Dubai: In the Middle East and North Africa (Mena) region, non-sovereign debt capital markets represent the smallest aspect of financial markets and have huge potential to emerge as an alternate funding source for private sector, according to Standard & Poor’s.
In the Gulf Cooperation Council (GCC), as a result of a strong deposit base, banks have little incentive to tap alternative funding sources. As a result, their domestic debt capital markets remain narrow and shallow.
The small and local currency debt capital markets in the Mena region lessen the effectiveness of the transmission of monetary policy in our view. Deeper capital markets with regular issuance that could provide for benchmarks along the yield curve would not only facilitate capital market access for corporate and sovereign borrowers, but also increase the effectiveness of monetary policy. A developed local currency capital market allows for open market operations and a financial system facilitating the central bank’s conduct of monetary policy.
“We think the development of capital markets can play a supporting role in the process of inclusive economic development and thus social stability. Developing fixed-income markets should lead to more resilient and stable financial sectors, and more diversified funding structures,” said S & P credit analyst Trevor Cullinan.
Stable and diversified financial markets are more efficient in channelling resources into productive investment, which in turn, is a precondition for economic and private-sector employment growth — a key structural challenge for many Mena societies.
Large-scale government projects could obtain alternate sources of funding other than bank loans. In so doing, banks would then be able to increasingly turn to financing small and mid-size enterprises (SMES). A deeper capital market with regular issuances and benchmarks along the yield curve would also facilitate the sterilisation of capital flows, supporting monetary policy.
In value, Saudi Arabia has the highest local currency non-sovereign debt amount outstanding in the region, reaching $30 billion at the beginning of September 2014. However, a large portion of this is unrated debt held by local banks rather than traditional fixed-income investors.
Across the region, local non-sovereign debt market is nascent, but there are growing efforts being made to develop active debt markets. In October 2014, Abu Dhabi’s Department of Finance (DoF) first listed government bonds, in a step towards building a bond market for the emirate, with the aim of creating a more attractive and dynamic climate for investors. Across GCC, interest in corporate sukuk issuance is seen gaining momentum.
