COMPARATIVE ANALYSIS OF DEBT MARKETS:

KUWAIT, IRAN, SAUDI ARABIA, IRAQ AND VENEZUELA

Sagnik Das, Arpit Gupta, Abhinav Kumar,

Aditya Gupta, Saurabh Sharma

Group 2

Semester VIII (Business Laws Hons.)

DEBT MARKET: A BRIEF OVERVIEW

•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)

•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

•IMPORTANCE OF A DEBT MARKET

•‘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

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

•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

•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

•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.)

•FACTORS AFFECTING MARKET DEPTH•Opening of local issue markets to foreign investors• Currently, sukuk bonds cannot be purchased by foreign investors

•IRAQ• Follows a similar regime as Iran• Recurrence of conflict in the region always keeps bonds at a risk of default

•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%

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%

• 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

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.

The impact of the US surge on the Bond MarketComparing 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

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.

Issue of Iraqi sovereign debtThe 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.

The current conflict persistsA 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.

THANK YOU

QUESTIONS?