Emerging market spreads tighten in thin trade; Philippines falls on court decision

By Reshmi Basu and Paul A. Harris

New York. July 1 - Spreads for emerging market debt tightened Friday in sparse trading as investors chose not to add more risk ahead of a holiday weekend in the United States.

This week saw emerging market bond funds show inflows of $142.9 million for the week ending June 29, according to EmergingPortfolio.com Fund Research.

In primary market action Friday, South African cellular company Cell C tapped the dollar market just two days after issuing euro-denominated paper.

Cell C priced an upsized offering of $270 million of 10-year notes (B1/Caa1) at par to yield 11%.

On Wednesday, the company issued €400 million of seven-year notes (BB-/B2) at par to yield 8 5/8%.

Citigroup managed both deals.

EM spreads narrow

Overall, emerging market debt saw light volume Friday. Although spreads compressed to what one analyst described as record tights, price action was downwards. During the truncated session, the JP Morgan EMBI+ Index fell 0.17% while spreads tightened by nine basis points to 298 basis points.

Across the board, sovereigns ticked lower. The Brazil C bond was down 1/8 of a point to 102¼ bid while the bond due 2040 fell half a point to 119¾ bid. The Mexico bond due 2009 slipped 0.35 to 118.95 bid. The Russia bond due 2030 dipped 0.118 to 111½ bid.

Meanwhile, spreads for Asian names were firm at Friday's close in Asia, according to a source, who added that Hanaro Telecom rallied by a ½ point on the company's decision not to issue more bonds.

And the postponement of Thai Aromatic's offering of $300 million in seven-year bonds helped other Thai petrochemical companies make strides, said the source, resulting in a three to five basis points narrowing for those names.

Philippines down on court vote

The long end of the curve for the Philippines was under pressure as political uncertainty rattled investors.

President Gloria Arroyo is fighting allegations that she rigged last year's presidential election. On Wednesday, it was announced that her scandal-prone husband was heading out of the country indefinitely.

Despite all the pressure, Philippine bonds have held up well since the start of the scandal, which one investor in Asia finds unbelievable.

"Everybody is startled, especially me," said the source.

"This can't be explained by improved fundamentals only but also due to the fact that there are no real contenders who could stand up against Arroyo.

"The fact that her husband is leaving the country and has therefore no influence on politics seems ridiculous to me."

However on the political side, the scandal is in its preliminary stages, hence it may a premature decision to dismiss the political risk just because there is not one clear leader yet, said an emerging market analyst.

"Susan Roces, the widow of Fernando Poe, has only this week emerged as a potential figurehead for the opposition, so in a week or two the opposition may have a clear leader," he said.

Roces has called for the immediate resignation of Arroyo. Her husband was Arroyo's closest rival in the close 2004 election.

Meanwhile in trading Friday, the bonds moved lower by another point on news that the Supreme Court suspended planned VAT increases, said the analyst at late morning.

"That would go right to the heart of the good fundamentals argument - without those VAT tax increases the fundamentals look a lot worse," he said.

Nonetheless, in general, the nation's paper has shown resilience, perhaps stemming from the overall strong performance of the emerging markets asset class, cited the investor.

"Take a look what emerging markets in general are doing," added the investor.

"That in spite of the fact that the Fed will keep on raising short term rates, there is just too much liquidity floating around globally and I think the big players take into consideration that the Fed might go on a lowering cycle again come mid 2006."

Both the investor and analyst agreed that the scandal has not produced a buying opportunity.

"I was hoping for that and expected the benchmark '25 going below 110. Alas, nothing doing. Asking price is still above 113.

At session's end, the bond due 2025 was bid at 110¾ bid, down 1¾ points.

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