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Lebanon's external debt appraisal kept at 'underweight'

15 March 2010

BEIRUT: Merrill Lynch maintained its recommendation on Lebanon’s external debt at “undeweight” in its model portfolio of emerging markets debt and kept Lebanon’s market weight at 2.1 percent in March 2010, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

Last January, Merrill Lynch revised downward its recommendation to “underweight” from “market weight” in its portfolio and reduced Lebanon’s market weight from 5.5 percent after it rebalanced its portfolio at the end of last year to reflect its 2010 views of the external debt market.

Lebanon’s allocation remained unchanged at 2.1 percent since the beginning of the year. It was 5.5 percent in September, 5.9 percent in July, 7.4 percent in April, and 6.9 percent in January 2009.

Lebanon’s external debt rating of “underweight” placed Lebanon in the same category as Brazil, Colombia, Peru, the Philippines and South Africa. Lebanon’s “underweight” is similar to the recommendation on the Europe, the Middle East and Africa (EMEA) region and for similarly rated countries. Lebanon is represented in the portfolio by the Republic March 2013 Eurobond. Lebanon accounted for 6.9 percent of the allocations in the EMEA region in March compared to 7.5 percent in January and a high of 25 percent last March. Lebanon’s allocation was the 14th highest among countries in the portfolio, unchanged from January. Lebanon accounted for 12 percent of allocations to similarly-rated countries, up from 10.5 percent in January.

In parallel, Lebanon’s external debt posted the 8th highest return at 2.75 percent among 20 markets in the EMEA region in the first two months of 2010, as well as the 17th best return among the 40 emerging markets included in Merrill Lynch’s Sovereign Plus Debt Index. Lebanon outperformed the EMEA returns of 1.88 percent and the overall emerging market returns of 1.84 percent in the covered period.

Also, Lebanon’s external debt outperformed the 1.93 percent returns posted by similarly rated sovereigns, while it posted the sixth best performance at 2.81 percent in the EMEA region and the 10th best performance in emerging markets in US dollar terms. But it underperformed significantly the 4.13 percent returns of US dollar “B”-rated bonds.

Further, Lebanon’s external debt posted the third-highest returns among 8 countries in the Middle East & Africa region during the covered period, as it came ahead of Iraq with 2.69 percent, Tunisia with 1.67 percent, Morocco with 1.31 percent, South Africa with 0.87 percent and Egypt with -0.04 percent, and behind Ghana with 3.28 percent and Gabon with 3.32 percent. Also, it posted returns of 0.62 percent in February, ahead of Gabon (-0.63 percent), Ghana (-0.27 percent) and Egypt (-0.02 percent), but behind Iraq (2.06 percent), Morocco (0.87 percent), South Africa (0.88 percent) and Tunisia (0.81 percent).

In parallel, Lebanon’s external debt posted the 11th highest return in the EMEA region and the 17th highest return in emerging markets during February 2010. It underperformed the EMEA returns of 0.95 percent, the emerging markets returns of 1.36 percent and the 1.15 percent returns of similarly-rated sovereigns for the same month.

Merrill Lynch said the spread on Lebanese Eurobonds ended February at 309 basis points, 12th narrowest in the EMEA region and 23rd narrowest among emerging markets. It was wider than the EMEA spread of 257 basis points and the emerging markets overall spread of 288 basis points as at end-February 2010. Also, Lebanon’s spread tightened by two basis points in December, as spreads in the EMEA tightened by three basis points while spreads in emerging markets overall tightened by 13 basis points in the same month. – The Daily Star

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