Emerging market debt up on Brazil; Philippines seen launching $800 million-plus in September

By Reshmi Basu and Paul A. Harris

New York, Aug. 15 - Emerging market opened the week higher as Brazilian bonds rose in response to the absence of new developments surfacing in the ongoing Brazilian corruption scandal.

Meanwhile in the primary market, the Philippines is expected to begin a roadshow in September for a sovereign issue of between $800 million and $1 billion.

No further details about the bonds are available, nor have the syndicate banks been designated, one source said.

Moody's Investors Service assigns the Philippines its B1 sovereign rating. Both Standard & Poor's and Fitch rate the Philippines sovereign at BB-.

Also, Gerdau SA, Brazil's largest steel company, plans to sell a dollar-denominated offering of perpetual bonds on the international bond market.

HSBC and Citigroup will be the bookrunners.

The issue size and timing of the deal remain to be determined.

In separate news, Ecuador's newly named economy minister Magdalena Barreiro traveled to Caracas where she is expected to facilitate the direct placement of $300 million in five-year Treasury notes to the Venezuelan government.

The notes will pay an 8½% coupon and will probably have a one-year rolling guarantee provided by Corporación Andina de Fomento (CAF), according to an analyst note.

She is also expected to negotiate loans from CAF for $126 million to be used towards infrastructure projects, said the analyst.

The analyst added that it is unknown what Ecuador will have to give to Venezuela in return. The funding has become a necessity, given that the World Bank will not give Ecuador the $100 million from a previously committed structural adjustment loan.

The burning question is whether a closer relationship to president Hugo Chavez would hurt Ecuador in its negotiations with the International Monetary Fund. High oil prices are safeguarding Ecuador from a financing crisis this year. But without a deal in place with the IMF, 2006 could be a rocky year for Ecuador, noted the analyst.

Brazil up on no Lula news

In recent sessions, emerging markets have been moving money to U.S. Treasuries because of worries created by oil price spikes and the political drama in Brazil, said a Latin America debt strategist at Refco EM.

"Last week was the [president] Lula situation and oil," he added.

"Today [Monday], you didn't have much influence from Treasuries.

"This week we had no news on the Lula front. In this case, no news is good news," said the strategist.

A headline reprieve for president Luiz Inacio Lula da Silva meant an uptick for Brazil, as investors gained a little more confidence that the country's fiscal policy will not loosen, said sources.

The country's portion of the JP Morgan EMBI+ Index tightened by 10 basis points on the day. By The end of Monday, the Brazil bond due 2040 was bid at 118.70 and offered at 1183/4, up 0.70. The bond due 2012 was spotted at 118.15 bid, 118¾ offered, up three-quarters of a point.

Last Friday president Lula apologized to the nation over the allegations of corruption, which has battered his Worker's Party for three months. But he denied any knowledge of the "bribes for votes" scandal, during a nationwide televised address Friday.

One market source said there are members of the Brazilian legislature who are calling for Lula's impeachment.

But the source added that one has to keep in mind that the approval ratings for the legislature are a lot lower than Lula's approval ratings.

Lula's enemies are going to try to keep this scandal alive, but its impact upon the market will likely decrease as time goes on because people are going to eventually have to begin to think about the 2006 presidential elections, remarked the source.

The source added that there are two main contenders for the presidency: Lula and the mayor of Sao Paolo, Jose Serra. At the moment, Serra, who is a member of Brazilian Social Democrat Party, looks to have an edge, most likely as a result of the scandal.

The source added that some people are beginning to key on a possible Moody's upgrade of Brazil to low double-B, which would bring it in line with the Standard &Poor's rating.

That could lead to significant tightening, noted the market source.

Tracking oil

Investors have been worried about record-high oil prices, which have increased 46% over last year.

The market is concerned that high oil prices will translate into inflationary pressures.

Although oil prices fell sharply Monday, they still remain above $65 per barrel.

High prices will either spell good news or bad news on emerging markets, depending on the individual country. Oil producers such as Ecuador, Mexico and Venezuela will benefit. But oil spikes will take a toll on oil consumers, said sources.

During Monday's session, the Ecuador bond due 2012 was bid at 100½ bid, 101½ offered, up one point. The bond due 2030 was at 88½ bid, 89 offered, gaining half a point. The Mexico bond due 2026 was at 159½ bid, 161 offered, up one point. The Venezuela bond due 2027 was at 106.35 bid, 106.65 offered, adding three-quarters of a point.

"Like any economy, some are more efficient to absorb oil price shocks and some are not. I think in emerging markets, you can say they aren't," added the strategist.

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