Lebanon Eyes $2 Billion Bond Sale as Yields Decline

Bloomberg

Finance Minister Mohammad Safadi said Lebanon plans to raise $2 billion in international bond markets this year, taking advantage of record-low borrowing costs for the most-indebted Arab nation.

“We are now talking to the financial markets to get their advice on when the best time is” for the sale of at least $500 million in bonds, Safadi said in an interview in Beirut yesterday. Lebanon also plans to exchange existing debt valued at $3 billion with new bonds within the coming year, he said.

The planned offering would make Lebanon the largest sovereign issuer of dollar-denominated bonds in the Middle East based on sales so far this year, data compiled by Bloomberg show. Safadi said Lebanon will use the proceeds to invest in electricity and gas infrastructure at a time the International Monetary Fund urged the government to maintain fiscal discipline to lower one of the world’s highest ratios of debt relative to gross domestic product.

The country last sold Eurobonds in March, raising $600 million in 5 percent notes due October 2017 and increasing the size of its 6.6 percent bonds due November 2026 by $350 million to $725 million.

“The market has shown us that we can have long maturities,” Safadi said. “We are hoping to make use of that trust.”

Yields Soar

The yield on the 6.6 percent dollar bonds rose one basis point, or 0.01 percentage point, yesterday at 6:05 p.m. in Beirut to 6.29 percent, six basis points above the low on March 23, data compiled by Bloomberg show.

The premium investors demand to hold Lebanese debt over U.S. Treasuries has risen five basis points this year to 389, lower than similarly rated countries such as Egypt, Senegal and Ghana, JPMorgan Chase & Co. data show.

Lebanon is rated B1 at Moody’s Investors Service, four levels below investment grade. Standard & Poor’s rates the country one level lower.

The bond offering plans come at a time that average borrowing costs for high-yield emerging market nations jumped to a four month high, according to JPMorgan data. The EMBI Global High Yield Index surged on concern Europe’s debt crisis and slower U.S. economic growth will curb exports.

Deposits in Lebanese banks grew at an annualized rate of 8 percent this year, the same as in all of 2011, Central Bank Governor Riad Salameh said last week. Bank balance sheets rose an annual 11 percent in January, according to central bank data.

‘Surprised Us’

The performance of Lebanon’s bonds reflect strong demand from cash-rich domestic banks, making the country stand out as the closest thing to a safe haven during market turmoil, Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt, said by e- mail on May 14.

Lebanon’s economy grew more than 4.5 percent in 2011, three times faster than the IMF had estimated, Safadi said, even after domestic and regional unrest brought growth to a halt in the first quarter. Lebanon is targeting growth of 3 percent this year, though the minister said the forecast may be conservative.

“It actually surprised us,” Safadi said, referring to last year’s expansion. “Retail recovered a lot, tourism recovered quite a bit and it gave a boost to the whole market.”

The estimated economic growth this year is still “well below Lebanon’s potential,” International Monetary Fund Deputy Managing Director Nemat Shafik said in a May 10 statement. She urged authorities to target a primary budget surplus -- before interest on national debt is added -- “which would keep the debt-to-GDP ratio on a downward path.”

Debt Burden

Lebanon can achieve a primary surplus if oil prices continue to fall, Safadi said. Oil prices have fallen 6.2 percent this year to $92.72 a barrel.

The government forecasts the budget deficit to stay little changed this year at 6.6 percent of gross domestic product because of increased public-sector wages. That’s below the IMF estimate of an 8 percent shortfall. Safadi expects the debt-to- GDP ratio to remain unchanged at 135 percent.

Lebanon’s debt burden has prompted some international investors such as Aberdeen Asset Management to shun Lebanese debt at these levels. Safadi said pressure for higher yields also comes from the domestic market.

Fair Yields

“Up till now we have managed to resist that pressure and our offerings are in line with what we think is fair to us and the market,” he said.

The yield on local-currency government debt has risen by 50 basis points since March, in line with an IMF recommendation that higher rates would help spur bank demand for the securities. The yield on one-year notes now stands at 5.35 percent, compared with almost 16 percent in Egypt, according to data from the central banks of the two countries.

Lebanon’s banks have been reducing their exposure to government debt since 2009, Salameh, the central bank governor, said in an interview on May 11. Deposits have climbed at an annualized rate of 8 percent this year, Salameh said, the same rate of growth for all of last year.

“Banks would like to see more long-term issues that expect higher interest rates of course,” he said. “We feel that could put pressure on us.”

Safadi said the government won’t borrow more to finance wage increases. Instead, it plans to impose a 15 percent capital-gains tax and will raise import duties on items such as tobacco and alcohol. Most of the proceeds from the tax on capital gains will come from the real estate industry, he said.

“We are also increasing the tax threshold on some economic sectors that we feel won’t be affected,” he said, without giving details. “I am not financing these increases through the deficit, that’s the important message. I am financing all the increases through taxation.”

Alaa Shahine, Dana El Baltaji