First with Financial Comment from Arabia

Call for bond market action as regional debts actually too low

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Far from drowning in debt as the recent crisis over the Dubai bond repayment might suggest, the Middle East is woefully deficient in developing its bond markets and ought to be borrowing far more heavily to finance its infrastructure program, argues a new briefing note from the Dubai International Financial Centre.

It highlights total sovereign, corporate and financial bond issuance of just $162 billion in the region. By comparison developed countries are indebted in bonds to the tune of $23,665 billion, perhaps a little on the high side and due to rise far higher.

Debt mismatch

DIFC chief economist Dr. Nasser Saidi says the paucity of bond issuance is resulting in a mismatching of short term debt and long term debt exposure in the region, which was one of the reasons behind the recent Dubai debt crisis.

Indeed, Dubai is the exception to the general rule of a lack of bond issuance in the region, but it is still a market over-reliant on bank lending to names rather than a capital market with the checks and balances of the bond market.

In developed markets capital is split roughly equally between bank debt, bonds and the stock market. In the Middle East region amazingly the bond market is under six per cent of total capital markets.

Dr. Saidi believes a hidden bonus from the current global financial crisis could well be that it forces regional governments to build up their local currency bond markets. He contends that the small additional cost paid for the finance – by contrast to interest-free government handouts – is more than justified in terms of the macro economic advantages.

Macro control

These include the greater availability of funding for large infrastructure projects, an alternative to bank finance for corporates, the ability to finance budget deficits in local currency, the facility to intervene in supporting local capital markets and the creation of mortgage markets for home loans.

Governments found themselves wanting for such controls in the recent global financial crisis and were thereby handicapped in what they could do. Hence the interest now among GCC policy makers in bond markets, quite apart from their obvious need to refinance a lot of short-term bank debt.

So bond markets are the answer to the lack of debt in the region, and that should change over the coming few years.


Written by Peter Cooper

January 24, 2010 at 1:39 pm

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