Emerging markets debt trades higher; Latin America wants looser IMF accounting rules

By Reshmi Basu and Paul A. Harris

New York, April 1 - Emerging market debt traded higher during Thursday's session. Brazil had another strong showing as political noise appears to be fading for now.

"For the most part everyone is up today," said a trader.

The JP Morgan EMBI global index moved up 0.16%. Its spread to Treasuries tightened by eight basis points.

Brazil continued its momentum as concerns over the ability of President Luiz Inacio Lula da Silva to rule simmered down.

"It appears that the political noise in Brazil is becoming quieter," said the trader.

The Brazilian benchmark C bond finished at 97.938 bid, 98.062 offered, up 0.56 on the day.

The Brazil component of the EMBI index rose 0.52%. Its spread to Treasuries tightened by 19 basis points.

Latin American countries join forces against the IMF

However concerns were raised by Mexico's decision to join the coalition of Latin American countries demanding that the International Monetary Policy loosen its accounting rules in order to stimulate growth.

In March, Brazilian president Luiz Inacio Lula da Silva and Argentine president Nestor Kirchner signed a joint declaration calling upon the IMF to not include the cost of infrastructure projects in budget surplus limits as a condition for loans.

"I think it's an attempt to adopt bogus public finance accounting," said an analyst.

"They want to exclude certain investment expenditures from their calculation of their primary surplus. That's like neglecting to tell your bank about your car payment when you're trying to take out a mortgage - if you're spending money it counts against the primary surplus period," he said.

"Investment spending is important and bondholders would be better off if all EM governments would follow the East Asian model and spend more on investments and less on government salaries and entitlement spending. But the accounting change simply papers over the fact that these countries cannot afford to pay for investments and maintain their spending level on other items," the analyst added.

"But there's a real question as to whether or not the IMF has the right policy," said Steve Hope, managing partner at Outrider Management. "It could be that all sides are wrong."

Indebted governments argue that infrastructure projects are capital investments because they result in economic benefits in the long run. But there are fears that excluding them could effectively mean the IMF is permitting runaway pork barrel spending.

"The argument is that infrastructure projects are capital investments. But to the extent that the government expenses it in the budget, it reduces the budget surplus," said Hope.

"And their point is, look these are really capital investments, even though the way we do our accounting makes it look like we're just spending money.

"You can understand why the IMF refuses to provide for capital investment as a loophole in the budget. You can understand why the countries might say, 'Gee, infrastructure, things that are definitely investments should not count against us here.'

"I think it would be bad for investors if the IMF conceded the point. It would just provide a way for the government of these countries to skirt around primary surplus targets," added Hope.

New deals fail to excite investor

Meanwhile, despite an active new-deal market, one fund manager told Prospect News he was finding it hard to work up much enthusiasm about the issuance pipeline.

"We're not that excited about Korea," said the investor.

"We are being more cautious about Russian corporates.

"The other credits that have come to market like Tunisia, Croatia, they are relatively tight to what we what we are usually looking for," he added.

Kazkommertsbank prices

In action Thursday, Kazakhstan's Kazkommertsbank priced $100 million of 10-year subordinated 7 3/8% notes (Baa3/B) at 99.535 to yield a spread of 464 basis points over Treasuries.

They debt came to market tighter than the price talk of 475 to 500 basis points.

Citigroup and ING were joint lead managers on the Rule 144A/Regulation S deal.

Out of Malaysia, Commerce International Merchant Bankers priced its $100 million 5% tier 2 subordinated 10-year notes (Ba1/BBB-) at 99.843 for a spread of 220 basis points over the five-year Treasury.

The offering came tighter than price guidance of 225 basis points to 235 basis points.

The deal was oversubscribed by 4¼ times, the issuer said.

Morgan Stanley and CIMB were joint lead managers.

Talk on 3 deals

For deals still being marketed, price talk emerged for offerings from Russia and Croatia.

Russian Standard Bank lowered price guidance for its $125 to $150 million three-year eurobond (Ba3/B) at a yield of 8¾% to 8 7/8% during the session. Guidance was reduced from the 9% area set early Thursday.

Barclays Capital and Citigroup are running the books on the regulation S deal.

Russian steel company OAO SeverStal set price guidance for its $300 million 10-year notes at a yield of 9% to 9¼% (B2/B+).

Pricing is expected the week of April 5.

Citigroup is the bookrunner on the Rule 144A/ Regulation S offering.

The Republic of Croatia plans to price €500 million 10-year bonds in the area of mid-swaps plus 100 basis points (Baa3/BBB-/BBB-) on Friday.

UBS Investment Bank and JP Morgan are running the Regulation S deal.

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