Lebanon’s borrowing costs dropped to close to a record low as investors dismiss the effect of Syria’s crisis on banks in the most indebted Arab nation. The yield on the 6.6 percent bonds due November 2026 fell 31 basis points this year to 6.25 percent at 11:26 a.m. in Beirut, three basis points above the March all-time low, data compiled by Bloomberg show. Average sovereign bond rates in the Middle East declined six basis points to 5.75 percent in the same period, the JPMorgan EMBIG Mideast Sovereign Yield index shows.
Lebanese banks have set aside provisions and reduced their exposure to Syrian businesses by 40 percent in the past 15 months, Central Bank Governor Riad Salameh said on May 11. While the measures may lead to slower earnings growth, they insulate the lenders from a possible spillover of the crisis, he said. Economic growth quickened to as much as 3.5 percent in the first quarter after no growth in the year-earlier period as airport traffic rose and tourism in Beirut recovered, Salameh added.
“Lebanon has often proved resilient during bouts of regional upheaval and Lebanese sovereign debt can be seen as a regional safe haven supported by a loyal Arab investor base,” Michael Hansen, who helps manage about $1 billion in emerging-market debt as a senior strategist at Global Evolution AS in Kolding, Denmark, said by email Tuesday. “All in, we’re comfortable with the situation in Lebanon and hold a small position in local Lebanese debt.”
Credit default swaps on Lebanon’s debt sank 27 basis points in 2012 to 445 on May 1, the lowest since December, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. They were at 446 Tuesday.
Syrian President Bashar Assad is fighting a nationwide rebellion that has spread as security forces kill thousands. Syria, which is under international sanctions, is Lebanon’s only land access for exports and tourism.
Billions of dollars have been moved out of Syria, some of which have been deposited in Lebanese banks that are heavily invested in local debt, according to Samer Mardini, vice president of fixed income and Islamic finance products at Dubai-based SJS Markets Ltd.
“Lebanese banks were already liquid before Syrian money came in, and they’re big investors in the country’s debt,” Mardini said in a telephone interview Tuesday. “They would surely use the excess cash to buy more bonds.”
Deposits in Lebanese banks grew at an annualized rate of 8 percent this year, the same as during all of last year, the Central Bank governor said last week. Balance sheets of banks in Lebanon grew by an annual 11 percent in January, according to Central Bank data.
Banks “still have room and appetite to buy more, and they are not a seller of this debt during periods of market turmoil,” Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt, said by email Tuesday. “I still hold Lebanese debt and don’t intend to sell it.”
Some investors, such as Anthony Simond, London-based emerging markets investment analyst at Aberdeen Asset Management, say Lebanon’s Eurobonds are too expensive given that the nation’s debt is 134 percent of economic output. The International Monetary Fund forecasts a budget deficit of more than 8 percent for 2012 after 5.6 percent last year.
The country is rated B at Standard & Poor’s, five levels below investment grade, and B1 at Moody’s Investors Service, the fourth-highest junk rating. The cost of insuring Lebanon’s debt against default is the third highest in the Middle East after Egypt and Iraq, according to data provider CMA.
“We don’t see any value in the Eurobonds with the fundamentals so weak,” Simond said by email Tuesday. “The political and geopolitical risks remain high. The bonds are supported by the local banking sector which have kept yields at levels we consider too low for the risks associated with the credit.”
While the IMF estimates that economic growth will pick up to 3 percent this year from 1.5 percent in 2011, the expansion is still “well below Lebanon’s potential,” IMF deputy managing director Nemat Shafik said in a statement May 10.
The yield on local-currency government debt has risen about 50 basis points since March, in line with an IMF recommendation that higher rates would help spur bank demand for the securities. The yield on one-year notes now stands at 5.35 percent, compared with almost 16 percent in Egypt.
The concern “is that the government’s attempt to stay fairly neutral in the Syrian conflict proves unsustainable,” Gabriel Sterne, London-based economist at Exotix Holdings Ltd., said in an email Tuesday.
Still, the country is benefiting from a boost in emerging market funds, according to Emanuele Del Monte, who helps oversee about $1.5 billion in emerging-market debt at Fideuram Asset Management Ireland Ltd. Investment flows into emerging-market bond funds rose to an eight-week high in the week ending May 9, according to U.S.-based research firm EPFR Global.
“Emerging-market funds continue to receive inflows that eventually need to be invested,” Del Monte said in an emailed reply to questions Tuesday. “Foreign players have been underweight in the credit for quite some time and local players seem to have recently built a good level of cash.”
The rate on the country’s 5 percent dollar bonds due October 2017 fell to a record 4.92 percent on May 11, data compiled by Bloomberg shows. The yields rose to 4.95 percent Wednesday.
“We have seen a lot of demand from international investors in the last two weeks, especially on the long end of the curve. Prices tightened because of that,” Ray Majdalani, a Beirut-based fixed-income trader at First National Bank, said in an email Tuesday. Most of the buying focused on Lebanon’s 6.6 percent dollar bond due November 2026 which “has the highest yield and one of the cheapest spreads on the curve.”