( BW)(NY-FITCH-RATINGS) Fitch Upgrades Venezuela's Sovereign Ratings to 'B-'

BW5724 JUN 23,2003 11:32 PACIFIC 14:32 EASTERN     Business Editors     NEW YORK & LONDON--(<a href=www.businesswire.com>BUSINESS WIRE)--June 23, 2003--Fitch Ratings today upgraded the Bolivarian Republic of Venezuela's long-term foreign currency rating to 'B-' from 'CCC+'and its long-term local currency (Venezuelan bolivar) rating to 'B-' from 'CCC'. These rating actions reflect the government's success in getting oil production back up to levels achieved prior to the national strike earlier this year, thereby relieving public financing pressures. Furthermore, voluntary domestic debt swaps and recent external bond payments have mitigated concerns about debt service willingness over the near term. The Rating Outlook is Stable.     The Venezuelan government's near-term financing outlook has improved given the resumption of oil production and the measures implemented to avoid a liquidity crisis. Fitch believes that the risks of further oil production disruptions have been reduced due to the failure of the strike to achieve its objectives and increased government control over PdVSA. Yet the highly polarized social situation and severe economic contraction could provide future political challenges, including sporadic outbursts of social unrest.     In the midst of an unprecedented political confrontation, which has translated into one of Venezuela's worst economic declines in recent history, the government has met all of its debt obligations. In this environment, the government made a US$275 million payment on its Brady bond obligations last week. At the onset of the national strike, Fitch was concerned that pressures on the government's capacity to service its debt as a result of oil revenue losses could ultimately affect its willingness to pay. To its credit, the government reduced its 2003 budget by 10% and has been under-executing this revised budget by 40%. Similar to the authorities' projections, Fitch expects the central government deficit to reach 1.8% of GDP this year, compared with 3.4% of GDP in 2002, representing a significant fiscal adjustment. However, a collapse of more than 50% in non-oil revenues combined with increased spending pressures, due either to the deteriorating social situation or a ramp-up in expenditures prior to a referendum and/or early elections, cannot be ruled out. The authorities continued to conduct market-based domestic debt swaps, extending close to US$754 million in DPN maturities over the medium-term. In addition, the authorities have been successful in securing new financing through private placements, which could reach US$950 million in 2003.     Venezuela's debt service capacity remains strong relative to similarly rated sovereigns and has been strengthened with the end of the oil strike. Since the implementation of capital controls and the resumption of oil exports, the country's international reserves have increased from a low of US$13.5 billion in January to US$16.5 billion in mid-June. At 153% (not including assets in the macroeconomic stabilization fund, the FIEM), Venezuela's external liquidity ratio currently exceeds the 123% median of 'B/C/D' rated countries. Assuming capital controls are not liberalized this year, this ratio could increase to an estimated 224% by year-end. Including an estimate for the loss of revenue due to the halt in oil exports, Venezuela's expected current account surplus position in 2003 will still be more than enough to cover its external amortizations and stock of short-term external debt this year, which Fitch estimates at about US$6.6 billion. The government should not have any difficulty meeting its financial requirements for the remainder of 2003. External amortizations amount to US$915 million, while domestic amortizations are about US$1 billion in the second half of this year.     Although recent changes to macroeconomic policy, including a fixed exchange rate and capital controls, have strengthened the government's ability to service its debt, the non-oil private sector is paying the cost of these measures. Future upgrades would be dependent on a viable resolution of the political crisis and improvements in the government's macroeconomic policy framework.     A comment detailing Fitch's analysis for this rating upgrade will be available shortly.

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KEYWORD: NEW YORK VENEZUELA INTERNATIONAL LATIN AMERICA
INDUSTRY KEYWORD: BANKING BOND/STOCK RATINGS
SOURCE: Fitch Ratings