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Mideast faces higher debt costs but won’t default

Mideast faces higher debt costs but won’t default

Over $16 bln bonds due in Mideast, North Africa in 2011; Over $35 billion in syndicated bank loans mature this year; Default risk seen negligible but borrowing costs may rise.

February 23, 2011 4:48 by

With no end in sight to political unrest in the Middle East and North Africa, borrowers from the region will find it costlier to roll over maturing debt this year but are unlikely to default.

Hundreds of people have been killed in Bahrain and Libya in anti-government protests inspired by upheavals that just weeks ago dislodged decades-old regimes in Egypt and Tunisia.

The turmoil has not only put on hold bond issuance plans from the region, it has also sparked a jump in the cost of debt insurance. Higher credit default swaps inevitably spell higher borrowing costs.

Few expect Egypt and Libya-style eruptions of violence in richer countries such as Saudi Arabia and Qatar but their CDS have surged to multi-month highs, raising borrowing costs across the region.

Thomson Reuters data shows Middle East and North African entities must find over $16 billion to redeem international bonds maturing this year.

Of this, over $13 billion belongs to sovereigns or state-run entities. Egypt must find some $2.5 billion to repay debt, while the region’s other two vulnerable states, Lebanon and Tunisia, must repay $1.3 billion and $795.5 million respectively. On syndicated loan markets, over $35 billion comes due as a deals sealed during the 2006-2007 boom start to mature

None of this looks onerous, investors and analysts say. Bank lenders are relatively more flexible in renegotiating loan extensions, and bond holders don’t appear too worried either.

“We are not expecting any of these markets to have any trouble with debt servicing,” said Kevin Daly, a portfolio manager at Aberdeen Asset Management, who holds debt from Bahrain and Jordan and also bonds issued by Dubai utility DEWA.

“These countries are not heavy borrowers in external debt markets,” he added.

There are other reasons: much of this debt is held by local investors while Gulf coffers benefit from oil revenues. Regional instability has pushed oil higher to 2-1/2 year highs, would paradoxically prove a boon even for Bahrain, whose budget balances with oil at $97-$100 per barrel.

Net oil importers Egypt and Tunisia are vulnerable to higher commodity prices but their foreign debt levels are relatively low. Even during the crisis in Cairo, Egypt’s external bonds saw interest from foreign fund managers.

Analysts point out central bank reserves in both these countries are well in excess of 2011 debt servicing needs.

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