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Iraq bond shelved again as clashes flare
Bloomberg
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A surge in sectarian violence in Iraq is weighing on crude oil exports and sending bond yields higher, prompting officials to shelve a planned debt sale.

“We will definitely issue new bonds, but it will take more time now with all the problems in the country,” Deputy Finance Minister Fadhel Nabi said in a phone interview Monday from Baghdad. The ministry is also adjusting to new leadership since Monday’s appointment of Safa al-Din al-Safi as acting finance minister.

Sectarian strife in OPEC’s second-biggest oil producer has intensified this year amid a political deadlock, with the death toll almost double what it was last year. Tensions between the Baghdad government and the country’s self-ruling Kurds compound the challenge, with the semi-autonomous region suspending oil exports via a national pipeline since last December.

The yield on Iraq’s 5.8 percent dollar bonds maturing in January 2028 rose 19 basis points from the end of September to 7.8 percent Thursday, according to data compiled by Bloomberg. That compares with a 4 basis-point decline to 5.2 percent in the average yield on regional sovereign debt as of Wednesday, the HSBC/Nasdaq Dubai Middle East Conventional Sovereign U.S. Dollar Bond Index showed.

The government’s plan for a second bond, which Nabi announced in October, is not assured. Iraq said more than two years ago, in July 2011, that it would come to market in a year to finance new infrastructure after decades of wars and economic sanctions, though it never did.

Energy services companies Baker Hughes Inc. and Schlumberger Ltd. temporarily halted operations last month after violent unrest in their work camps in the southern oil hub of Basra. Iraqi crude shipments dropped in the last quarter, even without the halt in Kurdish exports, because of maintenance and bad weather. The sales generated $7.33 billion in November compared with $8.36 in August, the Oil Ministry’s website shows.

Monthly crude exports rose in November to 71.4 million barrels from 69.8 million in October, Asim Jihad, a ministry spokesman, said Thursday in an emailed statement.

The government of Iraq, which holds the world’s fifth-largest crude reserves, has sparred for years with authorities in the country’s Kurdish north. Deputy Prime Minister for Energy Affairs Hussain al-Shahristani threatened Tuesday to take “necessary actions” if the Kurds started shipping oil through a new pipeline without government permission.

“Investor concern mainly comes because of all the bad news coming out of Iraq,” Robin Mills, head of consulting at Dubai- based Manaar Energy Consulting and Project Management, said by telephone Tuesday. “If I were a bondholder, the issues I’d be worried about wouldn’t be about oil exports. They would be much more to do with the geopolitics in the country – the violence, the instability, the chance that the central government might lose more control over parts of the country.”

A spillover from the civil war in neighboring Syria adds to investor concerns, he said.

Car bombings and other acts of violence have worsened this year, with more than 8,700 civilians killed as of Sunday compared with 4,568 fatalities in 2012, according to the unofficial Iraq Body Count website. Seven people, including five Iranians, were killed on Dec. 13 in an attack on workers building a pipeline meant to import natural gas from Iran. A roadside bomb killed two petroleum facilities guards Monday in Kirkuk, a northern area contested by the Kurds.

The premium for Iraqi sovereign bonds over Treasuries has widened by 32 basis points since the end of October to 540 Wednesday, JPMorgan Chase & Co.’s EMBI Global Iraq index shows. The comparable spread for Middle East government bonds fell 16 basis points to 414, according to JPMorgan.

The Federal Reserve said Wednesday that it was cutting its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding the unprecedented stimulus put in place to help the U.S. economy recover from the worst recession since the 1930s.

BP PLC Total SA and other international energy companies are helping Iraq ramp up its crude output, particularly at large oil fields in the south.

Production swelled by 24 percent last year as Iraq overtook Iran to become the biggest producer after Saudi Arabia in the Organization of Petroleum Exporting Countries. Iraqi fields produced 3.3 million barrels a day in November, and output will increase to 9 million barrels by 2020, Shahristani said on Nov. 25.

Still, political discord between Iraq’s ruling coalition and other groups, including Sunnis and Kurds, has blocked parliament from voting on this year’s state budget. The country has been unable to pass an energy law, and the government has been slow to invest in industries unrelated to oil.

 
A version of this article appeared in the print edition of The Daily Star on December 20, 2013, on page 5.
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