The Middle East’s Bruised Bond Guarantees

Jordan and Morocco on the back of IMF and Gulf assistance easily placed respective $1billion and EUR1billion bonds, with the former carrying a US government guarantee and the latter selling at a 3.5 percent yield equal to investment-grade credit Turkey. Their MSCI frontier stock market components are also up through mid-year on decent growth and political transition prospects in the regional context, despite the continued economic and humanitarian fallout from the Syrian crisis. Jordan’s parliamentary elections were boycotted last year by the Muslim Brotherhood but the results were accepted although relations remain frayed between the King and lawmakers. According to the Fund’s June update the effects of the refugee influx and Egyptian gas disruption should fade to enable a 3.5 percent GDP increase in 2014 driven by commodities and infrastructure spending, on 2 percent inflation. The fiscal and current account deficits should narrow on lower energy import costs and reduced state electric company losses, as the exchange rate peg continues to attract capital and tourism flows. Utility subsidies have contributed to the estimated 90 percent of GDP public debt and should be further consolidated as the maturity profile is extended for domestic instruments, the Fund advises. Income tax reform is also in the works as less than 5 percent of the population pays the levy. The long-term debt/GDP goal is 60 percent but higher global interest rates may delay progress and erode currency confidence. Banks have a conservative 70 percent loan-to-deposit ratio and capital and liquidity meeting international standards but NPLs are 7.5 percent and assets are heavily weighted to government bonds. Arab Bank has extensive cross-border operations where supervision may be lacking and anti-money laundering and terror funding deficiencies must still be addressed. Poverty and unemployment rates are 15 percent, and the business climate could be improved by better collateral and insolvency procedures. After rebuilding reserves with bilateral and multilateral support the central bank has cut rates, but the social situation is “stretched” with the Syrian and Iraqi influx and more grants are needed, the review urges.

Morocco’s ruling coalition was reconstituted after the Islamic party resigned in protest over gradual fuel and food subsidy cuts as the Finance Minister vowed to hit the 5 percent of GDP budget deficit target during the bond road show. With normal cereal output and export, FDI and remittance pickup from Eurozone stabilization economic growth should be 4 percent. The central bank will shift to a more flexible exchange rate over the next three years and widen small business credit access through new facilities and reporting systems as liquidity remains tight and many banks focus instead on African expansion. In Lebanon, where shares were also ahead slightly at mid-year as a capital markets regulator was launched, institutions were pioneers in regional diversification in light of their heavy exposure to the sovereign’s 140 percent of GDP debt. Spreads have been steady as S&P recently upgraded the outlook to stable and another Eurobond rollover/swap was completed for tentative assurance.