www.forbes.com Reuters, 01.22.03, 12:34 PM ET

CARACAS, Venezuela, Jan 22 (Reuters) - Finance Minister Tobias Nobrega on Wednesday said the government plans a 10 percent cut in its 2003 budget as it seeks to counter an opposition strike bleeding its oil-reliant economy.

The budget cut would be equal to about 4 trillion bolivars, or $2.2 billion.

Nobrega said the government would continue with an internal public debt swap and restructuring program to smooth out debt commitments in the world's No. 5 oil exporter. In November, Venezuela swapped about $2 billion in debt to ease a crunch in its primary payments and servicing.

The minister said the government also plans to extend an existing temporary bank debit tax, introduced last May to help cover fiscal needs. Nobrega said the tax would continue but at a lower rate.

The strike, started by opposition leaders seeking to force leftist president Hugo Chavez from office, has slashed oil output. Oil provides about half of all government revenue.

The Venezuelan economy contracted sharply last year after Chavez survived a brief coup. ($1 = 1,853 bolivars).

www.forbes.com Reuters, 01.22.03, 12:12 PM ET

CARACAS, Venezuela, Jan 22 (Reuters) - The following are statements by officials, economists and analysts reacting to a move on Wednesday by Venezuela's central bank to close the foreign exchange market for five trading days.

The closure is seen as an attempt by the government to stem capital flight during a crippling seven-week-old opposition strike against President Hugo Chavez.

ARMANDO LEON, ONE OF THE DIRECTORS ON THE BOARD OF THE VENEZUELAN CENTRAL BANK: "This is a decision taken by a collegiate group, which I obey and respect but do not share because I believe there were other ways to solve the crisis, such as fiscal and monetary measures.

"I don't agree with exchange restrictions because history has shown in this country that they don't bring benefits and the costs are very high."

RAMON ROSALES, MINISTER OF PRODUCTION AND TRADE: "The aim of this measure is to preserve our (international) reserves, which are the only guarantee of Venezuela's recovery after this oil sabotage (the opposition strike).

"The dollar had taken off ... we had to stop this."

JOSE CERRITELLI, BEAR STERNS, ANDEAN DEBT STRATEGIST: "It doesn't look like they have full foreign exchange controls ready. This looks more like a knee-jerk reaction of theirs to the currency weakness.

"In the functioning of the economy, this is another arm tied behind the back. Now the private sector no longer has a market exchange rate to guide it for transactions. The private sector is further handicapped in doing business.

"In its first impact, it's not so negative. It gives seniority to foreign debt holders. It provides some hope that at least for a short term, capital flight is curbed.

"Although foreign exchange controls initially slow capital flight, eventually people learn to circumvent them and you have a black market that makes it profitable to engage in capital flight. In the long term, people look to escape the controls by taking their money out."

CARLOS FERNANDEZ, PRESIDENT OF THE FEDECAMARAS PRIVATE BUSINESS ASSOCIATION AND A LEADER OF THE OPPOSITION STRIKE: "This is going to affect the operation of most industries. Remember that in the food sector, almost 60 percent of raw material inputs are imported. It's also going to have a heavy effect on the health sector.

"These currency measures will only increase the impact of the strike because they create more uncertainty and limit the ability to buy raw materials.

"With this move, the whole economy will fall into a kind of paralysis. The economy is being held hostage to the political situation."

ROGER SCHER, FITCH RATINGS, HEAD OF LATIN AMERICAN SOVEREIGN RATINGS: "This was to be expected. Capital controls from a sovereign ratings perspective are not a good thing in the long term. But when you are in crisis and you are trying to shore up the foreign exchange position for debt service and other immediate needs, then it can be helpful."

FRANCISCO RODRIGUEZ, HEAD OF THE ECONOMIC AND FINANCIAL ADVISORY OFFICE OF THE NATIONAL ASSEMBLY: "This measure reveals the state of desperation that the government finds itself in as a result of the fiscal crisis and the scarcity of foreign exchange caused by the oil strike.

"This is a short-term measure that will do nothing to restore macro-economic balance, but on the contrary will lead to a dangerous instability.

"From the economic point of view, there were other solutions not requiring exchange controls. The level of reserves had not reached critical levels. This measure could be motivated by not only economic but also political considerations."

cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 2:58 PM ET Jan. 22, 2003

NEW YORK (CBS.MW) -- Progress toward a resolution to Venezuela's eight-week strike pulled crude futures prices lower Wednesday, ending the commodity's six-session rise.

But doubts that an end to the strife would remedy tight oil inventories lingered.

