Emerging debt-Brazil inches higher amid surplus hopes

www.forbes.com Reuters, 01.31.03, 12:33 PM ET  By Susan Schneider

NEW YORK, Jan 31 (Reuters) - Brazilian sovereign bonds drifted higher on Friday, nudging the broader market into positive terrain, as a solid currency and the promise of an increased primary budget surplus kept investors sanguine about the economic giant's financial prospects.

Brazil's share of J.P. Morgan's Emerging Market Bond Index Plus added 0.47 percent on the day, aided by a 0.875 point gain in the country's benchmark C bond <BRAZILC=RR> to 68.75 bid. The broader EMBI-Plus inched up 0.1 percent on the day.

Brazil's bonds posted gains on the heels of a strengthening in the currency, the real, and came as investors await the unveiling of a new primary fiscal surplus target next week.

Finance Minister Antonio Palocci is widely expected to lift the 2003 surplus target above last year's goal of 3.75 percent of gross domestic product, a move that would buoy confidence by underscoring new President Luiz Inacio Lula da Silva is serious about maintaining Brazil's financial health.

"Until the beginning of last week, I would say that most of the market expectations were in the range of 4 percent of GDP," said Ricardo Amorim, head of Latin American research at research firm IDEAGlobal. "But now it's probably around 4.25 or 4.3 percent of GDP and this has helped the market."

On Thursday, Brazil reported a record primary budget surplus of 52.4 billion reais ($14.7 billion), or 4.06 percent of gross domestic product (GDP), putting the nation well ahead of its annual International Monetary Fund target.

The gains by Brazilian bonds also follow Thursday's move by Morgan Stanley to raise its rating on the country's debt to outperform from market perform. The investment bank said it advised clients to move their positions to overweight from market weight amid optimism for Lula's legislative agenda.

MIXED VIEWS ON VENEZUELA Venezuelan bonds see-sawed in early trade and were hovering 0.29 percent lower by midday in the New York session as investors took a mixed view on the nation's political and economic turmoil. Foes of President Hugo Chavez have staged a general strike for the last two months in an effort to force the leader's resignation or new elections. The shutdown has choked off Venezuela's lucrative oil output, fueling worries the country may be left without enough cash to pay its debts.

With the work stoppage showing signs of easing, however, oil production has risen, allaying investor fears of a debt default. The president of state oil firm PDVSA said on Friday that output had topped 1.5 million barrels per day (bpd), a sizable jump from the paltry levels of a few weeks ago.

But at the same time, the ebbing of the strike suggests that Chavez is likely to remain firmly in power for now, said analysts. Chavez has made few friends on Wall Street, thanks to his populist rhetoric and antagonism to free market reforms,

"People are looking at where they have some upside this year in Latin America and maybe Venezuela is one of them," said an emerging debt trader. "If things start to settle down, if they start getting oil production back, (the spreads over U.S. Treasuries) should grind tighter."

Venezuela's political impasse has already drawn the attention of the international community, including the United States, which had relied on Venezuela for more than 13 percent of its oil imports. A six-nation group, including the United States and Brazil began a mission in Caracas on Thursday in an effort to secure an elections deal to end the strike.

"If anything, I think the feeling is that the U.S. will draw closer ties (with Venezuela), especially if we invade Iraq, and then we're going to need oil from somewhere. We'd need to mend that up pretty quickly," said the trader.

The prospects for a resolution to the strike prompted Morgan Stanley to raise Venezuela to market perform from underperform on Thursday. Merrill Lynch, meanwhile, said a slow recovery in oil output and the nation's efforts to preserve cash for debt payments prompted it to raise Venezuela's bonds to market weight from underweight in its model portfolio.

Peru's debt, meanwhile, was little changed on the day after Thursday's sale of $500 million in 12-year global bonds. (Reporting by Susan Schneider, editing by Andre Grenon; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)