DUBAI: Iraqi bond yields fell more than three times as much as the average on Middle Eastern debt as Opec’s second-biggest producer pumped the most oil in 33 years and agreed to restore crude exports from its Kurdish region.
The rate on 5.8 percent dollar-denominated Iraqi government bonds maturing in January 2028 has dropped by 216 basis points from June 1 and stood at 6.48 percent on October 31, according to data compiled by Bloomberg. That compares with a decline of 67 basis points in the average yield on regional debt over the same period, the HSBC/Nasdaq Dubai Middle East Conventional Sovereign U.S. Dollar Bond Index shows.
Iraq, which overtook Iran in June as the largest producer behind Saudi Arabia in the Organisation of Petroleum Exporting Countries, is reviving its energy industry nine years after the U.S.-led invasion that toppled Saddam Hussein. Royal Dutch Shell, OAO Lukoil and other investors are helping to boost output at southern oil fields, and the government sees exports rising since it ended an impasse with northern Iraq’s self-ruled Kurds.
“That is a really positive signal for Iraq’s creditworthiness,” Liz Martins, senior economist at HSBC Holdings in Dubai, said. “The security environment has not improved. But recent numbers show that while this will clearly hurt the non-oil sector, investor confidence and quality of life in general, it does not have to hinder oil production volumes being ramped up.”
The spread between Iraqi sovereign bonds and US Treasuries has narrowed by 281 basis points since peaking this year at 757 on June 1, JPMorgan Chase & Co.’s EMBIG Sovereign Spread Iraq index shows. The spread was 476 basis points on October 29. The cost of insuring Iraq’s bonds for five years fell 50 basis points from an August 6 peak to 450 basis points ob October 29, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
“Iraq bonds have performed very well in the last few months,” Gabriel Sterne, senior economist in London at Exotix, an investment bank, said by phone Tuesday. “Since June 1, its spreads have performed in the top four of frontier economies we monitor.”
Iraq holds the world’s fifth-largest crude reserves, according to BP Plc, and is developing them ahead of schedule. It raised output capacity to 3.4 million barrels a day in September, four months faster than planned, Abdel Ilah Qassem, adviser to Deputy Prime Minister for Energy Affairs Hussain Al Shahristani, said on October 24. Iraq expects to pump as much as 6 million barrels a day by 2015, Shahristani said.
Crude exports, which generate 95 cents of every dollar in official revenue, rose 22 percent from January to September as the government eased bottlenecks to shipments from southern fields where energy companies are making most of their investments, according to the Oil Ministry. Two offshore mooring facilities for supertankers began operating this year, each adding about 800,000 barrels in daily export capacity.
The IMF forecasts Iraq’s economy to grow 10.2 percent this year and 14.7 percent in 2013. Of 20 countries in the Middle East and North Africa, only Libya is poised to expand at a faster pace, according to the IMF. “Capacity to repay is not an issue,” said Sterne of Exotix. “Investor concern is 95 percent politics and governance.”
Resurgent violence could threaten further improvements in this nation of 33 million people. Attacks in Iraq have escalated since the US withdrew its last combat troops in December, leaving 3,036 civilians dead in the first eight months of this year compared with 2,695 in the same period in 2011, according to the Iraq Body Count website.
Corruption, a political deadlock between Prime Minister Nuri Al Maliki and his opponents, and a possible spill-over of the war in neighbouring Syria pose additional “daunting challenges,” said Stuart Bowen, the special US inspector general for Iraq reconstruction. Even so, Bowen sees progress in Iraq’s record electricity production and highest crude output since 1990, he said.
Maliki’s central government and Kurdish authorities agreed last month to resume crude exports following a halt of about four months amid a dispute over oil revenue and contract terms with foreign companies. The two sides have yet to agree on an energy law that would help resolve their differences.
Iraq’s cabinet approved a $118.5bn budget for 2013, 18 percent larger than this year, as the nation strives to rebuild roads, airports, and industries following decades of war and sanctions. The Oil Ministry has signed 19 contracts with ExxonMobil, Total SA and other international oil companies since 2003. It plans to complete three additional contracts next week.
“Iraq’s bonds will continue to improve and become more and more attractive because the country’s economy is growing fast regardless of the violence,” Mudher Saleh, deputy governor of the country’s central bank, said recently.
WP-Bloomberg
