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Analysts note that with expansionary fiscal policy boosting money supply growth (14.4% y/y in August) and [private-sector] credit expansion, “GCC countries remain well positioned in the event of a global downturn”.  Yet said effects seem especially and comparatively potent in Qatar where, per Barclays, “M3 growth jumped the most, by 24.4% y/y [versus] more moderate growth observed in Saudi Arabia (15% y/y) and the UAE (12.4% y/y), while concurrently headline inflation, which [GCC weighted-average] region wide turned upward for the first time in 2011 in September, remains somewhat subdued given a still shaky real estate sector.  Said M3 jolt, in turn, continues to jostle its way onto regional bank balance sheets, with deposits registering double-digit growth in August–Qatar again leading the pack at 18.6% y/y.  Coupled with 
Abu Dhabi’s International Petroleum Investment Co.’s (IPIC) $3.75b, three-tranche foray into capital markets alongside Union National Bank’s international debt debut, pundits and punters alike now envision a rash or rally of sorts revolving around Abu Dhabi and Qatar issuers in particular given both “ongoing funding needs” as well as a “need to enhance/diversify” said funding bases.  Thus investors eying an increasingly stable and profitable sector (GCC collective average bank ROE stood at 13.9% in June, versus a 2005-2010 average of 18.9%) would be wise to perk up should debt capital markets indeed entice new concessions in the near term.


Nigeria’s relatively muted inflation figures for June (10.2% y/y from 12.4% in May) included food inflation (51% of CPI) at its lowest level in more than three years (9.2% y/y from 12.2% in May) and a drop as well in housing inflation (including household water, electricity, gas and other energy prices) to 16% y/y from 18.7% the month prior which, taken alongside the recent removal of regulations hitherto requiring foreign investors to hold the country’s sovereign paper for at least one year helped to shift the yield curve lower (ahead of Wednesday’s auction analysts with Absa Capital noted that “yields from the 2-20y space are now in the 9.5-11.8% range versus 10.5-13% in early July”).  That said a more prudent approach may consider that despite the suddenly surprisingly favorable inflation outlook, augmented no doubt by the naira’s 3.6% dollar appreciation over the past one and a half months (likely fueled in part by the aforementioned forex-friendly reform as well as a fairly volatility free 2.2mbpd of oil production in the past six months), central bank (CBN) Governor Lamido Sanusi’s rhetoric this summer has been continually hawkish for good reason: analysts expect inflation to creep upwards in the second half of the year to between 11-12%, a figure that excludes the impact stemming from the impending removal of fuel subsidies which remain in question but should ultimately help shore up at least one facet of fiscal vulnerability (Barclays wrote in July, for instance, that “currently the import price of fuel and added margins are more than double the retail price of N65/litre, which means one can expect the fuel price to rise sharply . . . [and] a significant effect on inflation”).  Thus while the CBN’s last policy rate boost came in May (+50bp) and the latest round of price inflation numbers may serve to somewhat delay another tightening bout, ultimately better entry points on the credit should reveal themselves in time.

Against the lingering backdrop of an overextended China (and by extension, Brazil et al.) and Friday’s shockingly moribund U.S. NFP report (as Zero Hedge tweeted, ‘less than six weeks until Jackson Hole…’) now is the time for portfolio managers to truly discriminate among emerging and frontier markets and specifically consider reducing exposure to high-beta names that are likely all-too uncomfortably correlated to the kick-the-can, er, ‘risk on’ trade.  Per Barclays, Qatar ’20 and ’30 sovereigns, for instance, as well as quasi-sovereign corporate names like Rasgas and Qtel are likely to benefit in the near-term not only from their hitherto underperformance (~20bp spread widening YTD) but from ever-improving macro fundamentals (21.5% y/y GDP, CA surplus 25.3%/GDP in June, a seemingly perpetually subdued, GCC-low 2% annualized headline inflation rate projected for 2011 and GCC-leading annualized export growth) as well as the implementation of the recently announced National Development Strategy 2011-16 ($USD226bn budget) that analysts expect will “boost the non-oil sector activities, particularly on the investment side.”  Furthermore fiscal stimulus in Qatar (money supply growth up 29.9% y/y in April versus GCC average of 17.3%) and its corresponding deposit growth (up 18.2% y/y) remains muted and quite manageable in the context of a budget breakeven oil price (now ~$40/b) more than half that of say, Saudi Arabia, while credit trends (bank credit to the private sector in Qatar expanded by 5% y/y in April versus a GCC forecast of 8.6% y/y in 2011 as post Arab-Spring liquidity mean reverts) also look positive.

