Morgan Stanley lifts Brazil, Venezuela bonds

www.forbes.com Reuters, 01.30.03, 4:21 PM ET

NEW YORK, Jan 30 (Reuters) - Investment bank Morgan Stanley said on Thursday it raised its recommendation on Brazilian sovereign bonds to outperform from market perform amid optimism for the legislative agenda of the country's new government.

Morgan Stanley said in a report it advised clients to move their positions to overweight from market weight, a move that comes on the heels of last week's nomination of ex-president Jose Sarney, an ally of new President Luiz Inacio Lula da Silva, to head the Senate.

After weeks of negotiations, the deeply divided Brazilian Democratic Party (PMDB) agreed on Sarney as its candidate, a move likely to bolster congressional support for Lula's agenda of economic reforms. Lula, who ran on the Workers Party (PT) ticket, took office earlier this month.

"The recently sealed agreement between the PMDB and the PT provides positive prospects for the new administration's congressional agenda," said Morgan Stanley.

The decision comes as investor fears about the economic fallout of a possible U.S.-led military strike on Iraq weigh on emerging markets. Despite the uncertainty over Iraq, Morgan Stanley said it still was moving to buy Brazil.

"Brazil and Latin American assets are currently participating fully in the global sell-off in risky assets. To the degree that it is Iraq-related, we expect that this sell-off will be temporary and we are buying Brazil heading into it," it said.

Morgan Stanley said it also raised Venezuela to market perform from underperform, thanks to the prospects for a solution to a two-month-old general strike, the government's efforts to maintain reserves through capital controls and increased oil output.

Foes of Venezuelan President Hugo Chavez are staging the work stoppage in a bid to force the leader's resignation or spawn new elections. The strike has strangled oil production, the government's chief source of revenues, and raised concerns the nation may be left without enough cash to pay its debts.

Morgan Stanley said that as the strike loses steam, it expects the opposition to reach an agreement with Chavez for an August referendum on his rule, a move that Chavez may concede to because of international pressure.

This, along with the government's plans for a single fixed exchange rate and a recovery in oil output sufficient to keep the government and state oil giant PDVSA from defaulting on its debt, support the move to market weight, the bank said. (Reporting by Susan Schneider; Editing by Stuart Doughty; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)