New Year, Brazil help Latin American debt bloom

www.forbes.com Reuters, 01.10.03, 12:19 PM ET   By Susan Schneider

NEW YORK(Reuters) - After a year of turmoil sown by Argentina's financial meltdown and Brazil's election shivers, Latin American debt issues have flowered in recent days as fresh turn-of-the-year funds and budding hopes for Brazil's new leader infuse the market with cash.

Chile and Mexico braved the once-rocky market this week for a hefty $3 billion in financing, while two Brazilian banks are issuing a further $200 million. A string of Central American nations are on the docket with expected sales this month, including a $500 million planned sale by Guatemala.

The revival is partly the product of the so-called January effect, said analysts. With the old year behind them, investors on the hunt for higher-yielding assets begin the game anew, meaning they must put their money in the markets if they hope to rack up gains in the new year.

Brazilian President Luiz Inacio Lula da Silva's honeymoon with Wall Street is also helping the Latin American debt market bloom. Where investors once viewed the former union boss as a likely death knell to Latin America's largest economy, Lula's cabinet choices and pledges of fiscal austerity and reforms have turned the tide of sentiment.

"The outlook for the first quarter is one in which people are putting money to work and in which Brazil is at least stabilized politically and fundamentally, which justifies people's short-term confidence," said Christian Stracke, head of emerging markets strategy at research firm CreditSights.

Lula, who ran on the left-leaning Workers Party ticket, took office on Jan. 1.

SCANT SALES IN 2002 The fallout from Argentina's disastrous devaluation and default and the skittishness toward Brazil made for a turbulent 2002 across Latin America.

The debt of market heavyweight Brazil closed 2002 with a loss of 3.4 percent, capping the region's gains at 7.2 percent, according to J.P. Morgan's Emerging Market Bond Index Plus. Russia, by contrast, notched up a lofty 35.9 percent return and Turkey gave investors a solid return of 20.7 percent.

Latin American debt sales suffered in tandem. The volume of issues sank 48 percent in 2002 from 2001 and Latin America made up just 28 percent of emerging market deals last year, a sharp drop from its 48 percent share in 2001, according to industry tracker Dealogic.

But the first days of 2003 show signs of a thaw. Chile's mad dash to the markets on Wednesday yielded $1 billion, a deal Chilean Finance Minister Nicolas Eyzaguirre said had seen demand of $4 billion. Mexico doubled its original plans for $1 billion to secure $2 billion in its sale on Thursday.

In Brazil, where credit to companies shriveled last year because of election fears, Banco Safra and ABN Amro Real, the Brazilian unit of of Dutch bank ABN Amro, are selling $100 million in debt each. Seven Brazilian banks have offered bonds in international markets so far this year.

"Last year there was a lot of issuance involving emerging Europe and emerging Asia. The problem was that there wasn't much issuance involving Latin America," said Arturo Porzecanski, head of emerging markets research and debt strategy at ABN-Amro. "So now when Chile comes with a $1 billion and the first Brazilian bank deals in a long time bubble up to the surface -- and there's talk that Central American or Caribbean countries will be next -- we marvel. We marvel because we've been 40 years in the desert," said Porzecanski.

Other emerging economies also jumped into the markets this week. The Philippines raised $500 million Wednesday in the opening of an existing bond maturing in 2013, while Turkey sold a $750 million 10-year dollar bond Thursday.

"A lot of money has been allocated to the emerging markets -- we hear that just this week about $1.5 billion in new money came into the marketplace -- so therefore issuers are taking advantage of it and trying to soak up the excess liquidity," said Walter Molano, head of research at BCP Securities.

TROUBLES STILL LOOM FOR LATIN AMERICA While the tone is rosier for Latin American issuers, not every would-be debt issuer is in for a smooth ride.

Venezuela is the source of scant cheer among investors, for example, because of a five-week old general strike staged by foes of President Hugo Chavez. The protest, aimed at forcing Chavez to resign or call new elections, has strangled oil production and raised concerns that an increasingly cash-strapped government will not be able to pay its debts.

Argentina, meanwhile, remains a market pariah after defaulting on $95 billion in private debt and an $800 million World Bank loan. Uruguay is still trying to right its economy after being pummeled by the fallout of Argentina's crisis.

Still, if Lula can keep Wall Street's faith, Latin American debt issues will at least have a better chance of success than they did last year. "If the vultures that were circling Brazil from April through September definitely vanish from the sky, all the little animals will come out of their caves," said Porzecanksi.

(Reporting by Susan Schneider; editing by Dan Grebler; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)