My contribution to this month’s Business Diary Botswana which now operates out of both Harare and Lusaka as well:

Zambia’s plan to issue USD$500MM in sovereign paper to finance infrastructure—Absa analysts wrote last month that the government “intends to forge ahead with plans to issue its maiden Eurobond [in early 2011] once it has obtained a sovereign rating”—comes on the heels of Nigeria’s initial foray into international debt markets in late January in which the continent’s most populous nation received orders equaling more than two times the amount of debt sold, attracting buyers from 18 countries in Europe, the U.S., Asia and Africa, despite fairly ardent reservations from certain international investment houses and fund managers regarding its fiscal profligacy.  A windfall oil revenue account set up under former President Olusegun Obasanjo, for instance, fell from $20bn to a recent estimate of roughly $300MM, while FX reserves dropped from USD42bn in January 2010 to USD33.1bn by November, marking the second consecutive annual decline (reserves were roughly USD53bn year-end 2008) as the Central Bank of Nigeria (CBN) continued to defend its preferred level of USD/NGN150.  Citing the above, along with increased “political risk” ahead of this April’s elections as well as high inflation underpinned by rising food costs and a 2010 fiscal deficit of 6.1% of GDP compared with 4.8% targeted, Fitch Ratings lowered Nigeria’s sovereign credit outlook to Negative (BB-) in October, though S&P maintained its B+ “Stable” outlook primarily on the back of the country’s strong external debt (2.4% of GDP).  Moreover, the Financial Times noted, “the country’s ratio of oil production to oil reserves is very low (2m barrels per day from 36bn in reserves), so it is a safe bet that petrodollars will keep flowing well beyond the 10-year lifespan of the bond.”  With this in mind, the paper’s ultimate 7 percent yield looked reasonable in comparison with Ghana’s 2017 paper (rated B)—which couponed at 8.5%, now yields 6.3% and is considered the region’s defacto sovereign benchmark—and per some analysts may even look “dear” sooner rather than later.  “All expectations are for a rally in the Nigerian Eurobond in the months to come, perhaps when the uncertainty of elections is seen to be less significant,” mused one Standard Chartered banker.  For their part, Nigerian officials couldn’t have been happier.  “This is a major success and milestone for the country and economy,” Finance Minister Olusegun Aganga gushed to reporters from his office in Abuja.  “[The country will now have a] transparent and internationally observable benchmark against which international investors can accurately price risk.”    

Relative to the squabble surrounding Nigeria’s fiscal soundness, Zambia’s impending auction should be somewhat tame as “lofty commodity prices should support the case for a relatively low interest rate” per one commentator in regards not only to Zambia but to Tanzania, a rapidly emerging gold producer.  But this outlook may be particularly true for Zambia, Africa’s largest copper producer (responsible for roughly 9 percent of total world exports) given the recent run-up for industrial metals while precious metals such as gold and silver have seemingly paused for breath.  Copper specifically has been buoyed by both demand and supply fundamentals—China’s consumption of the metal has tripled in a decade to an estimated 6.8 million tons in 2010, according to CRU, a metals and mining consultant that projects due largely to the accelerating urbanization of central and western China (in addition to the continued development and refinement of ever-burgeoning coastal giants) the country is on pace to almost triple its annual use of copper to 20 million tons in 25 years—more than the world produces today and setting the stage for a potential global shortage of 11 million tons a year by 2035.  And while the People’s Bank of China (PBC) has acted increasingly hawkish regarding inflation—“reserve requirement ratio (RRR) increases have triggered fears that the Chinese authorities are about to significantly accelerate policy tightening, which could lead to a sharp slowdown in domestic credit and consequently overall economic growth,” wrote one credit analyst, the overall global macro landscape is such that both demand and supply should be running in somewhat opposite directions for the foreseeable future.  On the demand front the U.S., the world’s second largest copper consumer behind China, continues to stabilize as economic data in late January showed that showed the country’s GDP grew at a rate of 3.2% for the fourth quarter of 2010 and 2.9% annually, its biggest rise in half a decade.  Moreover, VM Group, a London-based metals, energy, agribusiness and renewals consultancy, wrote to clients recently of the expectation of a supply squeeze in the medium term adding further support to copper’s overall return dynamic over the coming year: “Dominating copper’s allure are its supply-side shortfalls, which are now well established. Mine supply has not kept pace with demand for many years, nor has it responded with alacrity to the meteoric price rise, implying that structural difficulties exist.”  To that end “the world refined copper market is expected to have a 500,000-metric-ton to 600,000-ton deficit in 2011, even with a significantly weaker demand scenario,” according to metals strategists with JPMorgan Securities Ltd.

