Lebanese yields jump after Syrian spillover

Growth in the most-indebted Arab country is expected to remain below 3 percent for a third year in 2013.

Lebanon’s borrowing costs rose two times more than the Middle Eastern average this month, partly because of a spillover of violence from Syria that sparked renewed fighting in Tripoli.

The yield on Lebanon’s 8.25 percent bonds maturing in April 2021 gained 22 basis points this month to 6.03 percent at 2:08 p.m. Thursday in Beirut, poised for the biggest monthly increase in eight months, according to data compiled by Bloomberg.

That outpaces the 11 basis-point increase in HSBC/Nasdaq Dubai’s Middle East Conventional Sovereign U.S. Dollar Bond Index, while the yield on Iraq’s 2028 notes declined seven basis points.

Growth in the most-indebted Arab country is expected to remain below 3 percent for a third year in 2013, according to International Monetary Fund data.

The country has been on edge since the start of the mostly Sunni uprising against Syrian President Bashar Assad, an Alawite, two years ago, that has spread to Lebanese cities, including Tripoli and Beirut. The tensions were compounded by the resignation of Prime Minister Najib Mikati on March 22.

The decision significantly deepens the political divide and is a “credit negative” for the country, Mathias Angonin, an associate analyst at Moody’s Investors Service wrote in a March 26 note. It rates the country as B1, four grades below investment grade.

“Although the country has weathered previous political storms, the conflict in neighboring Syria has weakened Lebanon’s economy and government finances, both of which are now more vulnerable to political shocks,” Moody’s said.

The political crisis has contributed to the widening of yields, Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt, said by email.

“I expect more long-term consequences on the economic and social front from the Syrian crisis for Lebanon,” said Dergachev. “The current regional political uncertainty with Syria is not supportive for Lebanese credit at the moment.”

To be sure, all emerging markets have been hit by the rise in U.S. Treasury yields, Dergachev said. A really strong Lebanese sell-off would only be triggered by a “material escalation” in the region, such as a worsening of the Syrian conflict or of tensions between Israel and Iran, “where risks for the political landscape and its corresponding potential economic adjustment will be quite severe,” he said.

Mikati’s resignation was the culmination of months of bickering among political players over an election law and extending the tenure of a security chief. Clashes along sectarian lines have erupted between Assad opponents and supporters inside the country, which Syrian troops left only in 2005. Threats of abduction curbed Gulf tourism and a Syrian airstrike on suspected rebel trails strained relations with Assad’s government.

Lebanon is seeking to reduce the impact of Syria’s crisis on the economy, which may grow 2.5 percent this year after expanding at an average of 8 percent between 2007 and 2010, before the outbreak of the Arab Spring popular uprisings, the IMF said.

The Central Bank made LL2.2 trillion ($1.45 billion) available to banks in January for low-interest loans to boost real estate lending, as well as credit for small- and medium-sized companies and renewable energy projects. Banks will pay an interest rate of 1 percent for the money and extend the loans at a maximum rate of 6 percent, Central Bank Governor Riad Salameh said in an interview on Feb 16.

The government is also seeking to lower expenditures and increase revenue. Caretaker Finance Minister Mohammed Safadi said in e-mailed comments last week that the 2013 budget saw expenditures at 31.7 percent of output compared with 32.1 percent in 2012 and revenue increasing to 23.9 percent of gross domestic product from 22.5 percent in 2012.

“The main objective is to reduce the fiscal deficit in absolute terms and relative to GDP, and to stabilize or reduce the debt-to-GDP ratio,” Safadi said.

While the numbers in Safadi’s plan are good, “one year of numbers doesn’t count for much,” said Raza A. Agha, chief economist for the Middle East and Africa at VTB Capital Plc. “Lebanon needs a broad-based structured adjustment program where it fixes its problems.”

“You need commitment to fiscal reforms on a year-after- year basis given where your indicators are, and it’s very difficult to imagine that these numbers will be realized in the current political environment,” Agha said.

Mikati’s surprise resignation leaves the country with a caretaker government that cannot make fiscal reforms, said Jihad Azour, a former finance minister who now serves as vice president and senior executive adviser at consultancy firm Booz and Co., in Beirut.

“The target of Thursday is to preserve economic and financial stability while we navigate through this transition,” he added. “That is not an easy one.”

A version of this article appeared in the print edition of The Daily Star on March 29, 2013, on page 5.




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