21 May 2009
The debt market in the Middle East and North Africa (Mena) has the potential to grow to $1.6 trillion (Dh5.8trn) per annum but currently remains in its nascent stage, according to economic experts speaking at an event organised by the Dubai International Financial Centre (DIFC) yesterday.
The event - Issuing and Structuring Bonds and Sukuk - saw discussions on the IMF Global Financial Stability Report (April 2009), which said debt securities form just three per cent of the Mena capital markets.
This compares poorly with the average 42 per cent that debt securities contribute to global capital markets.
Dr Nasser Saidi, Chief Economist of the Dubai International Financial Centre (DIFC), said the Mena debt market was in a "severely underdeveloped" state.
Banks currently shoulder the bulk of the region's funding requirements, which is detrimental to the long-term health of the region's financial structure, experts said.
Abdulla Al Awar, Managing Director of DIFC Authority, said: "There is a need to find new ways to attract and raise capital."
Saidi said: "Banks have a short-term asset base."
Most government projects, including infrastructure, public works and even real estate, have a long gestation period. This leads to a mismatch between the banks' short-term assets and long-term liabilities," Saidi added, underlining the urgent need for regional governments to develop a local debt market to finance their projects and even budgets.
Michael Grifferty of the US Department of Treasury, Office of Technical Assistance, said: "Banks are constrained from offering term-loans. We need to develop the government debt market, corporate debt market, including convertible debt and conventional and Islamic bonds.
Pointing to the fact that, until now, oil prices have largely dictated the health of regional economies, Saidi advocated severing "the link between energy revenues and capital spending, leading to lower economic and financial volatility, breaking oil-induced boom-bust cycles". "Money has been coming in from oil but now we have matured and are looking at economic integration. We have to make that transformation and for that we have to break the link between oil and investments. The price of oil can lead to a cycle of boom and bust and that can be broken by the debt markets," Saidi said.
According to him, developing the Gulf's debt markets will not only provide local governments the flexibility to finance projects, the fact that they will be thus funded will ensure their viability, transparency and accountability. "To qualify for funding via the debt markets, projects will have to have the ability to pay back those funds, leading to more transparency and accountability," Saidi said.
He added that developing the local debt markets will also support and enable GCC economic and financial market integration, as well as the monetary union, by helping in the regional deployment of the region's investible wealth, which currently goes offshore owing to lack of local options. Saidi said the bond and sukuk markets of the GCC still lack important ingredients of a well-functioning debt capital market and need to be improved.
"Developing GCC debt markets is an opportunity to transform GCC economies," he said. There is no rating culture, no market transparency, a lack of benchmarks, no long maturities, lack of a broad spectrum of market participants, and an absence of a derivative market for managing interest rate and credit risk, he said.
In 2008, the GCC aggregate bond market, which includes both the conventional and sukuk dropped 62.4 per cent compared with the amount raised in 2007. The number of issuances was 34 conventional bonds and 42 sukuk. This signifies an increase in the number of sukuk issuances. "There is a shift in preference from conventional to Islamic bonds," said Saidi.
Plan to set up Bond association
The Gulf Bond and Sukuk Association (GBSA) is being established in the GCC as a regional trade association dedicated to pursuing best practices in the development and expansion of bond and sukuk markets.
The US Department of Treasury, Office of Technical Assistance, will help to set it up.
"The GBSA will be based in the DIFC but governed by its members across the Gulf," said Michael Grifferty, Department of Treasury.
The debt market in the Middle East and North Africa (Mena) has the potential to grow to $1.6 trillion (Dh5.8trn) per annum but currently remains in its nascent stage, according to economic experts speaking at an event organised by the Dubai International Financial Centre (DIFC) yesterday.
The event - Issuing and Structuring Bonds and Sukuk - saw discussions on the IMF Global Financial Stability Report (April 2009), which said debt securities form just three per cent of the Mena capital markets.
This compares poorly with the average 42 per cent that debt securities contribute to global capital markets.
Dr Nasser Saidi, Chief Economist of the Dubai International Financial Centre (DIFC), said the Mena debt market was in a "severely underdeveloped" state.
Banks currently shoulder the bulk of the region's funding requirements, which is detrimental to the long-term health of the region's financial structure, experts said.
Abdulla Al Awar, Managing Director of DIFC Authority, said: "There is a need to find new ways to attract and raise capital."
Saidi said: "Banks have a short-term asset base."
Most government projects, including infrastructure, public works and even real estate, have a long gestation period. This leads to a mismatch between the banks' short-term assets and long-term liabilities," Saidi added, underlining the urgent need for regional governments to develop a local debt market to finance their projects and even budgets.
Michael Grifferty of the US Department of Treasury, Office of Technical Assistance, said: "Banks are constrained from offering term-loans. We need to develop the government debt market, corporate debt market, including convertible debt and conventional and Islamic bonds.
Pointing to the fact that, until now, oil prices have largely dictated the health of regional economies, Saidi advocated severing "the link between energy revenues and capital spending, leading to lower economic and financial volatility, breaking oil-induced boom-bust cycles". "Money has been coming in from oil but now we have matured and are looking at economic integration. We have to make that transformation and for that we have to break the link between oil and investments. The price of oil can lead to a cycle of boom and bust and that can be broken by the debt markets," Saidi said.
According to him, developing the Gulf's debt markets will not only provide local governments the flexibility to finance projects, the fact that they will be thus funded will ensure their viability, transparency and accountability. "To qualify for funding via the debt markets, projects will have to have the ability to pay back those funds, leading to more transparency and accountability," Saidi said.
He added that developing the local debt markets will also support and enable GCC economic and financial market integration, as well as the monetary union, by helping in the regional deployment of the region's investible wealth, which currently goes offshore owing to lack of local options. Saidi said the bond and sukuk markets of the GCC still lack important ingredients of a well-functioning debt capital market and need to be improved.
"Developing GCC debt markets is an opportunity to transform GCC economies," he said. There is no rating culture, no market transparency, a lack of benchmarks, no long maturities, lack of a broad spectrum of market participants, and an absence of a derivative market for managing interest rate and credit risk, he said.
In 2008, the GCC aggregate bond market, which includes both the conventional and sukuk dropped 62.4 per cent compared with the amount raised in 2007. The number of issuances was 34 conventional bonds and 42 sukuk. This signifies an increase in the number of sukuk issuances. "There is a shift in preference from conventional to Islamic bonds," said Saidi.
Plan to set up Bond association
The Gulf Bond and Sukuk Association (GBSA) is being established in the GCC as a regional trade association dedicated to pursuing best practices in the development and expansion of bond and sukuk markets.
The US Department of Treasury, Office of Technical Assistance, will help to set it up.
"The GBSA will be based in the DIFC but governed by its members across the Gulf," said Michael Grifferty, Department of Treasury.
By Shuchita Kapur
© Emirates Business 24/7 2009
