Iraqi Bonds Struggle to Attract Investors
Arif Sharif and Lyubov Pronina | 07-09-2015, 07:56 AM | Iraq |
Conflict and low oil prices may drive down prices
Iraq’s effort to enlist bond investors in its fight against the self-proclaimed Islamic State and a collapse in the price of crude won’t come cheap.
The Gulf nation’s first trial in the Eurobond market in almost a decade means it may have to pay “double-digit” interest to lure investors, says Morten Bugge, who helps manage about $2.5 billion of emerging-market debt at Kolding, Denmark-based Global Evolution.
Iraq announced a $6 billion bond programme on 18 August and may hold sales meetings with international investors as soon as this month, people familiar with the matter say. “It’s an oil exporter with ISIS in their backyard which weighs negatively on the bond sale,” Bugge, Global Evolution’s chief investment officer, says.
“I am sure Iraq would wish for better timing”
Iraq has been struggling to contain the expansion of the Islamic State’s foothold a year after the radical Sunni group took the nation’s biggest northern city, Mosul, and captured Ramadi, the capital of Anbar province, three months ago. The government is borrowing to close a budget shortfall as
the fight against terrorism and oil’s decline by around 50 per cent in the past year sap government finances.
Compounding risks for investors is a selloff in commodity-exporting nations following mid-August’s yuan devaluation, while the Federal Reserve prepares to raise interest rates from near zero, Bugge says.
Middle East and North African countries are issuing bonds this year at the slowest pace since 2011, according to data compiled by Bloomberg. “I am sure Iraq would wish for better timing,” Bugge says.
The yield on Iraq’s only international bond jumped to a new high for the year on 20 August, climbing 19 basis points to 8.73 per cent. The country had to seek $1.24 billion of emergency financing from the International Monetary Fund in July after oil prices slumped to their lowest in six years. Crude contributes about 40 per cent of economic output.
“Iraq’s rating is very good in the current circumstances,” Majid Al-Souri, a board member of the Central Bank of Iraq said on 19 August. “It has huge fortunes of oil and gas and it can’t go bankrupt,” which will reassure investors, he said.
Fitch Ratings expects the country’s fiscal deficit to top 10 per cent of gross domestic product for 2015 because of lower crude prices, higher military spending and costs associated with the civil unrest.
Islamic State’s presence has put political risk in Iraq at the highest among any sovereigns it rates, Fitch said in August after it assigned the country’s bonds a speculative grade of B-. The assessment is on par with Cyprus and Jamaica and two levels above Greece and Ukraine.
The country’s foreign-currency reserves may drop to about $45 billion by the end of 2016, according to estimates by Exotix Partners. “Iraq is probably the most oil-dependent country in the world, so falling oil prices, really, really hurt this country,” Jakob Christensen, a London-based director at Exotix, says. Reserves “could drop significantly over the next two years if oil prices stay low and they don’t adjust,” he says.
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