Dubai: Across the Middle East and North Africa (Mena) region debt capital markets lag behind bank financing and equity markets as a source of private-sector financing, according to Standard & Poor’s.
The global rating agency attributes the slow development of debt capital markets in the region to lack of flexibility in monetary policy which is also blamed as a rating constraint for the regional sovereigns.
According to the rating agency, most financing in the region is extended by banks, which often hold concentrated loan and credit exposures to government-related entities and to individual companies. Equity markets are fairly sizeable but have relatively low liquidity.
“Across the board, debt capital markets lag behind financial intermediation and equity markets as a source of private-sector financing,” said Standard & Poor’s credit analyst Trevor Cullinan.
Lack of monetary policy flexibility in most countries across the region is seen as a key impediment to debt capital market growth in the region.
“With managed or pegged exchange rates, a country that does not control its own currency has very limited or no monetary flexibility to affect domestic economic conditions. If factors outside the control of the domestic monetary authorities mostly determine monetary conditions, there may be little buffer against domestic financial stress,” Cullinan said.
S & P sees managed or pegged exchange rates as impeding monetary flexibility. That’s because a country that does not control its own currency has very limited or no monetary flexibility to affect domestic economic conditions.
“Our sovereign monetary flexibility assessment also considers monetary policy credibility and effectiveness. The development of the financial system and debt markets is particularly important for our monetary assessment because these are the channels through which monetary policy decisions are transmitted to the real economy,” Cullinan said.
Monetary policy tools, such as the discount rate, reserve requirements, or open market operations, work by influencing the funding costs and conditions that households and businesses face. This influence is often weak when the financial sector is in its early stages of development.
In some of the leading Mena economies such as Egypt, Morocco and Lebanon, bank lending to the private sector is weak because of the banks’ heavy exposure to governments and the public sector. In Egypt nearly 45 per cent of commercial banks’ assets are exposed to the sovereign. Lebanese banks continue to use large and resilient, albeit slowing, deposit inflows to buy the debt the domestic government issues to finance its structurally high deficits, in turn inflating the banks’ balance sheets and effectively exposing them to a single large borrower. Morocco by contrast is much more integrated with the domestic private sector with loan concentration to real estate sector.
