By Alaa Shahine and Dana El Baltaji
Lebanon is safer than Dubai for the first time since June in the market for credit default swaps as foreign investors bet demand from the country’s banks will offset the risk of buying the debt.
The cost of protecting Lebanon’s bonds against default for five years fell 5 basis points last week to 375, while Dubai’s contracts rose 3 basis points to 396, according to prices from CMA. Lebanon has a B1 credit rating at Moody’s Investors Service, four levels below investment grade, and B by Standard & Poor’s, the fifth-highest junk rating. Dubai isn’t rated.
Lebanon is the Arab world’s most indebted nation with about $52.6 billion in public liabilities, equal to 137 percent of the gross domestic product. Lebanese banks hold about 70 percent of the nation’s debt and are “highly” liquid with an average loan-to-deposit ratio of 35 percent, Credit Libanais SAL said in July. Dubai, whose holding company roiled global markets in 2009 as it sought a debt standstill, must repay about $31.2 billion by the end of 2012, the International Monetary Fund estimates.
“The ability and willingness of Lebanese banks to buy up government debt is a reason frequently cited why Lebanon would not default,” Liz Martins, the Dubai-based senior economist at HSBC Holdings Plc, wrote Aug. 21 in response to Bloomberg questions. “More than half of Lebanon’s debt is now domestic. That leaves about $21 billion in external debt, painful as a percentage of GDP, yes, but only about half of Lebanon’s reserves which stand at $46 billion including gold, and a fraction of Dubai’s obligations.”
Lebanon held the second-biggest gold reserves in the Middle East and Africa after Saudi Arabia as of March, according to data compiled by Bloomberg. Dubai raked up about $113 billion to become a regional financial and tourism hub, the IMF said in a report published June 16.
The yield on Lebanon’s 4.75 percent dollar bond maturing November 2016 rose 7 basis points, or 0.07 percentage point, since it began trading Aug. 2 to 4.69 percent yesterday. The rate on Dubai government’s 5.591 percent debt maturing June 2021 with a five-year put option soared 21 basis points this month to 5.59 percent, according to Bloomberg prices.
Lebanon’s credit risk rose to 379 yesterday, while Dubai’s declined to 386, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
“I can’t think of better value for your buck in the current climate than Dubai and Dubai Inc. provided one can stomach some volatility,” Ahmad Alanani, the Dubai-based head of fixed-income sales for the Middle East and North Africa at Exotix, said in an e-mailed response to questions on Aug. 22. “The fundamentals have improved to Dubai’s favor. The emirate has done a great job in terming out its debt profile and has commenced deleveraging.”
Cutting the Budget
State-owned Dubai World reached an agreement in March to restructure about $25 billion with creditors and the government took over the company’s property unit in July, Nakheel PJSC, following a $13 billion debt deal. The Persian Gulf business hub set up a $5 billion-bond program in June, and expects to reduce its 2011 budget deficit to 3.8 billion dirhams ($1 billion), the lowest in four years, according to the bond prospectus distributed via the Regulatory News Service.
Dubai’s government bond still yields 88 basis points more than the average rate on debt in the Middle East, which last traded at 4.71 percent on Aug. 19, the HSBC/NASDAQ Dubai Middle East Conventional US Dollar Bond Index shows. The index tracks 108 securities in the region, including 19 sovereign bonds from Lebanon.
“Lebanon has terrible credit metrics. Having said that, you have to consider that the technicals are very supportive,” said Emanuele Del Monte, who helps oversee about $1.5 billion in emerging-market debt at Fideuram Asset Management Ireland Ltd., in an e-mailed response to questions Aug. 16. Bond “supply is limited and above all domestic liquidity is abundant,” he said.
Lebanese lenders attracted deposits with interest rates as high as 8 percent and confidence in the Lebanese pound, which has been pegged at about 1,500 to the dollar since the 1990s. Lebanon’s banks largely avoided the global financial turmoil of 2008 and 2009 because Central Bank Governor Riad Salameh banned them in 2004 from buying non-Lebanese risky assets, including non-investment grade paper and derivatives.
Lebanon’s “public debt is not volatile, as most of the holders are institutions and individuals who are very familiar with political risks in the country,” Nassib Ghobril, chief economist at Beirut-based Byblos Bank SAL (BYB), the nation’s third- biggest bank, said in an e-mail yesterday. “Recent history has shown that deposit outflows have been rare despite long periods of political instability.”
Tumult in Syria
Unrest in neighboring Syria and political wrangling in Lebanon slowed the economy this year, Ghobril said. The country’s growth rate will drop to 2.5 percent in 2011, the lowest since 2006, according to IMF figures. The gross domestic product expanded by 7.5 percent last year.
Syria, Lebanon’s only land link with the Arab World, has been gripped since March by protests against President Bashar al-Assad’s 11-year rule. Assad backs the Hezbollah-dominated government of Prime Minister Najib Mikati, formed on June 13. His predecessor, Saad Hariri, lost power in January when Hezbollah and its allies resigned from the cabinet amid an investigation by a United Nations tribunal into the 2005 assassination of his father, Rafiq.
“Lebanon’s bonds look indeed safe to me,” Sergey Dergachev, who holds Lebanese debt and oversees $8.5 billion in emerging-market debt at Union Investment Privatfonds in Frankfurt, said by e-mail on Aug. 22. “Only a significant change to the worst in Syria, a complete fall of Assad regime with pure chaos, will lead to more risks of deposit outflows. And this could be a warning signal for debt.”