Emerging markets cool; trading mixed to wider; Kospo may hurry $300 million deal

By Aaron Hochman-Zimmerman

New York, April 8 - Emerging markets trading activity receded on Tuesday after Monday's charge.

Trading saw some mild widening and profit taking as predictions for the week ahead remained tempered but mixed.

The outlook for the near-term is not as sunny, according to a report from the International Monetary Fund.

"Even though the United States remains at the 'epicenter,' financial institutions in other countries have also been affected by the current market crisis - reflecting the same overly benign global financial conditions, an inattention to appropriate risk management systems, and lapses in prudential supervision," the IMF's global financial stability report said.

"Emerging markets have so far been relatively insulated from the effects in mature markets, but the earlier benign financial conditions and low interest rate environment have also meant that risk taking was higher in some of these countries. The countries, most notably in emerging Europe, that have experienced rapid credit growth, some of which also have large current account deficits financed by private debt or portfolio flows, may be particularly vulnerable," the report continued.

Also, despite the resilience the sector has shown throughout the credit crisis and bouts of recent tightening, banks at the heart of the crisis have yet to prove the good health of their balance sheets, a strategist said.

As a result EMBI Global spreads are likely to stretch out another 50 basis points over the next three months, he added.

On Tuesday, emerging markets tightened as a sector by 1 bp to a spread of 283 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will require to keep assets in emerging markets debt.

Meanwhile, even as stocks slipped volatility ground lower by 0.06 to 22.36, according to the VIX index. The index is a commonly used yardstick of market volatility.

Emerging Europe softens, Georgia up

Emerging Europe took a step back on Tuesday, but sentiment remained optimistic for the rest of the week.

Prices and spreads were weaker across the board on Tuesday in what a trader called: "Quite a reversal of Monday."

However, "either Monday was the aberration or today was," he said on Tuesday, adding: "Over the week we can continue to do OK."

Georgia's breakthrough 7½% issue due 2013, which priced on Monday, traded well, he said, although it "lost the high" near 102 bid.

The bonds, which priced at par, were spotted at 101.75 bid, 101.875 offered.

In Russia, inflation came in higher than expected during March, a market source said.

Year-on-year inflation ended March at 13.3%, compared to 12.7% at the end of February.

Another rate hike is a possibility, the market source said.

"There is to be a reduction in money supply in May, and this will help bring inflation down," the first deputy president of Russia's central bank, Alexei Ulyukayev, said on Tuesday, according to the Itar-Tass News Agency.

The ruble was seen trading at 23.25 to the dollar.

The Russian sovereign bonds due 2030 were spotted at 115.5 bid, 115.625 offered.

In Ukraine, president Viktor Yushchenko asked the government to amend the 2008 budget after inflation hit 9.7% for the first quarter, according to Itar-Tass.

The hryvna was seen trading at 5 to the dollar.

Also, the parliament will begin to consider ratifying the World Trade Organization membership it was granted in February.

Progress toward ratification is expected this month, but parties opposed to prime minister Yulia Timoshenko may be able to stall discussions, a market source said.

The government has until July 4 to vote to accept membership.

Also in the commonwealth of independent states, the government of Kazakhstan will pump $2 billion into the construction sector, according to a market source.

The first $1 billion has already been distributed to lenders to refinance mortgages. The second $1 billion will likely be split by builders and lenders, the source said.

Turkey's AK party ready to deal?

In Turkey, the AK party made concessions to its opponents and to the European Union over the charges against it in Turkey's highest court, a market source said.

The AK party announced it will ask for a consensus among opposition parties to enact laws the European Union has called for in the past, the source said.

There is some skepticism from the opposition as the AK party may only focus on self-serving democratizing steps that would make it more difficult to disband a political party.

However, the AK party submitted draft amendments to parliament that would change Turkey's article 301 and allow greater freedom of speech, the source said.

"Article 301 of the Turkish penal code is one of the priority areas that need to be addressed," an official from the E.U. secretariat general told the Turkish Daily News. "But it is not the only one," she added.

The Turkish government bonds due 2030 were seen at 151.5 bid, 151.75 offered.

Kospo may move up $300 million deal

The primary market cooled after its firecracker Monday.

No deals priced on Tuesday, but the Korea Southern Power (A1/A-) $300 million five-year senior unsecured bond may be moved up, according to a market source.

"If [the] market is doing as well as it is today, [the issuer] could announce price talk tomorrow and it could price as early as Thursday," the source said, after the initial rumor held that "it will price Friday if the market is on fire; otherwise, it will be next week's business."

ABN Amro, Citigroup and Deutsche Bank will act as bookrunners for the deal.

The roadshow will be held in Hong Kong on Tuesday, London on Wednesday and New York on Thursday.

Kospo is a Seoul-based energy firm.

Meanwhile in Latin America, Venezuela may issue paper before the end of the month, a strategist said.

Also, some of the heavy hitters in the Brazilian corporate world may be getting ready to follow Construtora Norberto Odebrecht SA's $200 million retap of its 7½% notes with issues of their own, he said.

Asia stays balanced

"It was a non-day," a trader said on Tuesday.

A "decent amount" of buyers and sellers "pretty much balanced everything out," he said.

In the Philippines, domestic liquidity was up by 6.6% in February, compared to 7.2% in January and 22% in February of 2007, according to the central bank.

Lending to local governments and other government agencies declined, but private sector borrowing grew by 10.1% in February compared to 7.7% in January.

The Philippines' government bonds due 2030 slipped just 0.125 point to 131.5 bid, 132 offered.

In Indonesia, the parliament named Boediono the new governor of Bank Indonesia.

He is viewed as competent, honest and well-liked within the political bureaucracy, a market source said.

He is expected to combat the sharp inflation of the rupiah with a balanced approach, but rate hikes are likely, the source said.

"That's good; there was a lot of concern about that," a trader said about Indonesia's currency problems.

The rupiah was seen trading at 9,195.75 to the dollar.

The Indonesian sovereigns due 2017 lost 0.25 point to 103.25 bid, 103.5 offered.

Also in Asia, Pakistan's bonds due 2017 were quoted at 86.5 bid.

Profit taking in LatAm

Latin American trading saw some "general profit taking" after a few days of tightening spreads, an emerging markets strategist said.

As the minutes released by the Federal Reserve sink in, the market will "probably drift lower," he said.

More optimistically, a report by the Institute of International Finance said: "Latin America's economies grew in real terms by more than 5% in each of the last two years and that growth will be about 4.4% in 2008. These figures compare very favorably with the anemic growth experienced in the preceding decades."

Then, improved fiscal performance, strong export growth, and increased reliance on local capital markets as the source of financing have combined to reduce external debt from 193% of exports in 2002 to 94% in 2007 and further improvement is in prospect this year," the report continued.

Meanwhile in Venezuela, the government met with cement producers to make clear that they will only be allowed to retain up to 40% of their business interests in Venezuela after the cement nationalization program takes effect, a market source said.

The negotiations with the major cement producers will be done individually, the source said, adding that no schedule for the talks has been published.

The 9¼% Venezuelan sovereigns due 2027 held still at 95.75 bid, 96.25 offered.

In Brazil, trade is suffering from strikes and labor disputes between workers and management at the country's ports.

Industries which operate in components have been hit the hardest, while agricultural products have been largely unaffected.

The Brazilian government bonds due 2040 were quoted at 135.4 bid, 135.5 offered.

Elsewhere, Argentina's 8.28% discount bonds due 2033 slid 0.5 point to 85 bid, 85.5 offered.

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