WEEKAHEAD-Emerging debt eyes Brazil, Venezuela strike nags

Reuters, 12.29.02, 6:11 PM ET By Hugh Bronstein

NEW YORK, Dec 29 (Reuters) - Emerging market sovereign bond investors will be watching for signals this week from Brazil's incoming government about the future economic policy of Latin America's biggest country while a watchful eye is kept on Venezuela's nearly month-old national strike. "Even with Venezuela, Brazil will continue to be the central question mark. Will President Lula back his pro-market statement with concrete actions?" asked David Roberts, senior international economist at Banc of America Securities. On Friday, President-elect Luiz Inacio Lula da Silva met with his Cabinet appointees for the first time, but offered little new information for investors thirsty for policy signals from the one-time radical union leader who turned toward the political center to win October's election. Lula will take office on Wednesday. "One of the issues that the market will be looking at as Lula assumes office is the extent to which the economic team actually continues with orthodox policy, as it is signaling it will," said Mohamed El-Erian, chief emerging markets portfolio manager at Pacific Investment Management Co. (PIMCO) based in Newport Beach, Calif. The most dramatic news headlines may well come from Venezuela, where a 28-day-old strike, staged by opponents of leftist President Hugo Chavez, has almost stopped oil shipments from the world's fifth-largest exporter. But Brazil, Latin America's most important economy, is likely to command the attention of investors. Brazil's incoming finance minister, Antonio Palocci, said on Saturday that economist Joaquim Levy will head the National Treasury. Levy, who holds a doctorate in economics from the University of Chicago and has worked at the International Monetary Fund, is currently the chief economic adviser at the Planning Ministry. "It's an important appointment because it confirms orthodox shaping of the economic team," El-Erian said. Mark Dow, a portfolio manager at MFS Investment in Boston, said global economic concerns and heightened geopolitical risks focused on Iraq and North Korea will set the overall tone this week. "The market tends to interpret the news out of Brazil more charitably when the global backdrop is positive and we tend to interpret is less charitably when the global backdrop is less positive," Dow said. Market activity is expected to be thin as the New Year holiday falls in the middle of the week. SHOWDOWN IN VENEZUELA Venezuela's strikers, organized by business and union leaders, have demanded Chavez call elections or step down. But the president has only hardened his tone, vowing to break the work stoppage. "This is an impasse that cannot last long because of the costs for both sides," said Roberts. "For Chavez, the direct cost is the loss of oil revenues. The longer the ports stay closed the more his ability to govern is called into question," Roberts said. "In the meantime, the protesters can be charged with economic sabotage." Chavez was elected in 1998 after a campaign in which he vowed to wrest control from the country's corrupt elite and enact reforms to help the poor. But opposition has grown amid charges the president wants to establish a Cuban-style authoritarian state. "As we enter the fifth week of the strike in Venezuela the risk of street violence is increasing, which would further complicate the country's outlook," El-Erian said. "Both sides are very entrenched," he added. "You could see an event in Venezuela any day this week, as opposed to Brazil, where you are not likely to have an event but the market will just be trying to pick up signals about the orthodoxy of the economic team." Many investors say Chavez, notorious on Wall Street for his failed economic policies and anti-capitalist rhetoric, is probably on the way out and that Venezuelan bonds are poised to rally on that development, which helped account earlier this year for the stunning rise in Venezuelan bond prices. Venezuelan debt has rewarded holders with total returns of 18.79 percent in 2002, compared with the 14.16 percent rise in the overall market, according to the EMBI-Plus. But as the strike eats into the country's oil and Christmas season tax revenues, Venezuelan total returns have dropped 3.29 percent so far in December. Copyright 2002, Reuters News Service