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Terrorists spur cost of Iraq eurobond experiment (may hold sales meetings with international investors as soon as September)
August 23, 2015
Iraq’s effort to enlist bond investors in its fight against the 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, said Morten Bugge, who helps manage about $2.5bn of emerging-market debt at Kolding, Denmark-based Global Evolution.
Iraq announced a $6bn bond programme last Tuesday and may hold sales meetings with international investors as soon as September, people familiar with the matter said.
“It’s an oil exporter with ISIS in their backyard which weighs negatively on the bond sale,” Bugge, Global Evolution’s chief investment officer, said.
Iraq has been struggling to contain the expansion of the Islamic State’s foothold a year after the radical 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 54% decline in the past year sap government finances.
Compounding risks for investors is a sell-off in commodity-exporting nations following the recent yuan devaluation, while the Federal Reserve prepares to raise interest rates from near zero, Bugge said. 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 said.
The yield on Iraq’s only international bond jumped to their highest this year, climbing 9 basis points to 8.72% at 1.22pm in Baghdad on Thursday. The country had to seek $1.24bn of emergency financing from the International Monetary Fund in July after oil prices slumped to their lowest in six years. Crude contributes about 40% 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 from Baghdad on Wednesday. “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% 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 this month 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 $45bn by the end of 2016, according to estimates by Exotix Partners.
[url=http://www.gulf-times.com/eco.-bus. news/256/details/452281/terrorists-in-the-backyard-to-spur-cost-of-iraq-eurobond-experiment]source[/url]
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