The Increasing Pressure on Borrowing Costs in Neighboring Countries Amid Israel-Hamas Conflict

Introduction

The war between Israel and Hamas is putting significant strain on borrowing costs in neighboring countries. International investors are growing increasingly concerned about the potential escalation of the conflict, leading to higher risks associated with owning the debt of countries in the region.

Economic Impact of the Conflict

The ongoing conflict has widened the spreads between the average yields of Jordanian and Egyptian dollar-denominated bonds and equivalent U.S. Treasury bonds. This increase in spreads reflects the market’s perception of greater risk in holding the debt of these countries. In contrast, spreads on the broader emerging market index have tightened.

Widening Spreads

The spreads on Jordan’s dollar-denominated bonds maturing in 2030 have jumped from 8.5% to 9.45% since October 6, reaching their highest level since October last year. This significant increase indicates the market’s concern about a potential refugee crisis in Jordan and Egypt due to the conflict.

Economic Vulnerabilities

Jordan’s economy heavily relies on tourism, which accounts for around 10% of its gross domestic product. The conflict in the neighboring region has raised concerns about the impact on Jordan’s tourism industry, further exacerbating its economic vulnerabilities.

Egypt, another neighboring country, is also facing renewed strain on its debt. The price of its dollar bonds due in 2031 has fallen, adding pressure to a country already burdened with a significant debt refinancing wall in the coming years.

Global Concerns and Implications

The potential refugee crisis and the escalation of the conflict have wider implications in the region. The market reaction has been subdued in Gulf countries with low debt-to-GDP ratios, high foreign exchange reserves, and benefiting from high oil prices. However, the market remains watchful as the conflict could spill over into other countries, leading to more substantial impacts on Middle East sovereign credit spreads.

Lebanon’s Debt Restructuring Talks

The chances of debt restructuring talks in Lebanon, a country that defaulted on its debt in 2020, have diminished. Investors are concerned that the militant group Hezbollah could be drawn into the war between Israel and Hamas, further complicating the situation in Lebanon. This has negatively affected the country’s bonds.

Assessment of the Situation

Analysts and portfolio managers express caution and uncertainty about the future trajectory of the conflict. While the initial market reaction has been relatively contained, the potential for the war to extend beyond Israel and Gaza is a significant concern, with implications for the wider Middle East region.

Unique Insights and Perspectives

While the article provides an overview of the economic impacts and market reactions to the Israel-Hamas conflict, it’s essential to delve deeper into the subject matter to gain a comprehensive understanding. Here are some key insights and perspectives:

Refugee Crisis and Economic Consequences

The potential refugee crisis mentioned in the article has significant economic consequences for the affected countries. In addition to the strain on their economies, governments have to address the humanitarian and social challenges associated with hosting refugees.

For Jordan and Egypt, who are already facing economic vulnerabilities, the influx of refugees could put additional pressure on their limited resources. It may require substantial international support to mitigate the humanitarian and economic impact for these countries.

Investor Sentiment and Risk Perception

The widening spreads on Jordanian and Egyptian bonds indicate how the conflict is shaping investor sentiment and risk perception. Investors are pricing in the increased risk associated with owning the debt of countries in the region, reflecting their concerns about the potential long-term impact of the conflict on these economies.

Understanding investor sentiment and risk perception is crucial for policymakers and market participants to address challenges in accessing international capital markets and manage borrowing costs effectively.

Tourism and Economic Diversification

The article briefly mentions the heavy reliance of Jordan’s economy on tourism. However, the broader implications of this reliance on a single sector need further exploration. The conflict highlights the vulnerability of economies heavily dependent on tourism and the importance of economic diversification as a risk mitigation strategy.

Political Uncertainty and Market Volatility

The geopolitical dynamics of the Middle East region contribute to heightened political uncertainty and market volatility. The potential for the conflict to spill over into other countries can create ripple effects, impacting investor confidence, foreign direct investment, and trade flows.

Understanding the interconnectedness of political factors and market dynamics is crucial for assessing the long-term economic impact of the conflict and formulating appropriate policy responses.

