Iraq Plans Bond as 3.3 Million Barrels a Day Gushes: Arab Credit

An oil refinery in Kirkuk
An oil refinery stands in Kirkuk, north of Baghdad. Iraq is pumping 3.3 million barrels a day amid attacks that killed more people in the first nine months of this year than in all of 2012. Photographer: Marwan Ibrahim/AFP/Getty Images

Iraq plans to sell bonds for the first time since 2006 as surging oil revenue pushes borrowing costs lower even as sectarian violence in the nation escalates.

“We formed a committee to decide on the details for the bond issue, which will most probably be of medium- to long-term maturity,” Deputy Finance Minister Fadhel Nabi said in an Oct. 22 phone interview from Baghdad. “The joint committee from the Finance Ministry and the central bank will also decide on the timing, which can be within a year,” he said, declining to give more details.

Iraq, with the world’s fifth-largest oil reserves, boosted income from crude sales by 23 percent from June to August and earned $6.5 billion in September, data compiled by Bloomberg show. The country is pumping 3.3 million barrels a day amid attacks that killed more people in the first nine months of this year than in all of 2012. Government debt as share of gross domestic product should drop to 25 percent this year from about 800 percent a decade ago, Standard Chartered Plc said Oct. 20.

The extra yield investors demand to hold Iraq’s dollar bonds rather than Treasuries has tumbled 143 basis points, or 1.43 percentage points, since this year’s June 25 peak to 510 basis points today, according to JPMorgan Chase & Co.’s EMBI Global indexes. The spread between Treasuries and Middle Eastern bonds narrowed by 37 basis points in the period.

Attractive Yield

“Iraq’s yield is very attractive, underpinned by strong government finances and a fiscal position,” said Ahmad Alanani, Dubai-based director for the Middle East at Exotix Ltd. “I’d take Iraq risk today over some of the more vulnerable places in the Middle East.”

The yield on Iraq’s 5.8 percent dollar bond maturing in January 2028 dropped to 7.277 percent today from a high for this year of 8.803 percent on June 24, according to data compiled by Bloomberg. The bond began trading at about 9 percent in 2006.

Iraq issued $2.7 billion in securities to help restructure debt accumulated during the era of former President Saddam Hussein. The bond is the country’s only dollar-denominated debt and equates to about 1.2 percent of 2012 gross domestic product, Geoffrey Batt, managing director of the $82 million Euphrates Iraq Fund, said in an Oct. 22 e-mail.

“It’s tiny compared to Iraq’s financial resources, and there’s little doubt the country can meet its obligations,” he said.

Easier Borrowing

As government borrowing continues falling as a share of GDP, Iraq may find it easier to return to capital markets, particularly for long-term infrastructure projects, Standard Chartered said in its report this week.

Nabi, the deputy finance minister, confirmed in his interview that Iraq’s next bond would help pay to rebuild infrastructure damaged by decades of war and sanctions.

Even so, the government’s plan for a second bond is less than certain. Iraq said more than two years ago, in July 2011, that it would come to market in a year.

Iraq’s efforts to rebuild its economy 10 years after the U.S.-led invasion that ousted Hussein are hobbled by political in-fighting and sectarian strife. A dispute between the central government and the semi-autonomous Kurdish region led the Kurds to suspend oil exports through a national pipeline in December.

Growth Forecast

The International Monetary Fund scaled back its forecast for Iraq’s 2013 economic growth rate to 3.7 percent from an initial estimate of 9 percent, according to the IMF’s website. The economy will still expand fast enough to lead the Middle East by 2018 with projected growth of 9.6 percent, the IMF said.

Car-bombings and other acts of violence, aggravated by the civil war in neighboring Syria, have intensified this year, leaving about 5,740 people dead through September, according to the United Nations Assistance Mission in Iraq. The Iraq Body Count, an unofficial website, estimates that 4,574 were killed in all of 2012.

“There is an element of investor complacency or apathy,” said Alanani of Exotix. “Investors are shrugging away all the violence and disturbances.”

Exxon Mobil Corp., OAO Lukoil and other oil companies helped Iraq boost production by 24 percent in 2012 and become the second-largest producer in the Organization of Petroleum Exporting Countries. The government is increasing spending by 18 percent this year to $118 billion.

Iraq is poised to restore export capacity to about 2.5 million barrels a day from its southern port of Basra, after maintenance work and bad weather cut shipments, Deputy Prime Minister Hussain Al-Shahristani said Oct. 16. It will increase this capacity to 4 million barrels by the end of March after completing a fourth floating terminal, he said.

“Despite the violence, the market can absorb a new issuance from Iraq, and there will be demand for it,” Alanani said.