The price of a barrel of crude for March delivery closed at $32.85, down 34 cents on the New York Mercantile Exchange. Prices had been climbing since Jan. 13.

The contract traded as high as $33.45, but fell as low as $32.65 during Wednesday's session. The February contract rose as high as $35.20 on its expiration day Tuesday, the highest since November 2000.

Also on Nymex, cold weather boosted demand for natural gas, lifting prices for the heating fuel to highs not seen in two years.

Gold futures closed just short of $360, taking cues from the U.S. stock market and developments in Iraq. See Metals Stocks.

Some of Venezuela's striking oil tanker pilots returned to work this week following a government deal to get back wages, according to Bloomberg News.

Leaders from the U.S. and five other democratic countries are expected to meet in Washington to discuss ways to help Venezuela end the standoff between President Hugo Chavez's supporters and the opposition.

Former U.S. President Jimmy Carter has traveled to Venezuela attempting to mediate the dispute, and proposed an election plan that both sides are studying.

But "despite all the talk of resolving the Venezuelan problem, I do not believe that there will be any easy solution soon," said Dailyfutures.com President Todd Hultman.

Even if the crisis were resolved tomorrow, it could take months for the oil industry to get production back to where it was before the strike, Hultman said.

John Mesrobian, president of Constantinople Advisors, said, "Pilots can go back to work but, who is pumping and producing the oil to pump into the empty tankers?"

Chavez' government has claimed that daily oil output is at around 1 million barrels, but strikers have said it's running at half that amount. Venezuela produced around 3 million barrels per day before the strike began.

Meanwhile, a Saudi Arabian ambassador to the U.S. said Wednesday that Saudi Arabia was prepared to raise its oil output if prices don't drop back below $28 in the next few weeks. He didn't, however, note how much of an increase the country, an OPEC member and the largest oil producer in the world, was willing to make.

OPEC agreed earlier this month to raise its member production by 1.5 million barrels, excluding Iraq, to 24.5 million barrel per day beginning Feb. 1 in an effort to offset oil lost due to Venezuela's strike.

Iraq stays in view

"While the situation in Venezuela is important to the crude oil market, the upcoming war with Iraq is having a far greater impact on prices and the anxiety that traders are feeling," said Hultman.

"War in the equation elevates the level of uncertainty to greater heights and makes forecasting impossible," he said.

U.N. weapons inspectors, which began their search for weapons of mass destruction just before Thanksgiving, will deliver a report on the search and any findings to the United Nations Monday.

The oil market questions just how high prices can go and for how long if a war does erupt and Iraqi President Saddam Hussein doesn't flee in exile peacefully, said Infinity Brokerage Services' head financial analyst John Person. "This is why there is a diplomatic party trying to intervene in Venezuela."

Historical moves

Even though crude prices slipped Wednesday, the commodity has shown amazing resilience in recent days and they're still up about $2 from the close on Jan. 10, when the six-session rise began.

Michael Armbruster, an analyst at Altavest.com, explained that the current situation in oil is unique.

Some traders view the recent run-up in crude futures as a repeat of 1990 to 1991 when prices "spiked over $41 in the weeks leading up to the Gulf War only to implode and drop all the way down to $17.45 one month after coalition forces defeated Iraq," he said.

But others believe that the fundamentals affecting oil this time around are different.

Non-strategic petroleum reserve supplies are at 27-year lows thanks to Venezuela and the Department of Energy has estimated that the minimal operational level of non-SPR oil stocks level is 270 million barrels, Armbruster said.

Last week's U.S. inventory data pegged oil stocks at 272 million barrels, "precariously close to the 270 million mark," he pointed out.

"The problem is that the trend toward tighter inventories is likely to continue in the weeks ahead even without a war with Iraq," he said. As a result, he expects oil prices to jump to $40 or above "before this bull market runs its course."

Updates on U.S. supplies from the American Petroleum Institute and Energy Department won't be released until Thursday morning, a day late due to Monday's Martin Luther King, Jr. holiday.

Tim Evans, IFR Pegasus' senior analyst, expects the data to reveal a decline of 1 million to 3 million barrels for the week that ended Jan. 17. He also expects that gasoline inventories rose between 2 million and 3 million barrels and distillates fell by 2 million to 3 million barrels in the latest week.

Ahead of the news, petroleum-product prices closed lower. February unleaded gasoline fell by 0.17 cent to 89.93 cents a gallon. February heating oil closed at 91.19 cents a gallon, up 1.72 cents.

Natural gas surge

Expectations for a hefty drop in last week's U.S. natural-gas supplies, along with the current cold weather in much of the country, lifted prices for the heating fuel to their highest level in two years.