Moreover while Nigeria’s history of ethnic-fuelled political violence and current macro story (namely inflation) give some investors serious pause, Zambia in contrast is a study in economic soundness and stability.  Absa noted in its year-end Emerging Market Quarterly for instance that FDI inflows—which reached record levels totaling USD4.3bn (27% of GDP) in 2010—more than doubled the total FDI inflow of USD1.8bn in 2009 and should be underpinned in 2011 by further investment—as well as “improved private consumption and infrastructure spending will result in growth of close to 7% in 2011 from an estimated 6.6% in 2010.”  Of note, Chinese investment in Zambia (which has swelled by over 400 percent since 2004) is expected to more than double to $2.4bn in 2011, driven mainly by investments in mining and manufacturing, trade minister Felix Mutati reported last month.  Meanwhile, Vancouver-based First Quantum Minerals Ltd. will invest more than $1bn in a copper mine (with three open pits) and smelter project in Zambia’s Northwestern province that will be commissioned by the end of the year, probably produce copper over 20 years and create about 2,000 jobs, per the firm’s president Clive Newall, who noted that the company will also build a new hydropower station near the mine to ensure continuous supply of electricity.  And although the upcoming October presidential elections between the MMD’s President Rupiah Banda and the opposition PF’s Michael Sata should be closely contested, “Zambia has had peaceful elections since becoming a multi-party democracy in 1991,” analysts note.  Inflation, meanwhile, is likely to pick up some due to higher expected energy costs, infrastructure and social spending inherent to the government’s continued fiscal expansionary stance as well as the natural effect stemming from stronger domestic demand.  Yet Zambia’s fiscal deficit, at just above 3% of GDP in 2010, is among the lowest in Sub-Sahara Africa   And while rising food inflation (which accounts for 57% of the consumer basket) is likely to cause CPI to spike going forward, analysts note that large domestic food stocks mean inflation could remain anchored within single digits, although it accelerated already to 9 percent in January on an increase in grain prices, acting Director of the Central Statistical Office John Kalumbi announced.  Yet the inflation dynamic and the resulting pressure on sovereign borrowing costs is admittedly a nuanced one.  As one report noted, “for outsiders that balance between moderate inflation that stimulates healthy bond yields, and runaway price increases that damage overall economic performance, will be crucial.”  To that end, “there’s been a huge amount of policy accommodation in Africa, and understandably, a reluctance to roll that back very quickly,” said Razia Khan, head of Africa research at Standard Chartered in London.  “But at the same time the inflation outlook is not going to be that favorable. The big question is ‘Do domestic yields rise fast enough to compensate for that or not?’  If it’s not the case, you’re not going to see sizeable investor interest.”  Regardless, the eventual issuance of Zambian sovereign debt is yet another cause for celebration as it will accelerate the maturation of domestic capital markets, in turn making state and ultimately corporate balance sheets all the more autonomous.  And as Ashmore Investment’s Jay Dehn reiterated, “sovereign yield curves help corporates to price bonds, [and] in turn [will unlock] Africa’s huge medium term growth potential.”

