Yields on the Middle Eastern nation’s $2.7 billion security due January 2028 slid 137 basis points to 7.43 percent in the eight days from June 24 after Citigroup became the first U.S. lender to venture into Iraq since Hussein was toppled a decade ago. That compares with a 39 basis-point drop to 5.19 percent in the HSBC/Nasdaq Dubai Conventional Sovereign US Dollar Bond Index in the period. Iraq’s bonds yielded 7.4 percent at 4:20 p.m. today in .
Citigroup, and are the latest international banks to expand in the second-largest producer in the Organization of Petroleum Exporting Countries. The UN Security Council added to investor confidence by voting on June 27 to remove the threat of military enforcement on the issues of Kuwaiti people, property and archives missing since Iraq invaded the country in 1990.
Citigroup’s announcement “had an impact because it meant that big banks are going into Iraq,” Sanjay Motwani, president of Singapore-based Sansar Capital Management LLC, which manages a fund with $30 million invested in Iraqi equities, said in a telephone interview. “The for Iraq sharply dropped after June 24, mainly in anticipation of the UN decision to ease the sanctions, which was eventually adopted June 27.”
Iraq, with the world’s fifth-largest proven oil reserves, is boosting output and rebuilding its economy after decades of sanctions, war and neglect. , and other companies helped boost production by 24 percent in 2012. The government is increasing spending by 18 percent this year to $118 billion, and the forecasts an annual economic growth rate of 9 percent, the fastest after among 18 countries in the region.
The spread between Iraqi sovereign bonds and U.S. Treasuries, which peaked this year at 653 on June 25, has narrowed since then by 127 basis points, or 1.27 percentage points, JPMorgan Chase’s EMBIG Sovereign Spread Iraq index shows. The spread was 506 basis points yesterday.
“In a global context, Iraq has been a strong performer,” Gabriel Sterne, a London-based economist at Exotix Holdings Ltd. whose research includes 40 frontier-market sovereigns, said in a July 16 e-mail. “There is the usual trade-off between political risk and strong revenues that investors have to weigh up. So I think the bonds are roughly fairly valued.”
Car bombings and other violent acts threaten to undermine the country’s stability. The yield on Iraq’s bonds gained 20 basis points after July 2 amid a wave of deadly violence. At least 337 people have been killed in attacks across the nation so far this month, the reported, citing police and local officials.
Iraq faces internal political wrangling and a dispute between the central government in Baghdad and the semi-autonomous Kurdish region, which has halted oil exports by pipeline since December. Street protests by minority , worsening relations with and the civil war in neighboring contribute to tensions in the country.
The UN Security Council boosted Iraq’s prospects when it agreed that the issue of missing Kuwaiti citizens and disagreements over Kuwaiti archives and property should be resolved peacefully, under Chapter 6 of the UN Charter. The council kept the constraints pertaining to an arms embargo and war reparations under Chapter 7, which allows the use of force.
“The fact that some sanctions under Chapter 7 have been lifted means that it will be easier for international banks to trade and have a relationship with local Iraqi banks,” Sansar’s Motwani said.
Foreign banks were barred from the nation until after the U.S.-led invasion ousted Hussein’s government. Today, 15 international banks operate in the country of 33 million people. They compete with seven state banks, 23 private lenders and nine Islamic banks, according to the central bank’s website.
The country’s stock exchange attracted investors in the February listing of Asiacell Communications PJSC, which raised $1.3 billion in the Middle East’s biggest initial public offering since 2008.
Citigroup plans to open representative offices and branches in Baghdad and the cities of Basra and Erbil to benefit from an estimated $1 trillion of infrastructure spending, Mayank Malik, the U.S. bank’s chief executive officer for Jordan, Iraq, Syria and the Palestinian territories, said in a June 27 interview. The lender is also among international banks seeking to finance a pipeline to export Iraqi oil and natural gas through Jordan.
plans to open branches this year in Baghdad and Erbil, followed by a third office in Basra, a southern oil hub, in 2014. JPMorgan Chase signed a one-year agreement on July 6 to help the Trade Bank of Iraq finance imports of goods and services, John Gibbons, managing director and EMEA regional executive for the New York-based bank, said in a July 7 interview.
“Foreign banks entering Iraq are mainly there for trade finance, as companies from their respective countries need financial tools and services to do business in Iraq,” Abdul-Aziz Hassoun, executive director of the League of Private Banks, an Iraqi business group, said by phone on July 17.
“Iraq is a promising market because of the rising oil revenue and infrastructure projects which have helped boost the level of trade finance on an annual basis,” he said.