February natural gas tacked on 24 cents to close at $5.673 per million British thermal units. The session's high of $5.74 took out the March 2001 high of $5.71 and the next highest level is the $7.10 seen in February 2001.

Fimat's Fitzpatrick said the market estimates that natural-gas supplies fell between 175 billion cubic feet to 210 billion cubic feet during the week ended Jan. 17. IFR Pegasus' Evans expects a fall of 170 billion to 210 billion cubic feet. Both analysts pointed out that if supplies fell by as much as the market predicts, the change will be a far cry from the 126 billion fall seen a year-ago.

The Energy Department will release its weekly supply report Thursday morning.

"Once the price reaction to this report is out of the way though, prices may have a chance to reverse meaningfully to the downside, provided the weather outlook is still bearish at that juncture," Evans said.

The current strength in natural-gas prices helped most oil-service stocks move higher. The Oil Service Index ($OSX: news, chart, profile) traded up 1.9 percent. See Energy Stocks.

The Reuters/CRB Index, a broad-based measure of the commodity futures market, closed at 244, up 0.8 percent amid gains in natural gas and gold futures. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.

www.mpa.gr Athens, 22 January 2003 (16:20 UTC+2)

The European Union, through a statement issued by the Greek EU Presidency, welcomes the establishment of the “Friends of Venezuela” Group made up of Brazil, Chile, Mexico, Portugal, Spain and the United States.

The EU expresses its support to the contribution the “Friends of Venezuela” Group could have to the efforts aimed at finding a viable solution to the crisis in Venezuela in accordance with resolution 833 adopted by the Organization of American States. The resolution provides for a peaceful, democratic and constitutional solution through elections.

The EU urges the institutions and the people of Venezuela to seek a solution assisted by the OAS General Secretary and the “Friends of Venezuela” Group within the framework of democratic principles and the state of law.

www.forbes.com Reuters, 01.22.03, 11:57 AM ET  By Hugh Bronstein

NEW YORK, Jan 22 (Reuters) - Investors usually frown on foreign exchange controls because they impede the free market, but Wall Street is not complaining about Venezuela's decision to temporarily close its foreign exchange market.

In Venezuela's circumstances -- with the risk of default rising as its economy contracts -- holders of Venezuela's bonds should not be shocked by the move because it will help ensure that near-term debt payments are met, analysts said Wednesday.

"This should be seen as an attempt by the government to continue to honor its obligations in the short term," said Christian Stracke, lead emerging markets analyst at CreditSights, a Wall Street research firm.

Venezuela on Wednesday said it was closing the country's foreign exchange market for five trading days to stem capital flight spurred by a crippling seven-week opposition strike against leftist President Hugo Chavez.

The bolivar currency has tumbled more than 24 percent against the dollar since the start of this year and 28.5 percent since the strike started on Dec. 2.

When countries get worried about runs on their currencies, foreign exchange controls are sometimes adopted to ration currency sales. The government usually establishes a guide as to who has a priority claim on its reserves.

"In most cases where foreign exchange controls have been put in place, foreign debt payments are at the top of the list," said Jose Cerritelli, a Bear Stearns debt strategist.

"So foreign creditors should not have a knee jerk reaction against these exchange controls because these measures are there to give them a priority claim over foreign exchange reserves," he said.

The Venezuelan Central Bank said that during the five-day closure the government would maintain the necessary operations to make public external debt payments.

"Venezuela's international reserves are there in case of emergency to finance the government's liabilities," Stracke said.

"Right now those liabilities are not just foreign debt payments but also the import of food and gasoline, due to the strike," he added. "With that in mind, the government has to make sure it is not losing its reserves to speculative capital flight."

BUYING TIME, BUT HOW MUCH? "Protecting their reserves buys them a little time, but that's all it does," said Lacey Gallagher, Credit Suisse First Boston director for Latin American economics.

"How much time it buys depends in part on the structure of the capital controls that Venezuela may put in place once the foreign exchange market reopens," she added. "Given the severe underlying problems, the risk of a credit event remains high."

Venezuelan bond spreads, which measure the perceived risk of default compared with safe-haven U.S. Treasury bonds, have ballooned more than 500 basis points to 1439 basis points since the work stoppage began Dec. 2, according to JP Morgan's Emerging Markets Bond Index Plus.

Chavez was elected in 1998 after vowing to wrest control from the country's corrupt elite and enact reforms to help the poor. But opposition has grown amid charges that the president wants to establish a Cuban-style authoritarian state.