CORRECT: Fitch Lwrs Venezuela's Foreign Currency Rtg to 'B'; Rating Outlook Negative.

Business Editors

(In a press release issued earlier the rating mentioned in the headline was not clear. The amended release follows.)

Fitch Ratings-New York/London-June 28, 2002: Fitch Ratings today downgraded the Bolivarian Republic of Venezuela's long-term foreign currency rating to 'B' from 'B+' and its long-term local currency (Venezuelan bolivar) rating to 'B-' from 'B'. The Rating Outlook remains Negative.

Political uncertainty and the apparent polarization of Venezuelan society have buffeted confidence in the capacity of the Venezuelan authorities to pursue sound macroeconomic policies and have prolonged recessionary conditions. In this environment, the government has had difficulty rolling over debt in the domestic debt auctions and access to the international capital markets remains difficult at best. Pressure on foreign exchange reserves has abated, however, since the floating of the Venezuelan bolivar in February, and a new economic policy team came into government following the failed coup attempt in April with plans to reduce the government deficit and improve public debt management. Nevertheless, implementation of the new fiscal program remains in question and calm has not been restored to the financial markets. Should financing pressures continue unabated, the willingness of the authorities to pursue orthodox approaches to debt management could be tested.

The government has had difficulty reducing high levels of spending as oil revenues have retrenched. Revenues are estimated to have fallen 14% in 1Q02 (not including central bank profits), versus a decline of 2% in spending. Fiscal pressures have resulted in withdrawals from the macroeconomic stabilization fund (the FIEM), which was originally designed as an oil price stabilization fund. The deficit, which reached 4.3% of GDP in 2001, could remain around that level in 2002. Non-cash expenses related to public sector severance and social security liabilities would raise the overall deficit even further.

In addition to the deficit, the central government has some VEB2 trillion (under 2% of GDP) in domestic debt to roll over during the rest of the year, and VEB2.9 trillion due next year, and external debt amortizations of US$1.3 billion (1.4% of GDP) the rest of the year and US$2.9 billion in 2003. These financing needs are not heavy by international comparison. However, if external market financing remains largely closed to the Venezuelan sovereign (sovereign bond yields exceed 1,000 basis points over comparable U.S. treasuries), then the sovereign will have to finance larger sums in the domestic capital market, which is small by international comparison (bank deposits represent under 20% of GDP). Furthermore, the Venezuelan government has been redeeming domestic debt on a net basis, having difficulty rolling over maturities in recent debt auctions. In the debt auction of June 25, the authorities were able to rollover only 34% of maturing securities.

The Venezuelan authorities have some degree of flexibility with regard to public finances, given the captive flow of oil revenues to the government. Currency depreciation (by mid-year, the Venezuelan bolivar was down 45% from year-end 2001) helps balance the government budget, as a heavily dollar-based revenue stream funds predominantly bolivar-based expenditures. The FIEM could be tapped for additional withdrawals as well, though the funds technically available to the central government (with remaining funds available to PdVSA and local governments) have largely been depleted. Currently, the FIEM balance stands at US$4.5 billion. In addition, Fitch does not rule out the possibility of additional extraordinary income from PdVSA dividends and central bank profits to close the fiscal gap. Nevertheless, should financial pressures mount, heterodox financing measures, such as paying suppliers and others in bonds and attempting to exchange shorter dated obligations for longer maturities, could be contemplated.

The macroeconomic program announced by the new economic team in May included some spending cuts and revenue-raising measures that could yield up to 1% of GDP in deficit reduction. Should such measures yield substantive deficit reduction in a context of calm returning to the financial markets and to domestic politics, sovereign creditworthiness could stabilize in the coming months. On the other hand, persistent failure in the domestic debt auctions, maintenance of current policy settings, further deterioration in the business climate, renewed capital flight, or any type of forced debt exchange could result in a further downgrade of the ratings. Such financial stress could continue to test Venezuela's willingness to service its sovereign obligations.