WEEKAHEAD-Brazil bonds seen higher while Venezuelan debt falls
Reuters, 01.05.03, 7:55 PM ET By Hugh Bronstein
NEW YORK, Jan 5 (Reuters) - With the exception of Venezuela, where a national strike is strangling the economy, emerging market bond prices were expected to rise this week as as investors bet that the new president of Brazil will shed his radical past and govern responsibly.
President Luiz Inacio Lula da Silva, a one-time hard left union boss who won October's election after steering his campaign toward the political center, was seen winning over the markets with his recent pledges of fiscal restraint.
"The general tone of the market will be better, with Brazil grinding higher and most of the other credits remaining firm," said Christian Stracke, lead emerging markets analyst at CreditSights, a Wall Street research firm.
"The only wild card is Venezuela, but I don't see any contagion effect," Stracke said. "Even if Venezuela drops another five points I don't see that having anything to do with the rest of the market." While Venezuelan bonds have stumbled recently amid intensified opposition to President Hugo Chavez, Brazilian bonds have gained ground on Lula's reassurances that he will not abandon prudent policies in his quest to improve the lot of ordinary Brazilians. He was sworn in New Year's Day.
"The market is giving Lula the benefit of the doubt," said Walter Molano, head of research at BCP Securities, a Latin American broker dealer based in Greenwich, Connecticut.
Benchmark Brazil C bonds <BRAZILC=RR> ended last week bid just above 68. The bonds took investors on a stomach-churning ride in 2002, starting the year in the mid 70s only to be beaten down into the 40s several months ago when fear of Lula was at its highest.
"I think C bonds are poised to break through 70," Molano said. The Lula government has pledged to place pension reform high on the agenda when Congress reconvenes in February. Brazil's bloated social security system is one of the greatest drains on its public finances.
But Martin Schubert, chairman of the Miami-based European Inter-American Finance Corp., warned that Brazil C bonds are pressing up against resistance "based upon technically overbought conditions."
"To me these C bond prices look too high," Schubert said. "Prices have moved up from substantially lower levels on Lula's new cabinet, which has yet to be tested."
VENEZUELA WRITHES, BONDS FALL Thousands of supporters of President Chavez marched in Caracas on Sunday to protest the fatal shooting of two men in clashes related to the work-stoppage.
The killings intensified feuding during the five-week-old strike which has crippled the oil sector of the world's No. 5 petroleum exporter. Foes of Chavez have vowed to keep up the shutdown until he resigns or calls early elections.
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 the president wants to establish a Cuban-style authoritarian state.
Venezuela DCB bonds <VENDCB=RR>, which traded as high as 83 before the strike, weakened to a bid of 77-1/4 at the start of last week. They closed Friday at a bid of 72-3/4.
"I think DCB will trade lower this week but the pace of the selloff should slow," Stracke said. "I don't think they'll trade much lower than 70 because the market has more or less priced in the fact that Venezuela will have a serious cash crunch in the next three to six months that could challenge its ability to make external debt payments."
Many investors say Chavez is probably on the way out and that Venezuelan bonds are poised to rally on that development. But as the work-stoppage continues optimism is wearing thin.
"The strike could still push Chavez out, but even if it did it would be against a background of serious political instability and economic chaos," Stracke said. "If the strike does not push him out, the government will have to struggle with the slump in oil revenues. So there's no positive scenario for Venezuela that seems probable." Investors will also focus this week on Ecuador, whose bonds rallied on Friday after Mauricio Pozo, a Wall Street favorite, was named as incoming finance minister.
ARGENTINA BACK IN THE NEWS Wall Street is watching to see if Argentina will manage to make a $1 billion payment it owes to the International Monetary Fund on Jan. 17.
The once-prosperous South American nation has come to be held in low regard by the market since defaulting on its private creditors a year ago and more recently on the World Bank.
Top IMF and U.S. Treasury officials said on Saturday they were trying to work out an IMF loan deal with Argentina but talks with the country were not complete.
"Without a new credit agreement with the IMF the Argentina debt situation will fall into a deeper abyss and (the country's) FRB bonds could trade down to the 15 area," Schubert said.
The bonds <ARGFRB=RR> closed last week bid at 20-5/8.