Merrill Lynch touts Venezuela, Turkey bonds, urges investors to cut Philippines, Colombia debt

By Paul Deckelman

New York, April 24 - Merrill Lynch & Co. on Tuesday recommended that investors in emerging market debt increase their holdings in Venezuelan and Turkish sovereign bonds - while at the same time cutting back on the amount of Philippine and Colombian government paper they hold.

With world crude oil prices having moved up to the mid-$60 per barrel level from their lows in the lower $50 range around the end of last year and showing every sign of staying up there or heading higher, especially heading into the summer driving season in the United States, that black gold "basically underpins the fiscal account" of Venezuela, one of the world's largest oil producers, making its debt quite attractive, Merrill Lynch analyst Pablo Goldberg told Prospect News.

In the research report issued Tuesday, the investment bank said that earlier concerns that investors would dump the Venezuelan sovereign paper in favor of the recently issued $7.5 billion of new bonds issued by the country's state-owned oil company, Petroleos de Venezuela SA, seem not to have materialized.

Noting that those oil company bonds were initially sold to local Venezuelan investors trying to get access to hard currency exposure, "the risk was that these investors would turn around and try to sell these bonds to the Street, and in that process, generate pressure on the country's bonds," Goldberg said, which caused Merrill to recommend a month ago that investors exercise caution in buying or holding the sovereign debt.

"Since then, Venezuela has really underperformed the rest of the countries" - but at the same time, there had been no huge exodus out of its sovereign paper, so now, it was "making sense to get back [into] Venezuelan debt."

Buy Venezuela, sell Colombia

At the same time that it was recommending an overweight on Venezuela, Merrill was recommending an underweight on the bonds of neighboring Colombia, which have recently run up handsomely on expectations that the Bogota government might continue buying back debt, as it has been doing over the past several years.

Goldberg said that it was not a case of Merrill seeing any kind of negative about the Colombian paper, so much as "which is going to outperform what, not necessarily with a negative view of Colombia, but [a question] of which investment could make more money at this point," with the previously underperforming Venezuelan bonds ready to make their move upward, while Colombia perhaps already having seen most of its upside.

Problems ahead for the Philippines

On the other hand, Goldberg said, Merrill had definite reasons for urging investors to cut their holdings in Philippine government bonds.

"In the case of the Philippines, we are worried about their fiscal position," he asserted, "and the duration of the fiscal problem." He said that "tax revenues have been underperforming, and we thought that could put into jeopardy [the government] reaching their fiscal targets."

Turkish election seen going smoothly

In urging investors to buy Turkish sovereign debt, "it's a combination of things," the analyst said - one of which is "the idea that the [upcoming presidential] election will be a smooth process."

The seven-year term of president Ahmet Sezer is scheduled to end on May 16, meaning his replacement must be chosen by parliament before then. The possibility that he might be succeeded by prime minister Recep Tayyip Erdogan - whose Justice and Development Party dominates the legislature - had roiled the financial markets, since secularists in the largely Muslim nation, including many of the army leaders, opposed him because he is a former member of a banned Islamist political faction.

However, in recent days, market buzz emerged that Erdogan would not go for the presidency - speculation which pushed the country's bonds up solidly. Sure enough, on Tuesday he took himself out of the running and nominated the country's foreign minister, Abdullah Gul, for the presidential post.

Goldberg also cited the acceleration of the Turkish government's program of privatizing some operations and assets, reducing the need for public-sector borrowing, as among other factors that Merrill feels makes the bonds attractive. And he noted a rise in foreign direct investment, helping to finance Ankara's current account deficit.

The investment bank also recommended that investors cut their holdings in Serbian government debt.

The analyst said that in Tuesday's dealings, Venezuela's bonds were up about ½ point and Turkey's about ¼ point, while Colombian and Philippine debt were each off about 0.10 point.

He said that the rise in Venezuela's debt in particular was "very impressive," coming as it did on a day when crude prices continued to languish around the levels to which they had fallen on Monday, when they slid $1.31 on the New York Mercantile Exchange to end at $64.58 for a barrel of light, sweet crude for June delivery.

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