The document provides an overview of debt markets in several countries, including Iraq. It notes that since the 2003 US-led invasion and occupation, Iraq's economy and financial systems have suffered. Government bonds could be an important instrument for Iraq to raise funds, but they also carry risks given ongoing security issues. The market for Iraq's international bonds has fluctuated greatly in line with conflict in the country, with prices falling in 2007 during increased violence and investors growing nervous again in 2014 as insurgent groups advanced. The ongoing conflict continues to impact Iraq's sovereign debt market.
3. •WHAT IS A DEBT MARKET?
• Market for fixed income instruments
• Counterpart of equity markets
• 2 types – Primary and Secondary
• Example – Wholesale Debt Market segment of
the National Stock Exchange (secondary
market)
4. •WHAT IS A DEBT INSTRUMENT?
• In the nature of a loan, as opposed to shares
• 2 parties – investor/creditor and
issuer/borrower
• Issuer promises a fixed income to the investor,
in the form of interest
• Price of the instrument determines the yield
• More secure than equity; lesser returns
• Example: Debentures and corporate bonds
6. •‘DEPTH’ OF A DEBT MARKET
• It refers to the total number of buy and sell
orders that are present on the market
• Alternatively, it can also mean the percentage
of the GDP that the market accounts for
• The deeper a market, the higher is its liquidity
7. KUWAIT
• Government bonds
• Sukuk, or Islamic bonds
• 2003-2009 – Issuances worth US$ 100 billion
• Accounted for 40% of the total issuances of the
Gulf Cooperation Council
• Govt. debt issuances accounted for 93% of the debt
issued
• Market has now been recovering from the 2008-09
economic crisis
8. •FACTORS CONTRIBUTING TO DEPTH
• Central Bank of Kuwait – 66 issues in 2013 –
USD 25.41 billion
• 2 new private issuances in 2013 – USD 210
million
• However, the majority of the bonds issued are
with a maturity period of one year
9. •IRAN
• Does not have a publicly traded bond market
• Government allows for issuance of
participation certificates and sukuk bonds
• The Iranian Govt. had issued USD 4.2 bn in
bonds in 2011
• OPEC’s no. 2 oil producer
10. •SAUDI ARABIA
• Accounted for 20% of the total bonds issued by
countries of the Gulf Cooperation Council (USD
5 bn., out of a total of USD 24 bn.)
11. •FACTORS AFFECTING MARKET DEPTH
• Opening of local issue markets to foreign
investors
• Currently, sukuk bonds cannot be purchased by
foreign investors
12. •IRAQ
• Follows a similar regime as Iran
• Recurrence of conflict in the region always
keeps bonds at a risk of default
13. •VENEZUELA
• Venezuelan bond market is completely
government run
• Bond market hit an all time low in Dec. 2014
(lowest in 16 years)
• Bonds due in 2027 had fallen by 54%
14. FACTORS AFFECTING MARKET DEPTH
• Venezuelan government gives fuel subsidies,
which it refused to decrease
• Oil exports, which make up for 95% of the
country’s total exports, fell by 2.9%
15.
16. • Since the 2003 war, and the ensuing entry of occupied forces,
the economy like every other aspect in Iran has suffered.
• The Iraq economy is currently being reconstructed, and
requires development in all parts, especially the financial
system and the government bond (GB) market since they are
important for raising funds. However, GBs are considered a
good instrument for raising money in Iraq.
•Iraq
17. The Murky View of the Debt Market
•Professor Greenstone started by reviewing basic statistics on the Iraqi
economy and on the battle for security within Iraq since February,
2007.
•After the United States helped Iraq renegotiate its leftover debt from
the Saddam Hussein era, the Iraqi government issued about $3 billion
of new bonds in January 2006. These dollar-denominated bonds pay
2.9 percent twice a year and mature in 2028, paying the face value of
$100.
•However, by 2007 a bond with a face value of $100 was trading at
around $60. Professor Greenstone calculated that, from the markets’
standpoint, the implied default risk over the life of the bond was about
80 percent.
18. The impact of the US surge on the Bond
Market
Comparing the yields on Iraqi bonds from the start of the
surge in February, 2007 to late August, Professor
Greenstone calculated that the bondholders implicitly
raised the chances of an Iraqi bond default by 40 percent.
Over that period, Iraqi bond prices fell about 14 percent —
as much as the Confederate cotton bonds fell after the
battle of Gettysburg
19. The situation in 2014
•According to a Reuters news report of late 2014, escalating
conflict in Iraq is making holders of the country's international
debt nervous about whether they will get repaid.
•Advances by Sunni insurgents across northern Iraq and the
emergence of an increasingly viable Kurdish state have got
investors worried that Iraq could split. This could lead to a
disruption of interest or maturity payments on the bond,
particularly as there are no clear market guidelines about what
might happen to the debt.
20. Issue of Iraqi sovereign debt
The size of Iraq's dollar debt is relatively small - a $2.7 billion
bond launched in 2006 in a restructuring of Saddam Hussein-
era commercial debt.
But the bond is held by international investors - including
Franklin Templeton, known for its bets on risky markets such
as Ukraine - and is part of JPMorgan's closely watched
NEXGEM index of frontier market debt, which has
performed strongly over the past two years.
21. The current conflict persists
A sharp spike in the May headline and core WPI inflation,
further escalation of tensions in Iraq leading to Brent crude
price jumping to $115/bl. Most bond debts accelerated at its
quickest pace since December 2013 to climb to 6.01%,
beating analyst estimates of 5.2-5.3% by a wide margin.
Core inflation also unexpectedly rose by 44 bps to 3.84%
from 3.40% in the last month of 2014.
