WEEKAHEAD-Emerging debt to take cues from Brazil
Sun May 25, 2003 02:24 PM ET By Susan Schneider
NEW YORK, May 25 (<a href=reuters.com>Reuters) - Emerging debt is expected to take its cues again from Brazil in the week to come as investors eye the government's structural reforms and sift through a spate of inflation data for signs the Central Bank might have room to lower sky-high interest rates.
Argentina is also slated to be in the limelight as Wall Street awaits the initial policy decisions of President Nestor Kirchner, who assumes the leadership of the financially battered nation on Sunday.
While investors are unlikely to shift the sanguine view of emerging markets they have held since the turn of the year, they will be watching Brazilian President Luiz Inacio Lula da Silva for signs of progress on his promised overhaul of the tax and pension systems.
Once U.S. investors return from Monday's Memorial Day holiday, they will also eye inflation data to determine if an easing of the benchmark Selic interest rate, now at a four-year peak of 26.5 percent, might be possible at the June meeting of the Central Bank's monetary policy meeting. The rate is widely seen as a chokehold on investment and industrial production.
"We need to continue to see good inflation numbers that will allow the Central Bank to cut rates finally in June or July, and continued progress on the reform front," said Jim Barrineau, vice president in emerging markets research at Alliance Capital Management.
Brazil has spearheaded a bonanza in emerging markets this year. With U.S. interest rates at rock bottom, investors have been looking to other markets for higher yield and Lula's sound fiscal management and reforms have proved to be key draws.
The mix of Brazil optimism and a steady siphoning of funds to emerging markets has helped send Brazilian bond prices a dizzying 41 percent higher so far this year.
Argentina, meanwhile, may prove to be more of a trouble spot. Kirchner, a former governor, must act fast to sew up a long-term deal with the International Monetary Fund and jump start negotiations with investors left in limbo by last year's default on some $60 billion in debt, analysts said.
Kirchner's economy minister, Roberto Lavagna, has said he wants to start IMF talks as soon as possible after the lender withheld approval of a loan review because the outgoing government had not made market friendly reforms it agreed upon.
Still, some analysts expected Kirchner to take a tough line with the IMF as he tries to appease a population forced into poverty by Argentina's economic meltdown.
On Friday, for example, Lavagna said Kirchner would not veto a law that stops banks from repossessing homes, an issue the IMF has said is a concern.
"They have something like $3 billion in repayments coming due to multilaterals that are not extendable," said Suhas Ketkar, senior economist and head of emerging markets analysis at Royal Bank of Scotland. "The pressure will be there to reach an IMF agreement but they will play hardball."
Another focus will be Venezuela, whose bonds have lagged the broader market amid a bitter political standoff between President Hugo Chavez and his foes. In the latest bout of violence, one person was killed and 22 injured after gunfire broke out at an opposition rally in a pro-Chavez district.
The violence came after the government and opposition said Friday they agreed to a political pact to hold a referendum on Chavez's rule, which aims to end the standoff. But investors viewed the the pact with skepticism.
"I think what people are waiting to see is if this referendum is absolutely nailed down. Is it going to happen or can Chavez delay it?" said Barrineau. (Reporting by Susan Schneider, editing by Walker Simon; Reuters Messaging: susan.schneider.reuters.com@reuters.net, tel: +1 646 223 6319)