• Home
• /
• Business

Mideast bonds may escape worst of Iraq war

LONDON In a world where financial markets appear to follow each other blindly, common sense would suggest war on Iraq should see Middle East bonds being sold off indiscriminately.

Yet, investors and analysts say the effects will not be uniform on countries whose economies and geographical proximity to any conflict are as varied as Qatar, Turkey and Morocco and need not have a devastating impact on bond markets.

"It seems counter-intuitive to see a major conflict in the region and having no effect on sovereign creditworthiness, but that appears to be the case," said James McCormack, Senior Director of Sovereign credit ratings at Fitch.

So far that appears to be the case, with most bonds from countries like Egypt, Morocco, Qatar and Tunisia having traded at lower risk premiums since the end of September and since the end of 2002, even as the tension has ratcheted higher.

Apart from Turkey, which accounts for four per cent of benchmark emerging market debt indices used by investors to guide holdings and measure performance, only Egypt from the region makes it into the global indices, with 0.7 per cent.

Bonds of these countries tend to be owned by locals - analysts estimate 40 per cent of Egyptian Eurobonds are held domestically - or by Gulf financial institutions and these tend to be stable investors.

This comforts external investors.

"We own the bonds of these countries and are very comfortable with ability to repay and we do not believe there will be a sell-off," said Rafael Kassin, emerging debt fund manager at ABN AMRO.

Any argument that the closer you are to a potential conflict increases immediate risk also cuts little ice.

"The reaction you will see among Middle East bond markets is not going to be an indiscriminate event, nor will it work in simple concentric circles, based on how far a country is from the war," said Marco Annunziata, Deutsche Bank's Chief Economist for emerging Europe, Middle East and Africa.

Countries like Turkey and Jordan, as well as to a certain extent Egypt, will benefit from a financial shield which the U.S. will provide for its allies in the region.

Analysts expect Turkey alone to be able to count on U.S. support of at least $10 billion, which will reduce the risk of holding Turkish dollar debt for investors.

Turkey's benchmark 2030 dollar bonds are trading at a risk premium of 678 basis points over U.S. Treasuries, compared with 952 bp at the end of September 2002 and 643 bp at the end of 2002.

Countries like Qatar, where the risk premium over its benchmark on its 2009 Eurobond is 165 bp today versus 299 bp at the end of September 2002 and 192 bp at the end of last year, offer niggardly yields in line with countries with similar credit ratings.
Egypt's 2011 dollar bond is yielding 273 bp over its benchmark compared with 535 bp over at the end of September and 319 bp towards the end of 2002.

Tunisia's 2012 bond is trading at 226 bp over its benchmark, compared with 376 bp at the end of September and 258 bp at the end of last year and Morocco's Tranche A of its Brady debt is at 436 bp compared with 668 bp in September and 559 bp at the end of last year.

Of the more exotic credits in the region, Jordanian Discount bonds are trading 516 bp wide of their benchmark, compared with 489 bp and the year end and 566 bp at end-September, while Algeria's tranche 1 bonds are 418 bp over their benchmark, compared with 486 bp at end December and 549 bp at end September.

Iran's 2007 Eurobond is trading at 423 bp over its benchmark, little changed from its issue of July last year.
However, once the immediate conflict dies down and oil prices subside, countries in the Middle East could face longer term problems.

In countries like Egypt and Algeria, there may be a political risk which could spill over into the economic arena if there are protests against the war, which could feed through into the economy as potential industrial investors in the country may re-assess their plans.

"For those countries in the region which are trying to liberalise, such as Egypt and Algeria, political disruption could feed through into less confidence from overseas investors and less of the FDI (Foreign Direct Investment) they need in the longer term," said McCormack at Fitch.