Emerging debt-Venezuela prices climb, rest of market flat

<a href=reuters.com>Reuters Wed April 16, 2003 03:30 PM ET By Hugh Bronstein

NEW YORK, April 16 (Reuters) - Venezuelan sovereign bond prices shot higher in an otherwise flat market on Wednesday after Standard & Poor's brightened its outlook on the credit ratings of the politically troubled country.

In revising its outlook on Venezuela's long-term ratings to "stable" from "negative," S&P cited improved cash flow in the South American oil-exporting nation -- thanks to recovering crude output.

"That was the big thing today," one emerging debt trader said. "Besides that, the market was just chopping around in a pretty tight range."

Venezuelan total returns rose 1.8 percent in a market that as a whole drifted down 0.03 percent, according to JP Morgan's Emerging Markets Bond Index Plus.

Ricardo Amorim, head of Latin American research at IDEAglobal, said he disagreed with the move by S&P. He noted that Venezuela's upcoming bond swap will leave investors with longer-dated paper, exposing them for a longer period to a country prone to political convulsions.

A year ago, President Hugo Chavez was temporarily forced from office by a coup. And government fiscal accounts bled profusely in December and January when an opposition-led strike brought the nation's key oil sector to its knees.

Chavez's foes accuse him of trying to set up a Cuban-style socialist state.

"If investors accept the swap and lengthen the maturity of the debt they hold, they would potentially have to stick longer with Chavez," Amorim said. "Venezuela is also vulnerable to drops in oil prices, which I expect to happen when Iraq starts to increase its oil production."

Venezuela has said it plans to offer a voluntary, external debt swap during or after the second quarter of this year.

Meanwhile, Amorim characterized Wednesday's overall lull as but a pause in the 11 percent total return rally seen marketwide since the year began.

"The market is a little down today after some profit taking. But I don't believe this is a change in the trend," he said.

With little money to be made in the anemic U.S. stock market or in low-yielding U.S. Treasury bonds, Amorim said, "There will continue to be flows toward emerging markets, in particular toward higher-yielding emerging markets."