Reuters on Brazilian debt prospects.
October 27, 2002
Brazil Debt Seen Strong After Lula Win
By REUTERS
Filed at 7:06 p.m. ET
NEW YORK (Reuters) - Emerging market bonds were expected to
trade flat to higher this week in the wake of what early
results indicated would be a landslide by leftist Brazilian
presidential candidate Luiz Inacio Lula da Silva in
Sunday's election.
With 66 percent of the official ballots tallied, the burly
former metal worker and union boss had 61 percent to 39
percent for Jose Serra, the candidate of President Fernando
Henrique Cardoso's ruling coalition.
``When the market finally decided that Lula was going to
win and that his initial polices would be relatively
conservative and market friendly, we started to see a
rally,'' said David Rolley, emerging markets strategist at
Loomis Sayles & Co.
``We may see last week's higher levels sustained and we
could even trade higher depending on the early comments of
Lula and his transition team,'' he added.
Benchmark Brazil C bonds BRAZILC-RR ended last week bid at
57, after having traded 10 points lower in recent weeks
when market pessimism and fear of Lula was at its highest.
``By the end of this coming week I would expect to see C
bonds make a run at 60 cents on the dollar,'' Rolley said.
The bonds started the year trading in the mid 70s.
Returns on Brazilian debt have risen sharply so far in
October, but are still far lower than they were at the
start of the year.
``There should be a firm tone to the market, but a lot of
good news has already been priced in in terms of Lula
appointing a responsible economic cabinet,'' said Mike
Conelius, manager of the T. Rowe Price Emerging Markets
Fund.
``The upside is limited,'' he added.
Conelius said Brazil and all of Latin America is being held
hostage by an anemic world economy in which investors are
more likely to seek safe havens than dive into risky
emerging markets.
``It was never really a question of who won the election,''
he said. ``The problem with Brazil remains its massive
($260 billion) debt and without bullish global capital
flows I find it difficult to see Brazil getting through the
next year without some sort of debt restructuring.''
It has been a stomach-churning ride for Brazilian bonds
this year.
Wall Street and domestic Brazilian investors started 2002
convinced Lula would surge early in the opinion polls only
to fade late in the campaign and lose to a more moderate
candidate, as he had done in the previous three
presidential elections.
Brazil's country risk premium, essentially the additional
interest a nation must pay to borrow money, started the
year at 863 basis points, or 8.63 percentage points over
yields on comparable U.S. Treasuries, according to JP
Morgan's Emerging Markets Bond Index Plus. The risk premium
improved to 700 basis points in mid March.
But by late summer it had become clear Lula was running
stronger than expected. He widened his appeal by trading in
his working man's blue jeans for sharp business suits and
moderating his once fiery socialist rhetoric.
Voters bought it but investors were slow to embrace the
idea of ``Lula Light'' -- that he really had become a
moderate after personifying the hard left for so many
years. So as he consolidated his lead in the polls,
Brazilian bond spreads widened to a bruising 2,436 basis
points in late September, restricting economic growth by
making it almost impossible for Brazilian companies to
borrow money.
Since then, spreads have eased back to the neighborhood of
1,780 basis points as of the end of trade on Friday.
``As long as we see the Lula team continue to move in the
direction that they have outlined, the market should have a
pretty good tone,'' said Jim Barrineau, a vice president in
emerging markets research at Alliance Capital Management.
The market, Barrineau said, will be keen to see that Lula,
as president elect, indicates willingness to create an
independent central bank, increase the government's primary
fiscal surplus target, currently 3.75 percent of gross
domestic product, and enact tax and social security
reforms.
Lula would become Brazil's first working-class president
and his victory would mark a turning point for the country
-- and possibly for the rest of Latin America -- where
power has traditionally been held by the military or the
small, wealthy elite.
Copyright 2002 The New York Times Company. |
