Emerging markets up; Philippines softer on President Arroya's comments; Brazil higher

By Reshmi Basu and Paul A. Harris

New York, Aug. 24 - Emerging market debt continued to climb higher Tuesday but the Philippines' debt fell on comments made by president Gloria Arroyo on the health of the country's economy.

"Overall, I don't think there is a whole of news moving the market," said a sell-side source.

For the day, the JP Morgan EMBI+ Index rose 0.35%. Its spread to Treasuries narrowed five basis points to 431 basis points.

Paper from Russia, Mexico and Ecuador was up. Russia's bond due 2030 gained 1.062 points to 95.375 bid. The Mexico bond due 2026 was bid at 147.6, up 0.10. Ecuador's bond due 2030 added a point to 78¼ bid.

Philippines down on Arroyo comments

Meanwhile, president Arroyo sent a jolt through the financial markets as she warned that the country was "in the midst of a fiscal crisis" in order to highlight the hurdles the government faces in reducing its debt and balancing the budget by 2009.

Those comments meant to rally popular support may have backfired as the country's local currency and four-year Treasury bonds took a hit.

Arroyo did vow that the government was "not even considering" defaulting on its obligations.

Nonetheless its paper traded weaker during Tuesday's session.

The Republic of Philippines bond due 2014 fell 5/8 to 97 5/8 bid, 98 3/8 offered from its previous close at 98¼ bid, 99 1/8 offered. On Aug. 18 the bond was trading at 98 7/8 bid, 100 1/8 offered.

Its bond due 2025 fell 1¾ to 109 ¾ bid, 110½ offered from Monday's 110 5/8 bid, 111½ offered.

The Philippines' component of the JP Morgan EMBI+ Index dropped 0.42%. Its spread to Treasuries widened six basis points to 428 basis points.

"Philippines external debt is a little soft today [Tuesday], which is saying a lot given the solid performance in Brazil, Turkey and other EM credits," commented an emerging market analyst.

The Philippines did indeed underperform against liquid issuers.

Brazil's component of the EMBI+ was up 0.34%. Its spread to Treasuries tightened four basis points to 520 basis points. Turkey gained 0.56%. Its spread to Treasuries narrowed six basis points to 338 basis points. And Russia was up 0.87%. Its spread to Treasuries tightened 11 basis points to 289 basis points.

Philippines in a "mess"

"Investors haven't exactly been dumping Philippines external debt today, as Arroyo's comments basically just signal that she now admits what everyone else has known for a while, that the Philippines is in a fiscal mess," added the analyst.

"While it's always bad when the president of an EM country says the country is in crisis, investors can at least take comfort in the fact that Arroyo now realizes the depth of the problem and is trying to sound the alarm about the Philippines' fiscal crisis."

Arroyo's comments came after a group of prominent academicians warned that the country could follow the path Argentina took in 2001, when it defaulted on its public debt because of its swelling deficit and overwhelming borrowings.

At the end of 2003, the Philippine's total debt stood at $60 billion, equivalent to 75% of its gross domestic product.

"I think sometimes when politicians make those kind of statements, you have to question whether the statement is intended for domestic consumption or international consumption," according to the sell-side source.

"Sometimes you get politicians making those statements because you are trying to shock your legislators into proposing more austere fiscally economic policies.

"Having said that, some of the other policy makers were panicked by the comments."

If Arroyo's statements were meant to rally support, it was not well coordinated, added the source.

"But I wouldn't say it has had a deep impact on the bonds. It's not a rush for the exits. It's the kind of thing people expect from Arroyo."

However, the Asian credit, which is not traded much, performed better "than countries like Morocco and Nigeria that aren't particularly liquid," noted the source.

Brazil's well bid paper

Brazil's paper posted more gains during Tuesday's session. Its bond due 2040 added 1.3 points to 106.45 bid while the C bond was bid at 97.375, up 0.312.

One reason the paper has traded up is because investors were pleased with last week's Supreme Court ruling in favor of an 11% tax on pensions of government retirees, a victory for president Luiz Inacio Lula da Silva's government, according to the sell-side source.

"You've had a big rally in the market in general and Brazil is still one of the few countries that offers much value at this point," added the source.

"I think what is driving Brazil is people's perception of the external market.

"It's not so much what is happening in Treasuries today [Tuesday], but just the shift in sentiment over the past few weeks in favor of one in which the Fed doesn't have to be quite so aggressive and that the economic recovery is a little bit softer than what people had anticipated.

"I think people view that as a positive for emerging markets and a positive for Brazil," notes the source.

In other news out of Brazil, the federal domestic debt load increased 0.13% in July to R$759.20 billion, up from R$758.19 billion in June, according to a joint statement by the Treasury and the Central Bank.

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