Emerging Debt-Up, Brazil hope trumps war fear, for now

www.forbes.com Reuters, 02.07.03, 11:34 AM ET By Hugh Bronstein

NEW YORK, Feb 7 (Reuters) - Bolstered by hope that Brazil will increase its budget surplus target in a show of fiscal prudence, emerging market sovereign bond prices edged higher on Friday despite fear that a coming war against Iraq will scare investors into safer markets. "Money is still chasing yield for the time being," said Americo DaCorte, managing partner at Latin World Asset Management in New York. "So I would not be surprised if, in the short term, you see emerging market bond prices grind higher," he said. "If we have a war, that's another story." Benchmark Brazil C bonds <BRAZILC=RR> rose 5/8 to bid 69-3/4 as traders waited for a late-afternoon news conference by Brazilian Finance Minister Antonio Palocci, who is expected to unveil a new surplus target. The conference is scheduled for 4 p.m. local time(1800 GMT). Markets are widely expecting Palocci to hike the budget surplus -- which excludes debt payments -- to around 4.3 percent of gross domestic product from the current target of 3.75 percent of GDP. "This would signal that (President Luiz Inacio Lula da Silva) is adopting a policy of fiscal and monetary prudence," said Martin Schubert, chairman of the European Inter-American Finance Corp., a Miami-based emerging markets debt trading and fund management firm. Lula, a one-time radical union leader who won last year's election after shifting his rhetoric from left to center, took office at the start of the year. "He's giving all the right signals in this honeymoon period, but the key test remains his ability to pass social security and tax reforms that will allow the government to reduce its internal debt," Schubert said. Emerging market bond spreads tightened 7 basis points to 726 over U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus. Brazil's portion of the market tightened 20 basis points to 1,309. Tighter spreads reflect the perception of decreased risk as measured against safe-haven U.S. Treasury bonds. Despite the war jitters, which have shaken markets around the world, total returns as measured by the EMBI-Plus have risen by 2 percent since the start of the year. Brazilian returns are up 5.1 percent since Jan. 1 as optimism about Lula grows.

VENEZUELA STABILIZES AFTER SELL-OFF Venezuela spreads tightened by 14 basis points to 1,318 over Treasuries on Friday after a sell-off spawned by the government's move on Thursday to impose foreign exchange and price controls. Vowing to starve his foes of dollars, Venezuelan President Hugo Chavez announced the measures to shore up an economy reeling from a two-month opposition strike. Venezuela total returns, which include accrued interest and price movements, have fallen 5.5 percent so far this year as the country contends with its political crisis. Chavez, who has defied opposition demands that he resign, said payments to foreign bond holders will be given top priority under the new foreign exchange system. But Wall Street analysts said the new currency regime may invite corruption and hurt confidence.