Azeri dollar bonds outperform Armenia's as enclave conflict rages

10/14/2020 | 12:56pm

* Fighting erupted in late September over enclave

* Price of Armenian bonds have fallen 3.5% or more

* Bonds issued by oil-rich Azerbaijan slip 1%

* Armenia heading deeper into debt than Azerbaijan

LONDON, Oct 14 (Reuters) - Azerbaijan's dollar bonds are outperforming Armenia's amid a conflict in Nagorno-Karabakh, suggesting investors bet Baku with its oil and gas wealth can cope better during the crisis over the disputed enclave.

Prices of bonds of both states in the Caucasus region fell when fighting erupted on Sept. 27 over territory recognised internationally as part of Azerbaijan but populated by ethnic Armenians. However issues by Armenia, a poorer nation per capita, have dropped further

Since Sept. 21 in the run-up to the conflict, Azerbaijan's 2024 and 2029 issues are both down about 1%, while Armenia's 2025 and 2029 issues have fallen 4.5% and 3.5%, respectively.

On Wednesday, bonds issued by Azeri state oil firm SOCAR held steady even as Baku accused Armenia of attacking oil and gas pipelines, a charge Yerevan denies. At the same time, Armenia's 2025 bond shed 0.6 cents in the dollar.

The price of Azeri bonds are now just 2% off peaks reached this year before taking a knock from the coronavirus crisis.

"Azeri bonds are faring better because the conflict and pandemic have less near-term downside risks," ING Bank strategist Trieu Pham said, citing the country's external reserves and less than $3 billon in outstanding Eurobonds.

Azerbaijan, rated BB+ by Fitch, has a sovereign wealth fund worth $43.2 billion, equivalent to about 85% of gross domestic product (GDP), providing the country with a financial buffer.

Fitch cut Armenia's rating to B+ this month. The agency forecast the economy would shrink 6.2% this year due to the conflict and the pandemic, while it also expected government debt to surge to 63.9% of GDP by the end of 2020.

Azerbaijan's economy is expected to shrink in 2020, hurt by this year's fall in oil prices and the coronavirus crisis. But it has a lower debt ratio. Before the fighting, S&P Global predicted debt would reach 38% of GDP by the end of the year.

The conflict risks stoking tension beyond the region, given Turkey's support for Azerbaijan and Russia's defence pact with Armenia. Exports data https://www.reuters.com/article/armenia-azerbaijan-turkey-arms-int-idUSKBN26Z230 showed a six-fold increase in Turkish sales of military equipment to Baku this year.

But Nikolay Markov, senior economist at Pictet Asset Management, said Moscow has showed no interest in any escalation. "Russia wants to play at peace in the region, and doesn't really want a military involvement," he said.

(Reporting by Tom Arnold; Editing by Sujata Rao and Edmund Blair)

© Thomson Reuters 2020
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