In writing that “given the external demand, issuing [debt] overseas can be a cheaper option for African governments and corporations than their relatively small domestic debt markets, provided they can offer a bond big enough to whet foreign appetite,” a recent piece on rising Africa bond issues notes, for example, that “Ghana’s Eurobond was issued with a coupon of 8.5 percent, compared with the 13.95 percent on a three-year note issued locally the same year.”  In whole, sub-Saharan debt issuance totaled $5.6 billion in the first nine months of 2010, down 30 percent year-over-year but well above the $1.6 billion in the first nine months of 2008, according to Thomson Reuters data.

Ghana’s bond is somewhat infamous in that it was the first dollar-denominated debt issued by a sub-Saharan government apart from South Africa and is labeled by some as a “benchmark” for African frontier debt; its yield spiked above 23 percent in 2008 but has consistently made new lows this year, falling to 5.746 earlier this month for instance.  Moreover, a recent data overhaul revised 2009 output by 75 percent and allowed it to “leave the ranks of the World Bank’s low-income bracket of countries such as Liberia and Afghanistan [in order to] join the more affluent ranks of Thailand and the Ivory Coast.”  This only a few months after S&P downgraded its credit rating to B, citing concerns about large fiscal deficits and a lack of clarity on oil-industry laws (the country is due to begin the production and export of 120,000 barrels of oil a day in 2011).  Moreover, finance minister Kwabena Duffour noted last week that the cash budget deficit would narrow to 7.5 percent of GDP next year from roughly 9.7 percent in 2010, and proceed to drop to 4.7 percent in 2012 and 3 percent in 2013.  The changes “should foster a rating upgrade,” per one analyst.

It was only a matter of time before an asset manager like New York-based Van Eck Global launched a local currency debt fund; thankfully for investors seeking such exposure they now have a relatively low cost (0.49% net expenses ratio) vehicle to do it with (NYSEArca: EMLC; Market Vectors Emerging Markets Local Currency Bond ETF) before certain developing market currencies really start to appreciate against debt-ridden, developed ones.  Per the FT:

“Most emerging market governments issue debt in both ‘hard currencies’ like the US dollar and euro and in their own local currencies,” notes Kevin Gardiner, head of global investment strategy at Barclays Wealth.  “Generally, the local currency debt trades with a higher yield to compensate investors for the additional foreign exchange risk they are incurring by holding the bonds.”  But Mr Gardiner said that as many emerging market economies and fiscal positions were in much better shape than their counterparts in the developed world, this is currently a risk he was happy to take.  “Local currency bonds in Asia, in particular, seem to us likely to outperform in all but the very worst investment environment,” said Mr Gardiner.

Van Eck reports that EMCL will focus on issues with an average years to maturity of 6.6, while only 21.6% of the fund is currently allocated to bonds that mature more than 10 years from now.  The relatively low duration thus means less price sensitivity to interest rate movements.  As to individual country exposure, Brazil, Malaysia, Mexico, Poland, South Africa, and Thailand are each weighted at 10% of the fund’s total assets, the maximum any one sovereign can hold under the fund.  Finally, all of the countries in the fund are rated investment grade by S&P with four countries achieving ‘A’ status or better and only two countries, Hungary and Egypt, hitting the lower rung of the investment grade spectrum at BBB-.  The underlying benchmark for the Van Eck ETF is the JPMorgan Government Bond Index – Emerging Markets Global Core Index, which has 171 constituents and is yielding roughly 6.8 percent.

Per The Economist, Indonesia is likely to remain at “the heart of an Asian coal boom” given the fact that: (i) the quality of its coal is second to none and is thus eagerly sought even by net exporters such as China; and (ii) for coastal power stations in China, India, Japan and South Korea, “it is often cheaper to import coal by sea from Indonesia than from mines in the interior.” While not environmentally optimal, coal remains plentiful and cheap, two fundamental facets behind the International Energy Agency’s (IAEA) conclusion in November that global demand for coal will increase by 1.9%/year until 2015, placing its growth among fossil fuels second only to natural gas. And absent any kind of universally enforceable carbon tax, UBS analysts note, exports to China and India will see the largest percentage increases.

