Fitch: Ecuador Oil Receipts, Bank Stability and Political Developments Key to Avoiding Downgrade.

NEW YORK -- Fitch Ratings said that the political crisis in Ecuador raises uncertainty about policy commitment and continuity, pressuring sovereign creditworthiness. Ecuador's long-term foreign currency rating is 'B-' and the Outlook is Stable. The rating takes into account the country's chronic governability problems and an expectation of ongoing political instability. An extended comment titled 'Ecuador Political Crisis -- No Rating Change Yet' was published today for subscribers on www.fitchratings.com.

'Fitch will be monitoring events closely to determine whether economic policy and market conditions deteriorate to a point that would warrant a downgrade,' said Fitch Senior Director Morgan Harting, 'but in and of itself, the change in government last week does not automatically require one.'

Near term, Harting said, 'Fitch will be watching three key areas closely: the ongoing political crisis, the availability of oil receipts for debt service, and banking system stability. Setbacks in any of these areas could trigger a downgrade.'

Prospects for near-term capital markets financing have clearly worsened in recent days. This is not expected to have an immediate impact on public finances, however, as Fitch was expecting less than 10% of 2005 requirements (US$200 million, or about 0.7% of GDP) to be sourced from international capital markets, an amount that could be sourced in the domestic market. Alternatively, authorities could run a lower deficit. Remaining external market amortizations this year equal US$37.8 million and remaining external market interest equals US$269.7 million. The finance minister has affirmed that the US$75 million May bond coupon will be paid.

The president has stated his intention to focus government resources on social programs, a position he had advocated as vice president and one that protesters have encouraged in recent weeks. Just how these new policies might be articulated and whether or not President Palacio will serve long enough to enact them remain open questions, which is one of the reasons why Fitch has elected to maintain the ratings at current levels for the time being.

The finance minister's intention to propose a change in the law governing the fund for excess oil revenues (FEIREP) has clear negative credit implications. The FEIREP has been an important source of financing for the government, particularly in light of its limited access to capital markets. The FEIREP was created as part of the fiscal responsibility law and it remains too soon to tell what changes in the law the Congress might be willing to accept. The president's party has minimal representation in the Congress and some legislators may resist changes because they could imply more discretionary resources for the executive branch.