Emerging markets soften; Russia invades Georgia; Indonesia to bring rupiah-denominated sukuk issue

By Aaron Hochman-Zimmerman

New York, Aug. 8 - Emerging markets ended the week on a weaker note, but open hostilities between Russia and Georgia had a relatively mild impact on the market, which had already begun the day on a weekend footing.

In trading, Argentina continued to be the victim of a realization on the part of many investors that for some time its price was artificially inflated.

The benchmark discount bonds dropped 2.25 points to finally fall below 70 bid to 68 bid, 69 offered.

In the primary, Indonesia announced it will offer up its first Islamic bond denominated in rupiah on Aug. 26.

No amount was set, but if it is successful, a dollar-denominated sukuk will follow in October or November.

Also, during August, emerging market bond funds held the distinction, along with money market funds, of being the only funds tracked by EPFR Global to register positive inflows.

Emerging market bond funds took on $252 million during August, according to an EPFR press release.

Meanwhile, in the major markets a strong finish for equities cut volatility by 0.49 to 20.66, according to the VIX index. The index is a frequently used gauge of market volatility.

Treasury action drew emerging markets wider by 5 bps to a spread of 295 bps, according to JPMorgan's EMBI+ index. The EMBI+ determines the amount of extra yield investors are willing to accept to hold assets in emerging markets debt.

The EMBI global diversified index, which represents sovereigns and quasi-sovereigns, was wider by 10 bps with a spread of 322 bps.

The diversified index has a less strict liquidity rule for inclusion.

Russian army enters Georgia

Russian armored columns rolled into Tskhinvali, the capital of Georgia's breakaway region of South Ossetia on Friday, after earlier artillery fire was reported coming from the Georgian side, reports said.

Some reports of both military and civilian casualties put the number of dead over 1,000.

Georgia claimed to have shot down two Russian aircraft, but also said that the airport on the outskirts of its capital Tbilisi was bombed by Russian air force jets.

"All day today, they've been bombing Georgia from numerous warplanes and specifically targeting (the) civilian population, and we have scores of wounded and dead among (the) civilian population all around the country," Georgian president Mikhail Saakashvili told CNN.

Russian peacekeepers were dispatched to the region shortly after hostilities with the Tbilisi government renewed in May.

"I must protect the life and dignity of Russian citizens wherever they are," Russian president Dmitry Medvedev told the Interfax News Agency.

The open warfare came on a summer Friday during earnings season, a time with few traders at the desks, which may have spared the credits from greater losses.

The Russian sovereign bonds due 2030 gave up 1.25 points.

"Bonds in Georgia haven't been overly impacted today," a strategist said.

Emerging Europe pulled wider

Elsewhere in emerging Europe, issues were wider as Russia set the tone, but Treasuries still governed the sector.

In Turkey, the International Monetary Fund will continue its working relationship in order to reach a higher level of economic strength and stability in the country, the IMF said in a statement.

"Directors agreed that the [IMF] can continue to play an effective role in supporting Turkey's efforts to entrench economic stability and tackle its remaining vulnerabilities," it said in a statement.

"Many directors considered that the fund should be prepared to explore all available options for future IMF engagement, and several underlined the importance of close consultations on policy targets with the fund," the statement continued.

LatAm closes week softer

Even as equities were posting a strong recovery from Thursday's losses, the dollar's added strength left Latin America feeling weaker into the week's end.

In Venezuela, protestors marched through Caracas in opposition to a supreme court ban on approximately 270 politicians who will be kept off ballots in November's regional and local elections.

The demonstrators claim the move is a power grab by president Hugo Chavez.

The ban is being reviewed by a team from the South American trade bloc Mercosur.

The 9¼% sovereigns due 2027 dropped 1.4 points to 88.5 bid.

Elsewhere in Latin America, prices were softer, but mostly unchanged, a syndicate official said.

Brazil's highly traded 11% bonds due 2040 were lower by 0.15 point to 131.9 bid.

Mexico's 5 5/8% bonds due 2017 were unchanged at 101.1 bid.

Of the highly watched issues, only Colombia's 7 3/8% bonds due 2017 improved during the session.

The bonds added 0.25 point to 109.25 bid.

Argentina falls farther

Argentina continued to see investors running from the credit, which has taken on a downward momentum separate from the rest of the sector.

The problems that are dragging under Argentina should not come as a surprise to anyone, a strategist said.

"It's been a factor for every investor when they decided to buy or not," he said.

Also, "we know the overall debt levels are the same or a little higher than in 2001 when they defaulted," he said.

Plus, "35% of the debt is linked to inflation," if the government were to correct the inflation situation "20% inflation means an extra $9 billion and change added to the debt," he said.

Buenos Aires is able to tap local debt markets, including friendly offers from neighboring Venezuela, but beyond 2011, the prospect for debt issuance is more dubious, he said.

The 8.28% Argentine discount bonds due 2033 shed another 2.25 points to 68 bid, 69 offered.

Asia trades mixed

Asian credit finished the week mixed, but the tone was nervous as impeachment neared in Pakistan and inflation inched higher in India.

In the Philippines, the central bank's dollar reserves hit $36.9 billion by the end of July, bank governor Amando Tetangco said, according the Manila Times.

The bank has a reserves assumption of $36.5 billion to $37 billion by the end of 2008, the report said.

Some believe the increase in reserves is based on the country's 12.2% inflation rate it posted in July, but many attribute the higher numbers to the sell-off of government-owned power assets.

The Philippine sovereign bonds due 2030 took on 0.6 point to 127.6 bid, 128.25 offered.

In Pakistan, allies of president Pervez Musharraf believe they have enough support to deny the ruling coalition the two-thirds parliamentary majority it will need to impeach him.

In the face of possible impeachment charges by the Pakistan People's Party (PPP) and the Pakistan Muslim League (PML), Musharraf seems nervous, according to a BBC analyst.

The president cancelled his trip to Beijing to attend the opening of the Olympic Games.

In India, inflation topped 12% at the end of July to set a new 13-year record.

Recent rate hikes have not proven effective at lowering the rapid inflation of the rupee.

The Indian consumer has been damaged by the inflation, but many hope the falling price of oil will help to ease the pressure.

The rupee was seen trading at 41.98 to the dollar.

Indonesia sets sukuk date

In Indonesia, the government has set the issue of its first sukuk on Aug. 26, according to the Jakarta Post.

The rupiah-denominated bond will have between a seven- and 10-year tenure.

PT Danareksa Sekuritas, PT Mandiri Sekuritas and PT Trimegah Securities will act as bookrunners for the deal.

Depending on the success of the offering, a dollar-denominated sukuk will follow in October or November.

The bonds are likely targeted at investors in the Middle East, a strategist said.

Indonesia's benchmark bonds due 2017 were lower by 0.625 point at 99.125 bid, 100.25 offered.

"If they can buy Lebanon, I'm sure they can handle Indonesia," he said.

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