Moreover, the near-term cash flows of at least some firms may also have an implicit sovereign guarantee given their explicit value, which also provides them with an alternative source of financing. For example, Bumi Resources, Indonesia’s publicly listed and biggest miner by production, became the country’s fourth dollar denominated debt issuer this year when it sold $1.9 billion worth of debt at 12% in September to China’s CIC sovereign wealth fund, which the firm used to pare debt and boost investments. And last month, Bumi announced it would seek to raise $300 million from the sale of seven-year convertible bonds at 12%. A month earlier, Adaro Indonesia, the country’s second biggest producer which, along with Bumi, says it will double capacity by 2012, issued $800m in senior notes at an annual yield of 7.625% (two points lower than when it went to the market in 2004) and maturing in 2019. Interestingly, three-quarters of demand came from U.S. and European investors. And before Adaro, Indo Integrated Energy II, a unit of PT Indika Energy, sold $230 million of seven-years at 9.75%, while PT Bukit Makmur Mandiri Utama, the country’s second biggest coal contractor, offered 11.75% for $600 million of bonds maturing in four and five years.

Analysts at the time of Adaro’s issuance noted that most Indonesian miners would need to give between 9-10% on their coupons, meaning Bumi’s 12% on its upcoming seven years seems particularly high, particularly given the notes’ possible conversion to equity and CIC’s vested interest in the firm. Per Edwin Sinaga, president director of PT Finacorporindo Nusa, a Jakarta-based brokerage firm, “Bumi was forced to offer a relatively high interest rate because investors were aware of its high level of debt.” Other analysts have questioned whether Bumi has the assets remaining to properly secure further debt. Markets reacted poorly to the announcement of further debt, and Bumi remains below its 52-week high established in September. Going forward, it will be interesting to see if the market is properly pricing Bumi’s questionable capital structure.

The following appeared in the November issue of Business Diary Botswana:

Despite the IMF’s recent projection that Botswana’s economy will contract 10.3% this year, the lender expects a 4.1% uptick next year such that emergency funding would not be required. Back in June the country tapped a $1.5bn “budget support loan” from the African Development Bank–the largest such facility ever granted by the Bank–in order to finance part of a budget deficit then estimated at around 13.5% of GDP, and since revised to 14%. The IMF cited a renewal of demand for diamonds as a central facet of its optimistic forecast. Furthermore, it predicted, GDP growth across sub-Saharan Africa will rise to approximately 4% next year and 5% in 2011, up from 1.1% in 2009. “We think it should be possible for sub-Saharan Africa to recover quicker this time around and have a ‘V-shaped recovery,'” opined Antoinette Sayeh, director of the IMF’s African department. “A lot of that has to do with the good macroeconomic policies that have been pursued before the crisis and also the way many of the countries have managed the crisis.” For a growing contingent of economists and analysts, the V-shape recovery theme in fact extends across a variety of both “emerging” and “frontier” markets, underscoring these markets’ relatively strong fiscal positions–i.e. higher reserves and lower debt levels–in comparison to their more developed peers, whose recovery will more likely be ‘U’ shaped,” theorizes Antoine van Agtmael, chairman and CIO of Emerging Markets Management LLC, a U.S, investment firm specializing in emerging market equities. “Emerging markets are coming out of the [credit] crisis with greater respect and they now account for one third of the world’s gross national product,” said van Agtmael.

