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The war between Israel and Hamas is heaping pressure on borrowing costs in neighbouring countries, as international investors grow increasingly concerned that the conflict will rapidly escalate.
The spreads — or gaps — between the average yields on both Jordan’s and Egypt’s dollar-denominated bonds and equivalent US Treasuries have shot up this week as investors have priced in more risk for owning the debt. In contrast, spreads across the broader emerging markets index have tightened.
Spreads moved wider on Friday after Israel’s military warned more than 1mn Palestinians to leave Gaza City and its outskirts, in a move the UN said would cause a “calamitous” mass civilian displacement.
Since October 6 the yield on Jordan’s 2030 dollar-denominated bond has jumped from 8.5 per cent to 9.45 per cent, the highest level since October last year. Yields move inversely to prices.
“By Jordanian standards, it’s a big move,” said Edwin Gutierrez, head of emerging market sovereign debt at fund manager Abrdn. “The market is reading through and pricing that Jordan and Egypt could be dealing with a refugee crisis.”
Jordan’s economy is also heavily reliant on tourism, which accounts for roughly 10 per cent of gross domestic product. Analysts at Goldman Sachs said this left Jordan “particularly vulnerable” as the conflict unfolded, “but so far it has not pushed Jordan’s USD [dollar] bonds into distress”.
Egypt’s debt has also come under renewed strain despite already trading in distressed territory. The price of its dollar bond maturing in 2031 has fallen from 53 cents to 51 cents since October 6, adding pressure to a country facing a wall of debt refinancing in the coming years.
“A refugee crisis would only add to Egypt’s woes, though ironically it could benefit from international donors should one ensue,” Gutierrez said.
Egypt sealed its fourth loan since 2016 from the IMF in October last year but remains in tense negotiations with the agency. The country’s gross financing needs in 2023 amount to “a staggering 35 per cent of its GDP”, according to the IMF.
The chances of debt restructuring talks in Lebanon, which defaulted on its debt in 2020, have also fallen, investors said. The country’s bonds sold off on fears that the militant group Hizbollah could become involved in the Israel-Hamas war.
“The only hope Lebanese bonds had for a positive outcome was based on a scenario of both regional and domestic political normalisation being achieved,” said Thys Louw, portfolio manager for the emerging markets hard currency debt strategy at asset manager Ninety One. He added that the prospects for this “had deteriorated”.
Across the broader Gulf region, the market reaction has been muted, with spreads across sovereigns with investment grade-rated debt ending the week tighter despite an initial sell-off on Monday. These countries have low debt ratios, high foreign currency reserves and benefit from elevated oil prices.
“There was a knee-jerk sell-off but they all came back because it’s not like the conflict will dent the financing situation in the likes of the UAE, Qatar and Saudi Arabia,” Gutierrez said.
Paul Greer, an emerging markets fixed income portfolio manager at Fidelity, said that “for the moment, the market has viewed the war to be contained to within Israel and Gaza”.
“If this spills out into other countries in the region, then we would expect Middle East sovereign credit spreads to widen more materially,” he added.