlike more prudent countries such as Chile, it didn’t use the good times to stockpile at least a little bit of cash. Instead, the governments of late president Hugo Chavez and current president Nicolas Maduro have spent lavishly on social programs and deals to subsidize allies such as Cuba as part of Venezuela’s brand of so-called 21st century socialism. In the past six years, the country’s foreign reserves have fallen by half, from $42.2 billion in 2008 to $22.1 billion in 2014. “The significant pressures that we see are coming from the lack of dollars, and that is why we have assigned such a low rating,” Leos says of Moody’s recent downgrade. “And it’s one that implies a high probability of default.”

Life isn’t going to get any easier for Venezuelans already dealing with food shortages and an inflation rate of some 60 percent. “Not only are prices high, but there’s a scarcity of basic goods, too,” says Leos. “We’re talking about things like milk, rice and toilet paper. You cannot find anything in Venezuela. People are starting to get increasingly upset.” It’s not a place any sitting government likes to be in: when rapid economic deterioration starts to have real – and painful – social implications. “It’s hard to see the way out of this for Venezuela,” says Leos. “Or at least for this administration.”

For more on this story go to: http://www.thefinancialist.com/venezuela-running-out-of-cash/#sthash.fgWb7OWI.dpuf