Middle East Turmoil Beaten by Argentine Inflation in Yields: Arab Credit
Middle Eastern bonds have been offering a lower yield premium than Latin American debt for the longest stretch in six years, as Argentine and Venezuelan inflation concerns investors more than Arab uprisings.
The spread over U.S. Treasury bonds has been narrower for Middle East debt than for securities issued in Latin America since Nov. 12, JPMorgan Chase & Co. data show. Corporate bonds in the Middle East are also returning more this year.
While many Latin American economies are transparent and well managed, “growth is the next hurdle for some countries there because of inflation,” Stuart Culverhouse, chief economist at Exotix Ltd. in London, said in a telephone interview. Middle Eastern borrowers, meanwhile, have enjoyed renewed investor confidence after Dubai last year avoided default by renegotiating almost $25 billion in debt, he said.
Governments in the Persian Gulf, which holds more than half the world’s oil reserves, are also benefitting from crude prices averaging almost $100 a barrel in New York this year, almost 60 percent higher than 2009. The region’s biggest energy producers, including Qatar and the United Arab Emirates, have mostly been spared the popular uprisings that have toppled two leaders and threaten others in Yemen, Syria and Libya.
The yield gap between Middle Eastern debt and U.S. Treasuries was 328 basis points on July 1, against 349 basis points for Latin American issuers, JPMorgan data show. The average gap is 46 basis points this year compared with 18 last year, and it peaked at 69 points in April.
Venezuela’s May inflation rate of 22.8 percent was the highest among 78 economies tracked by Bloomberg. Opposition lawmakers in Argentina last month charged the government with distorting inflation figures and said the real rate is more than double the 9.7 percent reported for May.
The extra yield investors demand to buy government bonds from Venezuela, the holder of Latin America’s largest oil reserves, instead of U.S. Treasuries was 1,086 basis points on July 1, the most of any developing nation in JPMorgan Chase & Co.’s EMBI index.
Saudi Arabia, the largest Arab economy, and Qatar, the top exporter of liquefied natural gas, are set to grow faster and with slower inflation than the biggest Latin American economies, forecasts by Standard Chartered Plc show. Both have remained mostly isolated from the turmoil in the Middle East.
“The situation leads one to be constructive on the Middle East in general, and then to differentiate further within the region for value,” said Philippe Dauba-Pantanacce, an economist at Standard Chartered, in a phone interview from Paris June 27.
The Saudi economy is forecast to expand 7.5 percent this year, almost double last year’s pace, the Washington-based IMF said. Qatar may expand 20 percent this year, the International Monetary Fund said in April. Together with the U.A.E., the countries hold 28 percent of the world’s oil reserves and 21 percent of its natural gas, according to data compiled by Bloomberg.
The yield on Qatar’s 4 percent dollar bonds maturing January 2015 declined 800 basis points to 2.471 percent on July 1 from its high for the year on March 2.
Dubai, rebounding from a 2009 debt crisis sparked by a slump in property prices, is among the Middle East’s top performers this year. Support from Abu Dhabi, which holds about 7 percent of the world’s oil and lent money to its neighbor, helped speed the recovery.
“Dubai has gone from being a source of global disruption to a situation of confidence that the backstop is rock solid,” said Gabriel Sterne, a fixed income economist at Exotix.
Government-run utility Dubai Electricity and Water Authority’s 7.375 percent bond due in Oct. 2020 has returned more than twice as much as Centrais Electricas Brasileiras S.A.’s 6 7/8 percent bond due in 2019. The $1.5 billion Dubai issue has returned 10.08 percent compared with 4.07 percent on the $1 billion Brazilian utility bond, according to Bloomberg data. Both companies are rated BBB-, the lowest investment grade, by Standard & Poor’s.
Regional yields fell to 5.092 percent on July 1, from a nine-month high of 5.97 percent on March 18, according to the HSBC/NASDAQ Dubai Middle East Conventional Total Return Index. The average yield on emerging market debt fell 303 basis points in the period to 5.978 percent, according to JPMorgan Chase & Co.’s EMBI Index. One hundred basis points equal one percentage point.
Net private capital inflows to emerging economies may reach $1 trillion in 2011 and rise to $1.1 trillion next year, according to a June 1 report by the Institute of International Finance.
Yields on Middle Eastern borrowing widened last week on investor concern that a default in Greece may hurt economic growth. The Greek government won a vote in parliament June 29 on an austerity plan that will help it meet conditions for further aid from its European Union partners.
Another problem for Middle East investors is a lack of transparency in governance, Exotix’s Culverhouse said. Other risks may include renewed debt trouble in Dubai, or higher inflation as Gulf oil producers ramp up spending to stave off political unrest. The Saudi government has pledged about $130 billion for housing subsidies, new jobs and pensions. That’s a stimulus so big it will overflow into other Gulf countries, London-based Capital Economics said in a March report.
“There is a risk premium here,” said Dauba-Pantanacce of Standard Chartered. “For the investor who knows where to look, there tend to be very healthy yields and returns.”
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