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Beirut extends debt maturity amid low yields

The Finance Ministry building is seen in Beirut, Lebanon, Monday, Jan. 16, 2012. (The Daily Star/Mahmoud Kheir)

Lebanon’s borrowing costs tumbled more than its Middle East peers last month, giving the nation a window to extend maturities on $1.53 billion of bonds even as a civil war in neighboring Syria crimps growth and tourism.

The nation’s bonds due in 2015 yielded 4.19 percent on Nov. 30, down 12 basis points for the month and 90 basis points, or 0.90 of a percentage point, since August, data compiled by Bloomberg show. Lebanon is rated B1 by Moody’s Investors Service, two levels below Jordan, whose bonds maturing the same year fell in November, lifting the yield seven basis points to 4.85 percent.

Lebanon’s yields fell two times more than Middle East sovereigns in the past three months as investors downplayed a widening budget deficit that reflects slumping tourist visits and economic growth hindered by fighting in Syria that’s killed more than 40,000 people. Lebanon last month extended maturities on notes valued at $701 million by at least five years.

The move was a “wise decision,” said ex-Finance Minister Jihad Azour, who is now vice president and senior executive adviser at Booz and Co. “It is, in fact, a way for authorities to address ahead of time the risk of rollover.”

In the swap, the yield was set at 5.15 percent on the bond due November 2018, according to a banker familiar with the transaction. It was fixed at 6 percent for the January 2023 bond and 6.75 percent for the November 2027 bond. The average yield on Middle East sovereign debt fell 43 basis points in the past three months to 4.02 percent, according to HSBC/Nasdaq Dubai’s Middle East Conventional Sovereign U.S. Dollar Bond Index.

The International Monetary Fund forecasts a budget deficit of 8.3 percent of gross domestic product in 2013, compared with 7.9 percent this year. It forecasts a current-account deficit of 6.7 percent of GDP this year, rising to 6.9 percent next year.

Lebanon is the Arab world’s most indebted nation, with debt equal to 134 percent of GDP in 2011. Most of the country’s bonds are held by local financial institutions, according to the Central Bank.

Azour said in an interview last week there was a need “for additional clarity” about the debt management and “the medium-term approach that the government is going to use to curb the deficit and to lengthen the maturity profile of the debt and to show that fiscal sustainability is attained especially with an economy that is not going very fast.”

In the long term, “if the government fails to reduce its budget deficit and continues with a policy paralysis and delays much-needed structural reforms, we would not exclude a deterioration in Lebanon debt dynamics soon,” Alia Moubayed, London-based senior economist at Barclays Plc, said by email.

Lebanon’s $39 billion economy has been hurt by the crisis in Syria and the absence of Gulf tourists who, according to Central Bank Governor Riad Salameh, represent 40 percent of the consumer market. Lebanese banks in Syria have lost $400 million since the conflict began in March 2011, Salameh said last month. Tourism has shrunk as Gulf countries warned their citizens against traveling to Lebanon following threats of abduction.

At a conference last month, Salameh said the debt extension measure was “good” and has provided the treasury with more than $800 million as well as lowered the pressure of maturities in 2013.

The cost of insuring Lebanon’s debt against default has dropped to 425 basis points from 558 on Aug. 24, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Central Bank’s decision came ahead of next year’s parliamentary elections, which threaten to add to the political turbulence at home as rival political groups bicker over the rules that should govern the June 9 elections.

Lebanon cut its forecast for economic growth this year to 2 percent from an earlier estimate of 4-5 percent, Salameh told Bloomberg TV.

“You have stagnation and uncertainty,” said Nassib Ghobril, chief economist at Beirut-based Byblos Bank SAL. “You need a positive political shock to restore confidence to previous levels,” he added, suggesting something of a similar nature to the Doha Accord that was reached among rival factions in 2008, marking an end to a monthslong political crisis.

 
A version of this article appeared in the print edition of The Daily Star on December 06, 2012, on page 5.

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