Lebanon's Bonds Soar as Traders Place Counterintuitive Bets

The Lebanese national flag flutters in Beirut, Lebanon, August 18, 2020. (Reuters)
The Lebanese national flag flutters in Beirut, Lebanon, August 18, 2020. (Reuters)
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Lebanon's Bonds Soar as Traders Place Counterintuitive Bets

The Lebanese national flag flutters in Beirut, Lebanon, August 18, 2020. (Reuters)
The Lebanese national flag flutters in Beirut, Lebanon, August 18, 2020. (Reuters)

Israel's airstrikes in Lebanon are inflicting destruction that could set its economy back by years.

But the defaulted country's bonds have climbed to two-year highs, gaining a whopping 44% since late September, as traders snap them up for pennies on the dollar.

Investors reckon the weakening of Hezbollah could precipitate a shake-up of Lebanon's fractured political system and potentially an economic plan to pull the country out of default, according to Reuters.

"The reason bonds have rallied is that the market thinks that the Lebanese political class might finally be able to agree a political path forward and an economic reform plan without Hezbollah in the picture," said Anthony Symond at abrdn.

"This would pave the way for the Eurobonds to eventually be restructured."

The jump still leaves Lebanon's dollar bond maturing in 2025 trading at a paltry 8.5 cents on the dollar - a fraction of the 70-cent level at which bonds are considered distressed.

Lebanon tumbled into default in the spring of 2020 after the country's financial system plunged into a deep economic crisis in 2019. With an effectively non-functioning government wracked by discord and corruption, few expect a debt deal anytime soon.

"Lebanese bonds started getting bids after the death of Nasrallah," said Kaan Nazli, a portfolio manager with Neuberger Berman, referring to Hezbollah leader Sayyed Hassan Nasrallah, whose death was announced on Sept. 28.

"Lebanon was in the 'it could not get worse' category," said Nazli, adding that the latest events could spark change.

Bruno Gennari, emerging markets strategist with KNG Securities, said rumors that Washington could use Hezbollah setbacks to push Lebanon to appoint its first president in two years had given hope.

"Is all about Hezbollah getting weaker," he said.

S&P Global Ratings said last week Israel's military action in Lebanon "put severe pressure" on Lebanon's already battered economy, and would "further delay economic and financial reforms, and the longer-term recovery of fiscal and external accounts."

S&P has a selective default rating on Lebanon's foreign currency debt.

Given their incredibly low prices, any glimmers of good news could boost Lebanon's bonds again, Nazli said

"If you see any headline on a presidential election, or even just a schedule for one - that could be a sign that things are moving forward," he said.



After Trump’s Victory, Arab Demands for Competitive Advantages Due to Regional Tensions

Donald Trump addresses his supporters at the West Palm Beach Convention Center in Florida on Wednesday. (EPA)
Donald Trump addresses his supporters at the West Palm Beach Convention Center in Florida on Wednesday. (EPA)
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After Trump’s Victory, Arab Demands for Competitive Advantages Due to Regional Tensions

Donald Trump addresses his supporters at the West Palm Beach Convention Center in Florida on Wednesday. (EPA)
Donald Trump addresses his supporters at the West Palm Beach Convention Center in Florida on Wednesday. (EPA)

With the election of Donald Trump as US president, the global economy has gained direction for the coming years. Trump’s policies favor corporate tax cuts, increased investment, and expansionary monetary policies. He also promotes local production to boost job creation, which involves imposing significant tariffs on trade partners, particularly in Asia. This approach could trigger a trade war, affecting inflation in both the US and worldwide.

The US economy is already grappling with high prices, slower economic growth, and rising unemployment, alongside a national debt nearing 99% of GDP. This backdrop underscores the importance of economic issues in the recent election.

For the new US administration, domestic concerns will not be the sole priority. Ongoing geopolitical tensions, especially recent Middle Eastern conflicts, will also impact the US economy. To gain regional insights, Asharq Al-Awsat consulted economists from various Arab nations on their expectations and requests from the US president regarding the Middle East.

Priority of Regional Stability

Dr. Mohamed Youssef, an Egyptian economist, emphasized that regional stability is crucial, benefiting the economy and paving the way for resolving complex issues like the Nile Dam dispute affecting Egypt. He highlighted the American role in fostering calm in the region.

Iraqi economist Durgham Mohamed Ali noted that US relations vary across the Middle East; while Lebanon and Yemen remain outside current US alliances, Sudan and Somalia require international aid to rebuild infrastructure.

Competitive Advantage for Arab Countries

Ahmed Moaty, a global markets expert from Egypt, suggested that reduced US tariffs would improve Arab economies’ competitiveness. However, he pointed out the American high debt could motivate the administration to impose tariffs to protect local industries and reduce imports. Ali observed that US tariffs are interest-driven and selective, favoring allies like Japan, Taiwan, and South Korea while being stringent toward BRICS members, such as China, Brazil, and South Africa. He linked tariff policies to regional geopolitics, especially the conflicts involving Israel, Lebanon, Palestine, and Iran, which could influence US economic decisions.

Dr. Mohamed Youssef also argued that easing US-China competition could benefit the global economy, as high tariffs on Chinese goods reduce China’s growth, decreasing demand for key commodities like oil.

Ibrahim Al-Nwaibet, CEO of Saudi Arabia’s Value Capital, predicted that a Republican win could positively impact oil and interest rates, revitalizing the petrochemical and trade finance sectors.

On currency, Moaty noted the strong US dollar pressures emerging markets, especially in the Middle East. He suggested offering US Treasury bonds with higher yields to Arab countries as a counterbalance. Ali added that the dollar’s strength poses challenges for countries heavily reliant on US currency amid global liquidity shortages.

The BRICS Bloc

Ali also mentioned the high levels of US debt, explaining: “In general, the entire world is concerned about rising US debt, slowing growth rates... and is wary of the BRICS alliance, which some Arab countries hope to join. The question remains whether a cold economic war will ensue.”

Youssef also discussed the BRICS, which could play a role in attracting the new US president’s attention to countries joining the alliance. He added: “This may provide new competitive advantages for countries in the region, particularly as countries like Egypt, the UAE, and Iran recently joined BRICS, while Saudi Arabia is still evaluating the benefits of such move.”