Bloomberg News

Lebanon Weathers Mideast Bond Selling as Union Buys: Arab Credit

October 06, 2011

Oct. 6 (Bloomberg) -- Lebanon’s bonds weathered the worst performance of regional markets in a year, beating OPEC member Qatar, as investors bet that Europe’s crisis won’t affect cash- rich domestic banks holding most of the country’s debt.

The average yield on regional sovereign bonds surged 18 basis points, the most since November 2010, to 5.15 percent on Oct. 4, according to the HSBC/NASDAQ Dubai Middle East Conventional Sovereign US Dollar Bond Index, as Europe’s debt crisis prompted investors to sell riskier emerging-market notes. The yield on seven of Lebanon’s bonds fell, while rising less than 10 basis points, or 0.10 percentage point, on its other 10 notes, the data show.

“I was buying and adding more Lebanese sovereign bonds since they seem relatively strong in this environment, like a relative safe haven,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market bonds at Union Investment Privatfonds in Frankfurt, said by e-mail on Oct. 4. The bonds are “supported by huge cash at Lebanese banks and still solid inflows from the Lebanese diaspora.”

Lebanese banks have no “exposure” to Europe’s sovereign debt because regulations restrict the scope of their investments, Central Bank Governor Riad Salameh, who has held the job since 1993, said in a telephone interview yesterday. The ratio of loans to deposits at domestic banks is about 35 percent, compared with 106 percent in Qatar at the end of August and 98 percent for the United Arab Emirates, of which Abu Dhabi is the capital, according to official data.

Safe Havens

Investors and analysts, including Nomura Holdings Inc. have touted the bonds of Qatar and Abu Dhabi as the safest assets in the Middle East and North Africa, largely because of their energy resources. Abu Dhabi holds about 7 percent of the world’s proven oil reserves while Qatar is the world’s biggest exporter of liquefied natural gas. Both are rated AA at Standard & Poor’s, the third-highest investment grade, while Lebanon is rated B, the fifth-highest junk grade.

The extra yield investors demand to hold Middle East debt over U.S. Treasuries fell seven basis points on Oct. 5 to 453, according to JPMorgan Chase & Co.’s EMBI Global index. Emerging- market debt spreads on average retreated nine basis points yesterday to 475, reversing a 22 basis-point jump over the previous two days, the data show.

Lebanon’s default risk fell for a second day, declining seven points to 433, according to data provider CMA. Credit default swaps for Qatar dropped six basis points to 127, while Abu Dhabi’s contracts declined to 128, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated markets.

‘Strong Banking System’

“The pillars of the Lebanese economy are a strong banking system supported by a respected central bank, domestic banks that hold and have a vested interest in public debt, and the U.S. dollar peg,” Philippe Dauba-Pantanacce, Dubai-based senior economist at Standard Chartered Plc, said by e-mail. “Contrary to its Gulf peers, the Lebanese sovereign debt is part of some of the major global emerging-market debt indexes, which implies that its debt will be bought almost automatically” by funds following benchmark measures, he said.

The yield on Lebanon’s 6.1 percent dollar bond due in October 2022 fell one basis point on Oct. 4 to 6.09 percent and another three yesterday, according to data compiled by Bloomberg. The yield on Qatar’s 5.25 percent dollar bond maturing in January 2020 surged 21 basis points to 4.15 percent on Oct. 4, before retreating seven basis points yesterday. The yield on Abu Dhabi’s 6.75 percent dollar bond due in April 2019 climbed 33 basis points to 3.97 percent on Oct. 4. The yield was little changed yesterday.

Political Wrangling

Still, domestic political wrangling and unrest in neighboring Syria slowed the Lebanese economy this year. The International Monetary Fund sees 1.5 percent growth in 2011, the slowest since 2006. Public debt reached about $52.6 billion last year, the equivalent of about 137 percent of gross domestic product.

The uprising in Syria against the rule of President Bashar al-Assad, which began more than six months ago, is hurting tourism in Lebanon, which many travelers reach via Syria. The number of visitors to Lebanon fell 24 percent in the first eight months of the year from the same period in 2010, according to the Tourism Ministry, which says the industry accounts for about a fifth of the country’s GDP.

The appetite of Lebanese banks for government bonds helps shield the securities from turmoil in international markets, Nassib Ghobril, chief economist at Beirut-based Byblos Bank SAL, said in a telephone interview yesterday.

Domestically Held Debt

“Foreign institutional investors hold a small percentage of Lebanese eurobonds,” he said. “Lebanese eurobonds have outperformed emerging market bonds because the overwhelming majority of Lebanese eurobonds are held domestically by Lebanese institutions.”

The stability of Lebanon’s pound, pegged at about 1,500 to the dollar since 1993, coupled with interest rates that were as high as 8 percent in 2008, have attracted a steady flow of funds into the country. Bank deposits grew 10 percent last year to $110 billion. About 66 percent of deposits are in foreign currencies, said Salameh, the central bank governor, who now sees demand for local-currency deposits rising.

“The demand for the Lebanese pound and the Lebanese paper has increased,” he said yesterday. “This is a clear sign of confidence.”

--Editors: Riad Hamade, Claudia Maedler

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Massoud A. Derhally in Beirut, Lebanon at mderhally@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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