Iraqi Oil Gushing Spurs Best Bond Rally in 11 Weeks: Arab Credit

Iraqi bond yields fell the most in almost three months last week as a recovery in the oil output of OPEC’s No. 2 producer outweighs concern that a political impasse is hardening amid rising violence.

The yield on Iraqi 5.8 percent dollar-denominated government bonds maturing in January 2028 fell 19 basis points last week, the most since the five days ending Oct. 19. Iraq’s yield dropped by 250 basis points in the past 12 months and was 6.2 percent today, according to data compiled by Bloomberg. That compares with a decline of 74 basis points in the average yield on regional debt over the period, the HSBC/Nasdaq Dubai Middle East Conventional Sovereign U.S. Dollar Bond Index shows.

Iraq’s self-governed Kurdish region has started to export oil on its own to overseas markets, while the rest of the country is boosting output and upgrading energy facilities hobbled by decades of war and economic sanctions. Production swelled by 24 percent last year, and Iraq overtook Iran in June to become the biggest producer after Saudi Arabia in the Organization of Petroleum Exporting Countries.

“Iraq’s oil production is so important that investors aren’t deterred by political or security concerns, as the nation has one of the world’s highest risk-reward returns,” Sanjay Motwani, president of Sansar Capital Management LLC, said yesterday by telephone. “Iraq is an interesting contrarian market, with one of the fastest economic growth rates in the world,” said Motwani, who runs Sansar Capital Frontier Fund, which has invested about $30 million in Iraqi equities.

Spreads Narrow

The spread between Iraqi sovereign bonds and U.S. Treasuries has narrowed by 329 basis points, or 3.29 percentage points, since peaking at 757 on June 1, JPMorgan Chase & Co.’s EMBIG Sovereign Spread Iraq index shows. The spread was 428 basis points yesterday.

Iraq’s oil fields produced 3.3 million barrels a day in December, according to data compiled by Bloomberg, and authorities in Baghdad expect this year to match the production record of 3.8 million barrels set in 1979, Oil Minister Abdul Kareem Al-Luaibi said on Dec. 9. Iraq wants to boost output to as much as 10 million barrels a day by 2020, Deputy Prime Minister for energy affairs Hussain al-Shahristani said Oct. 10.

Increased Spending

BP Plc, Royal Dutch Shell Plc and other international companies are helping to restore output almost a decade after the U.S.-led invasion that toppled the regime of Saddam Hussein. The government is budgeting $118 billion in spending for 2013, up 18 percent from 2012, buoyed by crude prices that averaged almost $117 in London last year.

The Middle Eastern state’s political ills include daily street protests by minority Sunni Muslims, rising tensions with Turkey and the civil war in neighboring Syria. Acting Defense Minister Saadun al-Dulaimi warned on Jan. 6 that Iraqi forces would retaliate for Turkish air raids on Kurdish rebels in northern Iraq.

Sunnis, Kurds and others have denounced what they call a power grab by Prime Minister Nouri al-Maliki, a Shiite, and are calling for him to resign. The Sunni-backed al-Iraqiya coalition boycotted parliament and Cabinet sessions for several weeks last year and walked out again yesterday together with Kurdish ministers.

Violence has escalated since the U.S. withdrew its last combat troops at the end of 2011, with 4,471 civilians killed in 2012 compared with 4,137 in the previous year, according to the Iraq Body Count website.

Kurdish Exports

Maliki’s government is also sparring with Iraq’s semi-autonomous Kurds over oil revenue, and government troops clashed for the first time with Kurdish forces on Nov. 16, leaving one person dead.

The Kurds, who halted crude exports through a government-run pipeline on Dec. 22, have authorized their first shipments by truck into Turkey from the Taq Taq oil field, Andrew Benbow, a spokesman for the field’s operator, Genel Energy Plc, said yesterday in an e-mailed response to questions. Genel’s chief executive officer, Tony Hayward, said today the company hopes to export as much as 20,000 barrels a day from the Kurdish field.

The International Monetary Fund still forecasts that the country’s economy will grow 14.7 percent this year, the fastest pace in the Middle East and North Africa after Libya. The IMF projects Iraq to post the region’s quickest growth in the next four years.

‘Remarkable Resilience’

“The market as a whole has shown remarkable resilience to political instability over the last few years, suggesting that Iraq’s high political risk is understood and priced in,” Liz Martins, a senior economist at HSBC Holdings Plc in Dubai, said in an e-mail yesterday. The rapid increase in Iraq’s oil output and high crude prices are enough to offset such concerns, she said. “Ultimately the bond is a play on Iraq’s creditworthiness, and this looks stable over the medium term.”

The country’s stock exchange could also lure investors after the Feb. 2 listing of Asiacell Communications PJSC, which plans to raise $1.3 billion in Middle East’s biggest IPO in more than four years. “The real value in Iraq these days is found on the Iraq Stock Exchange,” Geoffrey Batt, managing director of the $39 million Euphrates Iraq Fund, said Jan. 7. Some companies offer earnings yields of 20 percent, he said.

Iraq’s bonds, meanwhile, total $2.7 billion, or roughly 2.7 percent of its 2012 oil export revenue, Batt said. “Given the tiny amount of this issue relative to oil revenues, there is little doubt Iraq can easily service this debt,” he said.

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