Conclusion

The war between Israel and Hamas is increasing pressure on borrowing costs in neighboring countries, with Jordan and Egypt facing widening spreads on their dollar-denominated bonds. The escalating conflict and the potential for a refugee crisis have raised concerns about the long-term economic implications for these countries.

While Gulf countries have exhibited relative stability in their sovereign debt market, the widening spreads reflect the market’s perception of increased risk. It remains essential to closely monitor the situation as the conflict evolves, as it poses wider implications for the Middle East region and investor sentiment.

Summary

The war between Israel and Hamas is causing borrowing costs to rise in neighboring countries, particularly in Jordan and Egypt. The spreads between their dollar-denominated bonds and U.S. Treasury bonds have widened, indicating higher risks associated with owning their debt. This increase in borrowing costs comes as international investors grow increasingly concerned about the conflict’s potential escalation. The conflict’s economic implications include a potential refugee crisis, strain on tourism-dependent economies like Jordan, and political uncertainty affecting market dynamics. Middle East sovereign credit spreads may be significantly impacted if the conflict extends beyond Israel and Gaza. While Gulf countries have remained relatively stable due to their strong economic fundamentals, it is crucial to closely monitor the situation and assess the long-term economic consequences of the war.

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The war between Israel and Hamas is increasing pressure on borrowing costs in neighboring countries, while international investors are increasingly concerned that the conflict could quickly escalate.

The spreads – or gaps – between the average yields of both the Jordanian and Egyptian dollars bonds and equivalent U.S. Treasury bonds have soared this week as investors have priced in greater risk to owning the debt. In contrast, spreads on the broader emerging market index tightened.

Spreads widened on Friday after the Israeli army warned more than a million Palestinians leave Gaza City and its suburbs, in a move that, according to the United Nations, would cause a “calamitous” mass displacement of civilians.

Since October 6, the yield on Jordan’s dollar-denominated bonds maturing in 2030 has jumped from 8.5% to 9.45%, the highest level since October last year. Yields move inversely to prices.

“By Jordanian standards, it’s a big move,” said Edwin Gutierrez, head of emerging market sovereign debt at fund manager Abrdn. “The market is reading and evaluating the fact that Jordan and Egypt may be facing a refugee crisis.”

Jordan’s economy is also heavily dependent on tourism, which accounts for approximately 10% of gross domestic product. Analysts at Goldman Sachs said this left Jordan “particularly vulnerable” as the conflict unfolded, “but so far has not boosted the Jordanian dollar [dollar] binds in difficulty.”

Egyptian debt has also come under renewed strain, despite already trading in troubled territories. The price of its dollar bonds due in 2031 fell from 53 cents to 51 cents as of Oct. 6, adding pressure to a country that faces a debt refinancing wall in coming years.

“A refugee crisis would only add to Egypt’s woes, although, ironically, it could benefit from international donors if it were to occur,” Gutierrez said.

Egypt signed its fourth loan since 2016 with the IMF in October last year but remains in tense talks with the agency. According to the International Monetary Fund, the country’s gross financial needs in 2023 amount to “a staggering 35% of its GDP”.

Chances of debt restructuring talks in Lebanon, which defaulted on its debt in 2020, have also diminished, investors said. The country’s bonds were sold off amid fears that the militant group Hezbollah could be drawn into the war between Israel and Hamas.

“The only hope Lebanese bonds had for a positive outcome was based on both a regional and domestic political normalization scenario,” said Thys Louw, portfolio manager for emerging markets hard currency debt strategy at asset manager Ninety One. He added that the outlook for this “has deteriorated”.

Across the Gulf region, market reaction was muted, with spreads across investment grade sovereign debt ending the week lower despite initial selling on Monday. These countries have low debt-to-GDP ratios, high foreign exchange reserves and benefit from it high oil prices.

“There was a knee-jerk sell-off, but they all came back because it’s not like the conflict is going to affect the financial situation in countries like the United Arab Emirates, Qatar and Saudi Arabia,” Gutierrez said.

Paul Greer, emerging markets bond portfolio manager at Fidelity, said that “for now, the market believes the war is contained within Israel and Gaza.”

“If this extended to other countries in the region, then we would expect Middle East sovereign credit spreads to widen more substantially,” he added.