The Middle East debt market is for connoisseurs. Too stable to attract the short-term investor and with too many risks for the long-term investor, it is largely the domain of the institutional investor seeking a diversified portfolio. And, after a year of high volatility in the bond markets, the price of Middle East debt has fared better than most.
‘The Middle East has held up well in a down market, but this has a lot to do with the issue size,’ says Joyce Chang, director in emerging markets research at Salomon Brothers. Middle East debt accounts for only a fraction of trading in emerging market debt and is concentrated on three countries in the region, Algeria, Morocco and Jordan. One London-based analyst estimates that for every $1,000 million of Latin American debt traded less than $100 million of Middle East debt changes hands.
Most of the tradable Middle East debt was issued after the restructuring of commercial loans in the late 1980s, as banks sought to write-off bad debts by selling it on at discount. Middle East countries have mostly kept away from new issues.
The country with the largest amount of tradable restructured debt in the region is Algeria, with between $3,000 million-4,000 million worth of paper on the market. Since late 1993, the value of Algerian paper has fallen dramatically to an average price of about $0.29 from about $0.70, which means that each dollar of Algeria’s debt is now changing hands at about one third its nominal value.
In recent weeks, the prospect of further rescheduling of Algeria’s commercial debt by the London Club, has encouraged some interest in Algerian paper. However, few analysts expect any marked rally in prices because of the depth of Algeria’s political crisis (see Algeria).
One reason for following the performance of the secondary debt market is as an indication of confidence in a country’s economic performance and as an influence on new bond issues. ‘This market is a benchmark. Any new issue will be treated according to this market,’ says a Redwan Merouani, director of UBAF Asset Trading.
Moroccan debt has proved a far stronger performer than its Algerian counterpart, reflecting the country’s successful completion of an IMF structural adjustment. Analysts say the country has long been considering a new bond issue, but is unlikely to go ahead until there is an improvement in the appetite for emerging market paper, particularly since the December Mexico crisis.
The only country in the Middle East to have taken the step to have its sovereign risk rated by an international agency is Tunisia. The Japan Bond Research Institute issued a BBB+ rating before the Tunisian government issued its samurai bond issue (yen-denominated bond) in March 1994. The government has now announced plans to issue a second samurai bond (see Tunisia).
Jordanian debt prices have remained stable over the past few weeks, which lends encouragement to the government’s plans to issue a $50 million Eurobond to part-finance the expansion plans of the local Telecommunications Corporation (TCC). However, analysts say the Jordanian issue will not be a true reflection of the sovereign risk of the kingdom, as the principal payment is guaranteed by the World Bank (MEED 3:2:95, Jordan).
However, the best performer in the region has been Lebanon’s $400 million Eurobond issue. The issue was oversubscribed in September, and is now trading at a premium, at higher prices than the nominal value. Analysts attribute most of the interest to Lebanese investors, who hold up to 75 per cent of the issue. A second Eurobond could be in the pipeline (MEED 27:1:95, Lebanon).