One immediate and stark byproduct of the economic turnaround among developing economies and concurrent paradigm shift concerning their ‘risk’ among investors can be seen in debt markets. Citing a record amount of capital inflow into emerging market bond funds, JPMorgan reported in late October that the credit spread between ‘riskier’ developing notes and comparatively ‘risk-free’ U.S. Treasuries had tightened considerably since last October–down from 8.65 percentage points to less than three. The sovereign credits of Argentina, Ecuador, Pakistan and Ukraine had risen more than 100% year to date on benchmark JPMorgan’s Emerging Market Bond Index Global, or Embig, reported the Wall St. Journal at the time. The post-crisis capital deluge has in fact reenergized a virtuous cycle of debt market development across emerging and even some frontier countries that many commentators attribute as the chief reason for these markets’ relative resilience and quick turnaround. “This is by no means universal, but those emerging market economies that are the most self-reliant and strong are the economies that have withstood the global financial crisis most effectively,” said Jason Toussaint, senior investment strategist in the Global Quantitative Management group at Northern Trust in London. For the majority of African nations, however, corporate and even sovereign debt markets remain vastly underdeveloped. Yet that is quickly changing, argues Stephen van Coller, the newly appointed CEO of Absa Capital, a South African investment banking group. “We’ve seen debt capital markets starting to open up in Botswana, Kenya, Tanzania and Nigeria,” van Coller says. “There’s actually been quite a lot of interest because the yields are quite good and I think people are seeing emerging markets as handling the recession better.”

The benefits of a mature debt market for both sovereign and corporate issuers and the underlying economy as a whole is too often understated and deserves repeating. Among myriad reasons, debt markets increase the competitiveness and efficiency of the financial system; enhance the stability of said system by creating alternatives to banks; and serve as a way to increase information sharing between policy-makers, financial markets and investors–such as when central banks gauge inflation expectations derived from the difference between yields on regular nominal bonds and CPI-indexed bonds with the same maturity, or when governments consider interest-rate expectations to better estimate the future cost of borrowing. Speaking to the first point, a 2002 paper disseminated by the Bank for International Settlements (BIS), the Basel-based international organization of central banks, pointed out that “when firms can raise funds by issuing bonds, they are less dependent on banks, less exposed to difficulties in the banking system and less vulnerable to the adjustments that banks need to make, including those required by bank supervisors.” More broadly speaking, wrote Philip Turner, then-BIS head of the secretariat group in the monetary and economics department, “the most fundamental reason [for developing debt markets] is to make financial markets more complete by generating market interest rates that reflect the opportunity cost of funds at each maturity. This is essential for efficient investment and financing decisions.” These market rates, wrote another observer, ultimately serve as a check on government spending as rate increases would also serve to increase the cost of government debt and thereby harness extraneous spending, tempering inflation. Thus, “the burden of interest rate targeting of inflation would be equitably shared between the public and private sector and therefore the average cost of borrowing for the private sector would be lower.”

One initial byproduct of debt market development relates to financial service providers such as banks, which can use low-risk sovereign debt to grow their loan book and subsequently expand the economy. Similarly, corporate issuance by banks tends to quickly follow. Per Daniel Broby, CIO of London-based Silk Invest, which in October unveiled a Luxembourg-domiciled fixed income fund to focus on frontier markets across Africa, the Middle East and Central Asia, “the financial sector, specifically banks, is the first to issue bonds due to their own balance sheet matching requirements. As a banking sector matures, the tenor of lending business is extended, compelling the banks to seek out longer term capital raising solutions such as raising funds on the debt capital markets.” Speaking to this same point of economic expansion, Turner noted that “the existence of tradable instruments helps risk management. If borrowers have available to them only a narrow range of instruments (e.g. in terms of maturity, currency, etc.), then they can be exposed to significant mismatches between their assets and their liabilities. If bond markets do not exist, for instance, firms may have to finance the acquisition of long-term assets by incurring short-term debt. As a result, their investment policies may be biased in favor of short-term projects and away from entrepreneurial ventures.” Moreover, as the BIS paper stated, a further evolved bond market accelerates the development of securitization, which remains theoretically sound in its method of spreading risk among those most willing and able to bear it, and of allowing lenders to more efficiently finance their businesses by selling loans they originated. Finally, economists underscore that it is far easier to mark-to-market in capital markets that offer an assortment of bonds, which in turn makes it easier for regulators to pin point “trouble spots” in the financial system.

