WORLD BONDS-Emerging debt rush may dampen new year rally

www.forbes.com Reuters, 01.13.03, 11:30 AM ET By Alexander Manda

LONDON, Jan 13 (Reuters) - Substantial new issuance by emerging market borrowers aiming to raise funds ahead of a threatened war in Iraq could weigh on bond prices in coming weeks, choking off a new year rally, analysts say. Last week, Chile, Mexico, Turkey and the Philippines all brought new bonds, raising more than $4 billion between them in a few days. Emerging issuers are bringing forward issuance plans as any conflict over Iraq would raise risk aversion and effectively close capital markets for lower-rated borrowers.

Emerging market debt has done well so far this year, up 1.7 percent on average, with investors chasing yields in a segment that returned 13 percent last year.

But analysts say the unusually heavy and early supply of bonds may undo these gains. "At some point the market should at least pause. I don't see the market having a great performance... It may tumble a bit," said Vincent Megard, emerging bond fund manager at AXA Investment Managers in Paris.

Fears of conflict over Iraq, which the U.S. suspects of developing nuclear and biological weapons in violation of UN resolutions, have been hanging over financial markets for weeks.

"Issuance has been crammed in to the beginning of the year, because people are expecting the market to be closed out to them for a period," said Tim Ash, emerging bond strategist at Bear Stearns in London. "For instance, Turkey had to issue, and had one eye on Iraq," he said. War would send risk aversion and oil prices soaring, locking countries like Turkey, Iraq's northern neighbour and a key U.S. ally, out of international capital markets. That would be a serious problem for Ankara which promised the IMF it would borrow $3.5 billion by the end of 2003.

Turkey, which issued a $750 million 10-year bond yielding 11.25 percent, might have wished to wait for its bond yields to fall back to levels reached in December, at the height of optimism about the country's bid to join the European Union.

Turkey said on Monday it planned to raise at least $4 billion in privatisation revenue this year but, if it had to return to the bond market, analysts reckon its terms might not be as favourable as last week.

"If Turkey comes with another issue now there will be some pressure. The latest issue initially traded down around half a point, and now people are saying that the leads are supporting the deal. It is not a market that can take a lot," said Borislav Vladimirov, emerging debt strategist UBS Warburg in London.

MARKET PAUSE SEEN According to the industry benchmark, JPMorgan's Emerging Market Bond Index plus <11EMJ>, emerging debt has risen 1.7 percent, or 47 percent annualised, in the first 13 days of the year. Low U.S. interest rates have encouraged investors to take on more risky, high-yielding assets.

But this may not last long, said Peter West, senior economist at Poalim Asset Management in London.

"The increase in risk appetite could be reversed by a long conflict with Iraq, or if something were to go terribly wrong in Brazil. Venezuela is also looming as a potential problem," he added. Brazil elected a new president in October, who took power at the start of this year. The EMBI+ priced Brazil's risk more than 4.5 percentage points higher at the beginning of January than a year earlier, because the new president's team is left-wing and untested.

Venezuela is gripped by a general strike, now in its sixth week, which has brought its oil industry, the provider of 90 percent of its export revenues, to a standstill.

NET REPAYERS IN 2003 Overall though, analysts reckon that with cash raining into funds managers' coffers from redemptions, demand for emerging debt will outstrip bond supply through 2003, meaning prices should resume their upward path.

Also limiting supply, Russia, the second largest element in the JPMorgan index, has been a net creditor since its financial crisis in August 1998, and may not need to do an international bond this year.

Mexico, which launched a $2 billion bond last week, is not expected to come back to market this year.

"The market may well be net receiving money at the end of this year," said UBSW's Vladimirov.