Emerging debt-Brazil bobs higher, spotlight on reforms

Forbes.com-Reuters, 04.23.03, 1:59 PM ETBy Susan Schneider NEW YORK, April 23 (Reuters) - Brazilian sovereign bonds crept higher on Wednesday as investors, while still optimistic about the prospects for Latin America's largest economy under its four-month-old government, kept their eyes peeled for progress on promised pension and tax reforms. Brazil's share of the benchmark J.P. Morgan Emerging Market Bond Index Plus, or EMBI-Plus, added 0.45 percent at midday, with spreads -- the premium investors demand to compensate for perceived risk -- at 8.53 percent over comparable U.S. Treasuries. Brazil's C bond <BRAZILC=RR> was flat at 86.0 bid. Wall Street greeted the Brazilian Central Bank's widely expected decision to maintain the benchmark interest rate at 26.5 percent with a cursory nod, as worries about inflation persisted. Investors focused instead on the tax and social security reforms that President Luiz Inacio Lula da Silva is expected to submit to Congress this month. The overhauls are viewed as critical for Brazil to nourish its financial health. "One of the things that could give an additional boost to the market is when the government finally presents the final proposal for the tax and social security reforms to the Congress," said Ricardo Amorim, head of Latin American research at Wall Street research firm IDEAGlobal. "But, basically, the optimism toward Brazil remains the same," he added. "We can see that also in the (foreign exchange) rate -- the real has been very strong over the last weeks." Brazil's bonds and the currency, the real , have soared as investors warmed to the idea of a Lula presidency. The former union boss spooked markets in 2002 because of his talk in previous campaigns of debt renegotiations, but his constant pledges for fiscal austerity and reforms have lured Wall Street to his corner. Brazil's bonds have gained more than 30 percent since the turn of the year, according to the EMBI-Plus. Argentina's bonds, meanwhile, trekked higher on investor hopes that a market-friendly candidate will eventually pull out a victory in the upcoming presidential race. Argentines go to the polls on Sunday to pick from a field of five candidates, a race that is widely expected to move to a second round. The country's share of the EMBI-Plus added 3.07 percent on the day, extending a 17.2 percent rally this year. "We're still seeing a lot of buying interest across the board," said an emerging debt trader. "Most of the interest has been in Argentina. With the election coming up, the expectation is that one of two or both market candidates are going to move on (to the next round)." Among the candidates, investors would cheer the re-election of Carlos Menem, a favorite of the business community because of his free-market reforms during two presidential terms in the 1990s. While Menem has gained support -- a poll last week showed him leading the race with 18.3 percent of voting intentions -- he remains a controversial figure. Many Argentines blame him for laying the groundwork for the nation's December 2001 fiscal meltdown. Increased support for candidate Ricardo Lopez Murphy has also left investors feeling sanguine. The center-right Lopez Murphy gained five points in the poll to 16.3 percent, or third place after Menem and Gov. Nestor Kirchner. If no candidate wins 45 percent of the vote on Sunday, a second round will be held on May 18 between the top two contenders. VENEZUELA FALTERS Venezuela was a dark spot in an otherwise rosy day in emerging markets as its share of the EMBI-Plus fell 0.74 percent. The country's benchmark DCB bond <VENDCB=RR> slid 0.375 points to 75.5 bid. The decline came one day after Venezuelan President Hugo Chavez brought back a leftist academic as his Planning Minister. Chavez named Jorge Giordani, who served in the same post during the first three years of his rule, to the position after he fired the previous minister for disagreements over economic policies. For investors, the move underscored Chavez's firm hold on power despite his foes' bid to oust him this year with a two-month general strike. Chavez has few friends on Wall Street because of his antagonism toward free markets. "The fact that Chavez appears to be stronger is negative. That's the bottom line," said Amorim of IDEAGlobal.