Emerging debt-Brazil climbs on rosy financial data

www.forbes.com Reuters, 01.30.03, 12:33 PM ET By Susan Schneider

NEW YORK, Jan 30 (Reuters) - Brazilian sovereign bonds climbed nearly 1 percent on Thursday, lending support to the broader market, as a record primary budget surplus heightened investor confidence in the financial health of Latin America's largest economy. Brazil's share of J.P. Morgan's Emerging Market Bond Index Plus added 0.75 percent in terms of daily returns, underpinning a 0.19 percent gain in the broader index. Brazil's benchmark C bond <BRAZILC=RR> picked up 0.625 points to 68.375 bid. Brazil's bonds clawed their way back from a spate of negative days after the government reported a 2002 primary budget surplus of 52.4 billion reais ($14.7 billion), a figure that put the nation well ahead of its yearly International Monetary Fund target for the fourth time in a row. The surplus was 4.06 percent of gross domestic product. Brazil was also buoyed by expectations that Finance Minister Antonio Palocci will raise Brazil's 2003 primary fiscal surplus target from last year's goal of 3.75 percent. The move would fire investor confidence by further confirming rookie President Luiz Inacio Lula da Silva is sincere about keeping public finances solid. "After the happiness of the election and the good things (Lula) said right after the election, it was time to follow through on some of the policies, and he's starting to do that," said an emerging debt trader. Uncertainty about a possible U.S.-led military strike on Iraq weighed on Brazil's debt and the broader market in recent sessions as investors fret an attack would batter an already tepid U.S. economy, which would in turn weigh heavily on Latin America. The war worries carved a chunk out of the rally Brazilian bonds saw at the turn of the year, when investors snapped up the debt on optimism for Lula's pledges to keep a tight rein on finances and pursue key structural reforms. Lula roiled markets for much of 2002 as Wall Street feared his inexperience in government and pledges to bolster social programs would lead to economic mismanagement and an eventual default on the debt. While investors have warmed to Lula, they are keeping a keen eye on his reform agenda, particularly a proposed overhaul of the costly pension system, said analysts. "From what we can see now, (the pension reform) appears to be much more significant than what we had seen from the former government," said Knut Langholm, a senior vice president at State Street Research and Management Co. "I think the market remains optimistic on that front, even though it will be subject to some controversy because it will create winners and losers," said Langholm. He added that without a meaningful reform, Brazil would need to maintain a primary surplus target of 5.5 percent of GDP or more. Venezuelan bonds, meanwhile, took a breather from two straight days of solid gains. The nation's share of the EMBI-Plus inched 0.75 percent lower, with the DCB bond <VENDCB=RR> slipping 0.5 points to 72.75 bid. Venezuelan debt made a fierce move higher this week as a two-month-old general strike, staged by foes of President Hugo Chavez in a bid to force his resignation or new elections, showed signs of weakening. With Chavez utilizing replacement workers and troops in an effort to break the strike, oil output has climbed in recent days, allaying fears that a sharp, protracted drop in the government's chief source of revenues would leave it without the cash to pay its debts. In addition to the partial oil output recovery, the resumption of normal hours by private banks and the reopening of some restaurants and stores have also signaled the strike's grip is losing hold. But while investors are hunting to pick up Venezuelan debt, the recent price jump means they are not too tempted to do any buying, said the emerging debt trader. "I think there is some latent demand -- there are still a lot of people who don't have Venezuela on their books and are going to need to buy it," said the trader. "They're looking for dips, and they're probably not going to get it unless there is significant bad news." Among other emerging nations, Peru launched a $500 million, 12-year global bond on Thursday morning, a sale that was set to price later in the session.