August 3, 2011
Investors weigh pros and cons of Iraq debt
Iraq's hydrocarbons sector has been slowly turning a corner, supported by investment by international oil companies. Now, investors are turning their attention to the country's debt.
In 2004, after the US invasion of Iraq and the subsequent toppling of Saddam Hussein, the former president, the Paris Club of 19 western creditors agreed to forgive roughly 80 per cent of the $37.2bn owed to them.
Gabriel Sterne, senior economist at London-based Exotix, the illiquid debt specialists, says Iraq's public and external debt is heading towards a "firmly sustainable footing". Mr Sterne forecasts that Iraq's debt to gross domestic product ratio will be less than 40 per cent by the end of 2011, compared with 552 per cent before the Paris Club agreement.
"With oil revenues buoyant and production volumes set to increase, we still think the risk-reward trade-off is acceptable on the eurobonds," Mr Sterne wrote in a recent note.
The mood of optimism is shared in Baghdad. Iraq may sell its first bonds since 2006 next year, Bloomberg reported last month, citing Waleed Eedi, a director-general at the central bank of Iraq. Mr Eedi put Iraq's total debt at about $40bn compared with $135bn eight years ago.
Not all investors are as bullish as Mr Sterne, however. "Iraq is an interesting credit and we think that the country is attracting FDI and getting back on its feet. But the yield just isn't attractive enough," says Daniel Broby, chief investment officer at London-based Silk Invest.
The yield on Iraqi bonds is about 6.7 per cent, according to Silk Invest. "It's a medium-term story. It's not going anywhere fast," Mr Broby says.
There is also the vexed issue of bilateral Arab debt, owed mainly to Kuwait and Saudi Arabia. Mr Sterne says this debt is not being serviced but, equally, neither is it being enforced by the two Arab neighbours.
The outlook is underpinned by plans to develop the oil sector to boost output to an ambitious 12m barrels a day within six years, from the present 2.6m b/d.
While analysts are sceptical that this will be achieved, the International Monetary Fund estimates Iraq's economy will grow 9.6 per cent this year and 12.6 per cent in 2012 as oil production rises. Inflation is forecast at 5 per cent for the next two years.
As ever, boosting oil production relies on political stability. Negotiations over whether US troops will remain in Iraq beyond the end of this year are critical.
"It's a matter of security and once that is solved, really the sky's the limit in terms of the growth potential for Iraq, in terms of the demographics and the supply-demand issue," says Sherif Salem, portfolio manager at Invest AD. "It's going to be a bumpy road in the short term but in the longer term, given Iraq's importance, it is in people's interests that Iraq gets through this."
http://www.zawya.com/story.cfm/sidZAWYA20110804060152/Weighing_Pros_And_Cons
Investors weigh pros and cons of Iraq debt
Iraq's hydrocarbons sector has been slowly turning a corner, supported by investment by international oil companies. Now, investors are turning their attention to the country's debt.
In 2004, after the US invasion of Iraq and the subsequent toppling of Saddam Hussein, the former president, the Paris Club of 19 western creditors agreed to forgive roughly 80 per cent of the $37.2bn owed to them.
Gabriel Sterne, senior economist at London-based Exotix, the illiquid debt specialists, says Iraq's public and external debt is heading towards a "firmly sustainable footing". Mr Sterne forecasts that Iraq's debt to gross domestic product ratio will be less than 40 per cent by the end of 2011, compared with 552 per cent before the Paris Club agreement.
"With oil revenues buoyant and production volumes set to increase, we still think the risk-reward trade-off is acceptable on the eurobonds," Mr Sterne wrote in a recent note.
The mood of optimism is shared in Baghdad. Iraq may sell its first bonds since 2006 next year, Bloomberg reported last month, citing Waleed Eedi, a director-general at the central bank of Iraq. Mr Eedi put Iraq's total debt at about $40bn compared with $135bn eight years ago.
Not all investors are as bullish as Mr Sterne, however. "Iraq is an interesting credit and we think that the country is attracting FDI and getting back on its feet. But the yield just isn't attractive enough," says Daniel Broby, chief investment officer at London-based Silk Invest.
The yield on Iraqi bonds is about 6.7 per cent, according to Silk Invest. "It's a medium-term story. It's not going anywhere fast," Mr Broby says.
There is also the vexed issue of bilateral Arab debt, owed mainly to Kuwait and Saudi Arabia. Mr Sterne says this debt is not being serviced but, equally, neither is it being enforced by the two Arab neighbours.
The outlook is underpinned by plans to develop the oil sector to boost output to an ambitious 12m barrels a day within six years, from the present 2.6m b/d.
While analysts are sceptical that this will be achieved, the International Monetary Fund estimates Iraq's economy will grow 9.6 per cent this year and 12.6 per cent in 2012 as oil production rises. Inflation is forecast at 5 per cent for the next two years.
As ever, boosting oil production relies on political stability. Negotiations over whether US troops will remain in Iraq beyond the end of this year are critical.
"It's a matter of security and once that is solved, really the sky's the limit in terms of the growth potential for Iraq, in terms of the demographics and the supply-demand issue," says Sherif Salem, portfolio manager at Invest AD. "It's going to be a bumpy road in the short term but in the longer term, given Iraq's importance, it is in people's interests that Iraq gets through this."
http://www.zawya.com/story.cfm/sidZAWYA20110804060152/Weighing_Pros_And_Cons