For a country such as Botswana, the risk associated with its underdeveloped debt market are now especially pressing. Analysts have pointed out, for instance, that the country must develop its debt market in order to utilize excess liquidity in the local market to help finance its current budget deficit and, as Razia Khan, Head of African Research for Standard Chartered Bank Group noted this past spring, “increase the scope of its borrowing.” Specifically, debt-financed spending increases could be targeted to the most productive sectors of the economy, Khan said, stimulating growth and growing the nation’s tax base, which in turn would help to refinance and ultimate repay the country’s liabilities. At the same time, issuing debt would allow the government to protect its foreign reserves, a central component to maintaining a high credit rating and associated low borrowing costs. While demand for Botswana’s sovereign debt has been historically high–as evidenced by the oversubscription of the its bond offer last year by over 500%, the market overall remains woefully undercapitalized and illiquid. But its maturation is inevitable, and will be a process. One ultimate result will be the further development of local currency markets, Broby points out, especially as pension and insurance industries begin to more efficiently “emancipate their long term investments from hard currencies” and match them up with their long term liabilities. But, as Broby argues in “The Case For Frontier Market Fixed Income,” a paper presented by his colleague Mohamed Bahaa at the “Challenges of Globalizing Financial Systems” conference held at the Hashemite University in Jordan in late October, the successful evolution of a fixed income market depends on several factors, including the presence of a non-restrictive fee structure for prospective issuers and the difficulty in being able to properly price issuances–a function of liquidity–to a benchmark in an environment where liquidity by definition is lacking.

Investment firm Kuwait Projects Co.’s (KIPCO) seven-year, $500 million benchmark bond–which featured a fixed 8.875% rate and were priced at a spread of 608 bps above the USD mid-swap curve, fetched orders in excess of $3.3 billion this past week, signaling further maturation of the Gulf’s debt markets.   The bond was not only the first to come out of Kuwait this year, but it was also the first international bond of the year to be issued by a Gulf-based private sector firm.  KIPCO owns stakes in 50 companies and operates in 21 countries, and this past spring announced that it would “move ahead with plans to sell pension products worth up to $500 million in the Middle East over the next five years, and launch an insurance firm in Algeria [later in the year].”

Earlier this year the IMF stated that debt securities form just 3% of the Middle East and North African (MENA) capital markets–compared with an average of 42% across the rest of global capital markets.  However, the credit crisis has ironically spurred the market’s growth, as domestic banks became more risk averse and reticent to enter into the discounted syndicated loans that were viewed as a cheaper alternative to paper, and which had hitherto greased the region’s economic wheels.  Borrowers also took to the fact that debt issuances could be targeted to a wider market of buyers–such as pensions and insurance companies–than could syndicated loans, given not only their relative liquidity, but also the fact that they could be denominated in various currencies.  Per Dr. Nasser Saidi, Chief Economist of the Dubai International Financial Centre (DIFC), debt markets in fact are the holy grail of the region’s long-term social and economic development:

“Money has been coming in from oil but now we have matured and are looking at economic integration. We have to make that transformation and for that we have to break the link between oil and investments. The price of oil can lead to a cycle of boom and bust and that can be broken by the debt markets.”

The worry, however, centers around the viability of sustained demand.  If the “new normal” is indeed accurate, then emerging and frontier debt–both sovereign and corporate–will truly need to replace or at least coincide with more mature, developed issuance.

Regular readers need to accept my sincerest apologies…updates for the next week will be rather itinerant due to a taxing MBA orientation schedule.

In the meantime, I’d like to mention that Silk Invest CIO Daniel Broby, a friend of the blog whom I consider to be an (the?) authority on frontier market investing, will be presenting a paper entitled “The case for frontier market fixed income” that he co-authored along with Silk’s Director of Fixed Income, John Bates, at the “Challenges of Globalising Financial Systems” conference to be held at the Hashemite University in Jordan on October 21-22, 2009.

The paper, which Daniel allowed me a sneak preview of, and surrounding which Mr. Bates was kind enough to answer some of my questions, posits that frontier fixed income “should be included in strategic asset allocation using a technique known as reverse asset allocation,” in order to benchmark the currently off-benchmark instruments “to the way the world will be, not the way it is now.” Significant spread differentials still exist within the frontier debt market universe, even though corporate issuers “tend to have relatively strong balance sheet fundamentals and are generally well managed.”


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