Brazil's slide slows but worries remain; TuranAlem, Latvia price deals

By Reshmi Basu and Paul A. Harris

New York, March 25 - Another blasé news day left emerging markets generally flat but market worries about Brazil continued against the backdrop of rising political disenchantment in the country.

Meanwhile in primary action, Kazakhastan's Bank TuranAlem priced a $100 million add-on to its existing $300 million 10-year 8% bond and Republic of Latvia brought €400 million.

Brazil's debt finished essentially unchanged on the day.

The C-bond ended the session at 96.375 bid, flat to a little lower than Wednesday.

Other Brazilian issues were similarly around unchanged or a little lower.

And the Brazilian component of JP Morgan's EMBI index fell 0.11%. Its spread to Treasuries tightened by 3 basis points.

After three straight day of losses, the hits on Brazilian debt subsided - making holding ground a relatively good performance by comparison.

"Today they're recovering somewhat," said a buy-side source.

"The Brazilian C is slightly weaker, but they're pretty much unchanged. Even the 2040, which are the really liquid issue, are slightly down, but mainly unchanged. The 2020s, and the middle part of the curve, is up a little."

But investor nervousness has not waned, according to the buy-side source.

"I suppose people are a little nervous about what they're hearing with regard to the political situation more than anything else."

Critics inside the country of President Luiz Inacio Lula da Silva's tight economic policy have complained that the government is putting the capital markets ahead of the populace and are demanding a loosening of its economic policy.

And again this week, the fate of Lula's chief of staff Jose Dirceu was in question after he alienated two party allies.

Whether or not Dirceu leaves, the damage has been done, according to an emerging market analyst.

"On Dirceu, the rumors about him leaving may be false, but at this point it almost doesn't matter," he said.

"If he leaves, Lula looks like his cabinet is in disarray. If Dirceu stays, he remains a controversial figure and a lightning rod for criticism. Either way the political crisis continues."

However, the political scandal will have little impact, according to a buy-side trader.

"My reaction to the scandal is that unless it becomes bigger, what's new? It's par for the course. That's nothing new in Latin America and should not bother anyone," said the trader.

The Central Bank of Brazil released the minutes of last week's Monetary Policy Committee (Copom) meeting at which it made an unexpected cut of 25 basis points in the benchmark Selic rate to 16.25%.

Analysts had said that the minutes would be indicative of whether the interest rate cut was a political move to appease critics.

In the minutes the Central Bank said that "the risk of missing the 2004 inflation target decreased," which allowed it to cut rates.

However, the cuts were a political maneuver, according to the emerging market analyst.

"The minutes were an exercise in damage control, trying to come up with an explanation for the Copom's unexpected rate cut which looked like it had been done under political pressure," said the analyst.

"It may be true that some evidence suggests that the risk of missing the inflation target is lower, but there's still plenty of evidence from Brazil's wholesale prices that inflation remains a risk.

"And the Copom had sent consistent signals, up until the latest meeting, that they would adopt a cautious stance. So no, I don't think the minutes did much to dispel concerns that the Copom is acting under political pressure," he noted.

Lula's government was due to head in the direction of favoring labor, according to the buy-side source.

"That's something I was expecting at this time last year, when I thought that the honeymoon would be over and he would start trying to satisfy his political base," said the buy-side source.

"I think those pressures have always been there and the way they have addressed it is by saying 'Let's try to stabilize everything and eventually we will get paid.'

"Getting paid is harder."

Furthermore, the source added that the "balancing act will continue."

Philippines holds firm

Overall the JP Morgan EMBI index fell 0.32% on the day while its spread to Treasuries tightened by three basis points.

But the performance of the Philippines attracted attention from one source - Thursday its component of the EMBI index rose 0.04% while its spread to Treasuries tightened by six basis points.

"Philippines has held pretty well over the past few weeks. If you want yield in Asia, that's where you have to go to get it," said the buy-side source.

"The Philippines is a highly levered country, not necessarily in external debt but in internal debt. So elections add to those concerns. But I wouldn't say that people are running away from the Philippines."

New deals from TuranAlem, Latvia

The primary saw two new offerings price.

Bank TuranAlem sold a $100 million add-on to its existing $300 million 10-year 8% bond at 98.75 (Baa3/BB-).

The issue came at the cheap end of talk of 98.75 to 99.00 but was much bigger than the minimum size of $50 million the bank had set for the deal.

The original offering priced at 98.32 to yield 8¼% on March 11.

JP Morgan and ABN Amro were bookrunners on the Rule 144A/Regulation S issue for the Almaty, Kazakhstan bank.

The Republic of Latvia priced €400 million of 10-year 4¼% senior notes (A2/BBB+) at 99.696 to yield 4.29%.

At 28 basis points over mid-swaps, the deal came at the tight end of talk, which had put the spread at 28 to 31 basis points.

Citigroup was the bookrunner on the sovereign issue.

Titan expected Friday

Among upcoming deals, Malaysia's Titan Petrochemicals & Polymers Bhd is now expected to price its sale of $300 million bonds due 2011 (Ba3/BB-) on Friday rather than Thursday.

Talk is for a yield in the 8% area.

Goldman Sachs & Co. and JP Morgan are running the books on the Rule 144A/Regulation S (with no registration rights) issue for the petrochemical company.

SK Telecom Co. Ltd.'s new bonds were seen at 116 basis points over Treasuries bid, 113 basis points offer at Thursday's close.

That was one basis point wider on the session but still two basis points better than when it priced.

The Seoul-based cellphone provider sold $300 million of seven-year notes at 99.271 to yield 4.372% on Tuesday, for a spread of 118 basis points.

Hutchison sees spotty buying

In trading Hong Kong's Hutchison Whampoa has seen trading settle down since the releases of its earnings on March 18.

In action Thursday, a trader saw "spotty buying" for the company's debt.

Hutchison's 6¼% bond due 2014 finished at 202 basis points bid, 198 basis points offered. Its 5.45% bond due 2010 ended at 215 basis points bid, 211 basis points offered. And the 7.45% bond due 2033 closed at 244 basis points bid, 239 basis points offered. Those levels were four, two and seven basis points wider respectively than last Friday's close, when movements settled down after several days of volatility.

On March 18, the telecom company reported its net profit for 2003 as whole was HK$14.38 billion compared with HK$14.36 billion a year earlier.

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