Last Updated: Sat Oct 15, 2011 16:06 pm (KSA) 13:06 pm (GMT)

Why did Lebanese sovereign bonds outperform their international counterparts?

Nadine Hani

After having made headlines in the Middle East for years, current affairs in Lebanon appear to be overshadowed by the upheavals shaking the region from Syria to Egypt. The absence of news on Lebanon today is in itself a good thing because, as the saying goes, no news is good news. The economic and political situation of the country is much less dire than that of its Arab neighbors.

Despite that, Lebanese economic indicators remain negative this year, which made it surprising to see the country’s sovereign bonds record the fourth best performance globally in the third quarter of this year, according to a report by CMA, which rates global sovereign debts.

In the past months, fears of default by some European countries prompted investors to refrain from taking risks. When such fears regarding a certain country grow, investors sell its sovereign bonds, causing their prices to tumble, and prompts investors to demand a higher return for investing in them. This is what happened to the European sovereign bonds, with Greece topping the list of the world’s riskiest countries, followed by Portugal. The list of the top 10 riskiest countries saw the entry of Italy and Hungary in the third quarter, while Dubai remained the 10th riskiest sovereign.

Amid investors’ reluctance to take risks, the borrowing cost for Arab countries rose in general, albeit very slightly for Lebanon’s sovereign bonds. If we compare the spread that investors demand above the rate of return of American Treasury bonds for buying Lebanese Dollar bonds due in 2011, this margin increased in the third quarter by 34 percent to 398 basis points by the end of September. The spread for Dubai’s bonds due in 2020 increased by about 60 percent during the same period to reach 652 basis points by the end of September.

Lebanon also outperformed Qatar, whose 2020 bonds’ spreads increased by 74 percent in the third quarter despite its AA rating by S&P as compared to the B rating of Lebanon by the same rating agency. But there is a technical reason why Lebanese dollar bonds are performing well. Lebanese banks are the largest investors in the country’s sovereign bonds. They own $12.5 billion of these bonds whose total value is $18 billion. The remaining third is owned by individuals and the Lebanese Central Bank and international institutions.

Dollar deposits in the Lebanese banking sector reached $75 billion by the end of September 2011, whereas the dollar loans reached only $31 billion. This means that banks have $44 billion of surplus dollar deposits.

According to Central Bank directives, Lebanese banks can only invest 50 percent of their shareholders’ equity in foreign investments. This is equivalent to $5.35 billion as of today.

So if we consider that banks invested this entire amount, in addition to the $12.5 billion they own in Lebanese sovereign bonds, they would still be left with $26 billion liquidity surplus, which enables them to buy more bonds whenever prices go down. This is what supported the price of the Lebanese dollar sovereign bonds in the third quarter.

This should not lead to inaction in dealing with the budget deficit. The cause of liquidity flowing into Lebanese banks is the economic stability that Lebanon has enjoyed in the past few years. But every increase in the deficit or deterioration of the economic situation could lead to the downgrading of the already low rating of Lebanese sovereign bonds, which in turn could lead to a decrease of the flow of liquidity into the banking sector.

(The writer is a senior business news presenter at Al Arabiya and can be reached at She can be found on Twitter at: @Nadine_bn. This article was first published in An Nahar newspaper on Oct. 13, 2011 and translated by Mustapha Ajbaili, who can be reached at:

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