The Government of Iraq issued USD denominated bonds worth USD 2.7 billion in January 2006 under commercial debt-for-debt exchange offer. The bonds are dated January 1, 2006 with first coupon date July 15, 2006 and maturity date January 15, 2028 at coupon of 5.8% p.a. payable twice a year on January 15 and July 15 every year during the lifetime of the bonds.
During 2013, the bond price has moved within a range from 75.00 and 97.00. Median is 90.88, mode is 84.00 and average is 88.78 with a standard deviation of 0.88. The last price was 82.50 or a yield to maturity of 8.356% on Friday. The lowest yield to maturity in this year was 6.178% on January 21, 2013 and the maximum yield to maturity was 9.627% on June 26, 2013 while the average yield to maturity in this year is 7.369%
The market as a whole has shown remarkable resilience to Iraq’s political and security situations over the last few years, suggesting that Iraq’s high political and security risks are priced in. The risk premium for Iraq sharply dropped after June 27 after the UN decision to ease the sanctions. The spread between Iraqi sovereign bonds and U.S. Treasuries, which peaked this year at 653 basis points on June 26, has narrowed since then to 548 basis points on Friday.
The oil production and export are on an increasing trend. Oil constitutes more than 90% of Iraq’s revenue. Iraq’s GDP is growing at 10.2% with inflation at 1.28% on y-o-y basis. Iraq is having current account surplus of 0.3% and its net foreign reserve is USD 67 billion. The dollar-dinar rate is maintained at 1166 for more than two and a half years. The government is increasing spending by 18% this year to USD 118 billion, and the IMF projects Iraq to post the region’s quickest growth in the next four years with its real GDP growing at 9%.
With healthy oil revenues and growing economic and financial strength of the country, the yield is expected to fall in near future from the present level. In the last week, the yield fell by 5.68% from 8.859% to 8.356%
Iraq’s only dollar-denominated sovereign bond issue of USD 2.7 billion is roughly 2.7% of its 2012 oil export revenue. Given the tiny amount of this issue relative to oil revenues, there is little doubt Iraq can easily service this debt. In the present scenario, these bonds are expected to give an excellent risk reward.