Yields on Lebanon bonds soar as exports, tourism suffer


Lebanese bond yields had their biggest monthly jump in more than three years in July as the revolt in neighboring Syria hobbled tourism, the country’s largest foreign-exchange earner.

The yield on Lebanon’s 8.25 percent dollar-denominated notes due April 2021 jumped 60 basis points last month, the most since December 2008, to 6.55 percent Tuesday, data compiled by Bloomberg shows. Middle East debt yields fell 21 basis points in the period to 4.19 percent, according to HSBC/Nasdaq Dubai’s Middle East Conventional U.S. Dollar Bond Index. JPMorgan Chase & Co.’s EMBIG Euro Blended Yield lost 46 basis points to 4.85 percent.

Syria is Lebanon’s only land access route for tourism and exports, making the most-indebted Middle East nation vulnerable to spillover from fighting that has left about 20,000 people dead since Syria’s uprising started in March 2011. Arab Gulf nations including Saudi Arabia and Qatar warned citizens against travel to Lebanon, triggering the worst tourism season since the civil war ended in 1990, according to the country’s hotel association.

“The contagion risk from Syria is deterring investors who are concerned that more civil clashes could erupt in Lebanon and lead to a civil war,” said Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt. “There are questions about what would happen if the regime falls in Syria.”

Violence in Syria, which is under international sanctions, threatens to hurt economic growth as the fighting spills over into Lebanese cities from Beirut to Tripoli in the north. In Syria, troops loyal to President Bashar Assad stepped up an assault on rebels in Aleppo as they try to regain control of the city, a commercial hub.

The yield on Lebanon’s 6.1 percent dollar bonds maturing in October 2022 added 23 basis points in July, the biggest monthly advance since January 2011, to 6.31 percent. Yields on dollar debt in the UAE, Qatar and Egypt fell in July. Lebanon’s debt yield was little changed Wednesday.

The country’s $39 billion economy has been shaken by a history of instability, including a 15-year civil war that destroyed infrastructure and reduced the heart of Beirut to rubble.

Lebanon’s gross domestic product will grow at a “fairly sluggish” rate of 2.4 percent this year compared with 1.7 percent in 2011, HSBC Holdings Plc said in a July 3 report. The economy expanded 7 percent in 2010, International Monetary Fund data shows. “Unrest in Syria will continue to weigh on confidence in Lebanon,” Dubai-based HSBC economists Simon Williams and Liz Martins said.

Tourism has fallen each month versus a year earlier from March 2011 to the end of the first quarter of this year, with total arrivals down 16 percent, and visitors from Asia slumping 60 percent. Tourism made up about 20 percent of economic output in 2010.

While Beirut hotel occupancy grew about 32 percent in the first six months of 2012, occupancy at summer resorts outside the capital plunged more than 50 percent in the same period, according to Pierre Achkar, president of Lebanon’s Syndicate of Hotel Owners.

“We have lost all the tourism coming by road,” Achkar said in a phone interview from Brummana, Lebanon, on July 26. Achkar is also the Mayor of Brummana and owns a number of hotels throughout the country. “We used to have 17,000 Jordanians per month, of which 14,000 were coming by road and 3,000 by air.”

Lebanon, which at B1 is the fourth-highest non-investment grade at Moody’s Investors Service, had a debt to GDP ratio of 136 percent in 2011, according to the IMF – the highest in the Middle East and Africa. Mauritania is the second with a ratio of 92 percent.

The cost of insuring Lebanon’s debt against default has jumped 124 basis points in the past 12 months to 488 basis points on July 31, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts, which pay the buyer face value if a borrower fails to meet its obligations, are the region’s second highest, after Egypt.

Lebanon’s bond yields benefit from being held mostly by domestic banks, which benefit from high funding levels from remittances of Lebanese nationals abroad. Foreign-currency deposits climbed 3.7 percent in the year to May, while deposits in local currencies jumped 9.9 percent, central bank data shows.

This makes the nation’s debt less volatile during “tough global-market environments,” Union Investment’s Dergachev said.

Banks’ dependence on remittances and the state’s ability to service its debt are a “long-term vulnerability,” the London based Economist Intelligence Unit said in a report on July 11. Lebanon, which has about $64 billion of debt according to data compiled by Bloomberg, has never defaulted.

Daily Star