The Israel-Hamas conflict isn’t just shaking up the political landscape; it’s shaking up regional debt markets with an intensity that’s impossible to ignore.
Neighboring countries are feeling the heat, and international investors are sitting on pins and needles. Their worries? A rapid and uncontrollable escalation of the situation.
A Domino Effect on the Economic Front
Jordan and Egypt, two of Israel’s closest neighbors, are paying the price. The difference between the average yields on their dollar-denominated bonds and those of US Treasuries have surged.
This widening gap stands in stark contrast to the shrinking spreads seen across the broader emerging markets index.
And here’s a twist: just as Israel’s military sent warnings to a staggering million Palestinians in Gaza City, suggesting a mass exodus, the UN responded with grave concerns over a potential catastrophic civilian displacement.
Such geopolitical moves only add fuel to the financial fire. In light of these events, the yield on Jordan’s bond maturing in 2030 experienced a significant leap – from 8.5% to 9.45%.
It’s a jump that Edwin Gutierrez, a heavyweight in emerging market sovereign debt, finds quite telling. He suggests that the markets might be bracing for a refugee crisis that Jordan and Egypt would have to confront head-on.
Jordan’s financial health is intricately tied to its tourism sector, contributing a hefty 10% to its GDP. While some analysts, including those at Goldman Sachs, have raised red flags about Jordan’s vulnerability, the nation’s dollar bonds haven’t hit the distress alarm just yet.
Egypt’s Growing Debt Woes
But Jordan isn’t the only one in the hot seat. Egypt’s debt has entered the danger zone. The price of its bond, which matures in 2031, has declined from 53 cents to 51 cents in a mere week. And let’s not forget, Egypt is staring at a looming debt refinancing mountain in the foreseeable future.
A refugee crisis? That might just be the straw that breaks the camel’s back for Egypt, albeit Gutierrez speculates that international donors might step in should the crisis materialize.
The IMF already extended its fourth loan to Egypt in the previous year. Yet, negotiations between the two are still rife with tension. The financial figures are eye-popping: Egypt’s gross financing needs for 2023 could be an astronomical 35% of its GDP, as per the IMF.
Lebanon, a nation already grappling with a 2020 debt default, isn’t faring any better. Hopes for a debt restructuring have dimmed. Why? Investors are spooked over the possibility of Hizbollah, the militant group, jumping into the Israel-Hamas fray.
Thys Louw, an emerging market portfolio manager, had banked on both regional and local political stabilization. But given the current turbulence, he believes that outlook has turned bleak.
Gulf Region: A Different Story
Interestingly, the broader Gulf region has remained relatively stable. Initial reactions saw a dip, but sovereigns with investment grade-rated debt concluded the week on a tighter note.
What’s their secret? A combination of low debt ratios, substantial foreign currency reserves, and the cushioning effect of high oil prices.
Gutierrez weighs in on this as well, highlighting that nations like UAE, Qatar, and Saudi Arabia remain financially robust. They’re not going to let the Israel-Hamas conflict dent their financing scenarios.
Wrapping it up, Paul Greer of Fidelity points out a crucial distinction. The market perceives the war as localized, contained primarily within Israel and Gaza.
However, should it spill into other nations, the debt domino effect might just become more pronounced across the Middle East.
