Emerging Markets-Venezuela debt spreads narrow on strong growth

By Manuela Badawy

NEW YORK, Aug 19 (Reuters) - Venezuela's sovereign bond spreads narrowed on Tuesday as data showed the economy grew 7.1 percent in the second quarter, while spreads overall remained flat amid summer holidays.

Venezuela's portion of the JP Morgan's Emerging Markets Bond Index Plus (EMBI+) 11EMJ.JPMEMBIPLUS narrowed 10 basis points to 657 over Treasuries.

Total returns on the bonds rose 0.67 percent on the day, fueled by news of the economic rebound in Venzuela, after a slowdown earlier in the year when the government tried to rein in consumer price rises.

The OPEC nation's non-oil sector grew by 7.8 percent while the oil sector grew 3.2 percent, according to its central bank.

"It was a better than expected growth number and that appears to have lent some support to the bonds, surprisingly, because given the size of the shadow economy it is very hard to forecast what growth is going to be in a country like Venezuela," said David Spegel, global head of emerging markets strategy at ING.

"The fact that it overshot it shouldn't come as a surprise."

Venezuela's benchmark global bond due in 2027 VENGLB27=RR rose 0.312 to bid 91.250 in price and to yield 10.306 percent.

The rise in economic growth was supported by income from high crude oil prices which has funded a boom in construction and public spending that has also fed rampant inflation.

With oil prices above $110 a barrel, Venezuela is enjoying a consumer boom which has seen the rapid new construction of shopping malls in the capital and other major cities.

On Monday the government of President Hugo Chavez took over plants owned by the world's No. 3 cement maker Cemex (CX.N) (CMXCPO.MX) in a bid to run key industries. For details see [ID:nN19302009]

Meanwhile, Peru's sovereign credit rating was upgraded by Moody's to "Ba1" from "Ba2" putting one of the world's fastest-growing economies just one notch below investment grade.

Though investors welcomed the news, Peru already has investment-grade ratings from Standard & Poor's and Fitch, both of which upgraded the Andean country to "BBB-" this year. Those two investment-grade ratings have started to give Peru greater access to cheaper loans and more foreign investment.

The upgrade however, did not have an impact on the credit. Peru's benchmark global bond due in 2025 PERGLB25=RR traded down 0.187 to bid 111.813 in price and to yield 6.211 percent.

Meanwhile, overall spreads remained flat at 303 basis points over treasuries on the EMBI+ as investors stepped away for summer holidays.

"We are just in the height of the summer doldrums. A lot of investors are on holiday (any movement) that you are seeing on the screen is largely dealer driven. There is no real money coming into the market at all," Spegel said.

In other news, Colombia may relax some of the capital controls that have been imposed to keep the appreciation of its peso currency in check, President Alvaro Uribe said in a press interview published on Tuesday. For details see [ID:nN19303532]