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The bond market is MENA equity's unnoticed little brother

By Adnan Halawi, Team Leader – Fixed Income, Zawya
Capital markets in the MENA region have been for a long time underdeveloped and only in the last few years have we started seeing activity there. The bond market more specifically has been the unnoticed little brother of the equity market.

In 2008 we had less than a dozen issuers including three sovereigns whose curve consisted of one or two bonds. Also, the involvement of locals in the bond market has increased tremendously in the past couple of years to a level where their partaking became a game changer, Bassel Barbir, senior trader on the fixed income desk at MENA Invest Lebanon, tells Zawya.

Excerpts from an interview:

What are the effects of the Eurozone debt crisis on the Arab fixed Income markets so far and in the near future?

In retrospect, volatility has definitely been the theme for 2011. The Arab Spring and the Euro debt crisis have taken their toll on the bond markets and created one of the most volatile years ever. Volatility will persist in 2012 but will be less subdued and liquidity will take over as the theme for this year.

The Eurozone is facing a debt crisis and its banks are facing a liquidity crunch. MENA companies and banks have long relied or looked at Eurozone banks for borrowing. Refinancing and borrowing will have to take on different routes as existing ones will be difficult or expensive. On the other hand capital that has flown out of troubled countries in our region is looking to be deployed. Seems an easy match and the potential is huge but the timing and the conditions have to be right.

How do you view the liquidity in the region and what are the major steps that are expected to enhance it in the near future?

Egypt and Tunisia have accessed the bond market in the past, on the corporate and the sovereign level, but between the two only a handful of bonds exist. The road to democracy for them is a long way where political developments will weigh on existing bonds and volatility will further ensue. However, the potential is huge if the transition of power proves successful and the public is at ease with the ruling parties. Domestically achieved peace combined with a tighter liquidity from the banks will open the doors to a multitude of alternative financing means including and not limited to bond issuances.

For the rest of the MENA and more particularly the GCC, the formula is the same but the fear factor there is the recent Iran tensions.

What was the most significant development in 2011 and why?

It has to be noted that the recent increased involvement of the locals in their bond market is a blessing. It is also by far the most significant development of last year. It is what has shielded the existing bonds numerous times form a major sell off due to an international crisis. Many times last year we saw foreigners sell off as a result of weakening economics back home or because of redemptions. On many of those times locals were stepping in to buy off the inventory offloaded and consequently turning the market into a resilient one.

I believe the locals have understood that the Euro zone debt crisis will take a longer time than previously considered to unwind and be resolved. So notwithstanding any shock, major selloff or weakness in the Eurozone, locals would continue to support their bond market. Bond spreads of course will continue to move in lieu with the spreads in the rest of the emerging markets. However, any shock on the political front in Iran, Syria or Bahrain will weaken the demand and a small sell off could easily turn into panic mode!

What is your outlook for 2012?

It seems promising but with many "if"s. The same uncertainty that marked 2011. If conditions are right, liquidity can be overcome and 2012 could be marked by record issuance as 2009 was. Otherwise, we're looking at a dry primary market and a secondary that is more dry as availability of existing paper will be subject to market conditions. In times of tension paper will be more available only to dry up again when times are calm.

© Zawya 2012