Fitch: Prolonged Oil Export Interruption Key Credit Concern in Venezuela.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 12, 2002

A general strike in Venezuela, begun on December 2nd, which has disrupted the country's oil exports, could lead to a downgrade of Venezuela's sovereign ratings if prolonged. Venezuela's long-term foreign currency rating is 'B' and its long-term local currency rating is 'B-', both of which have a Negative Rating Outlook. Likewise, should the severe political pressures between the Chavez government and the opposition or an acceleration of bank deposit flight begin to impact sovereign debt service willingness, then sovereign creditworthiness would clearly suffer.

In spite of macroeconomic imbalances and uncertainty over the viability of the Chavez government, Fitch believes that the Venezuelan sovereign's capacity to meet its foreign currency debt service compares favorably to similarly rated sovereigns. At 189% (including assets in the macroeconomic stabilization fund, the FIEM), Venezuela's external liquidity ratio far exceeds the 114% median of 'B' rated countries. Venezuela's expected current account surplus position in 2003 could cover up to 82% of its external amortizations and stock of short-term external debt next year, which Fitch estimates could total US$6.6 billion. Nevertheless, the government's willingness to service its debt could come under increasing pressure if the strike were to continue to disrupt oil exports for an extended period of time. Fitch estimates that at today's prices and export levels, the government could potentially lose over US$20 million per day in revenue if exports were to come to a complete halt.

Although the government's domestic bond swap (DPNs) last month, which was not deemed a 'distressed debt exchange' by Fitch, has relieved some of the short-term refinancing pressures Venezuela faces, Fitch believes that the government's near-term financing outlook remains challenging, not least because a resolution of the current political conflict appears remote.

The bond exchange last month yielded amortization relief through 2004. The central government's domestic amortizations have been reduced by approximately 26% and 19% in 2003 and 2004, respectively. While this transaction has alleviated some of the government's cash constraints, the current circumstances could easily complicate cash flow management. Fitch estimates that the government still has a financing gap of close to 9% of GDP in 2003. Higher than expected oil prices and major exchange rate depreciation have allowed the authorities to avoid any significant fiscal adjustment this year and provided the central bank with sufficient resources to stabilize the exchange rate. If oil production and exports remain at a standstill, then budgeted 2003 revenues could come under significant pressure and result in continued financing difficulties next year.

Fitch maintains Venezuela's foreign currency rating above its local currency rating as the country's external liquidity position remains strong relative to similarly rated sovereigns. In addition, the government has in the past demonstrated a greater willingness to continue servicing international obligations while domestic obligations were in default (e.g. the DPN payment suspension in 1995). However, given the government's dwindling sources of extraordinary revenues and lack of access to financial markets, aggravated by the domestic political climate, it could prove difficult for the Venezuelan government to selectively default on specific obligations.