Securitisation potential strong in Gulf: Moody's

Dubai: Although current conditions are difficult, securitisation financing has strong growth potential in the Gulf Cooperation Council (GCC) says Moody's Investors Service in a new special comment published on Monday.

The report explores the key drivers Moody's believes are behind the future growth of a securitisation market in the GCC. Firstly, home finance is still relatively new in the region and despite current events, the long-term demand for housing is predicted to grow steeply given predicted demographic and immigration patterns.

"Both the public and private sectors in the GCC have been heavily focused on the supply side of the real estate equation but the demand side too needs major funding - especially in the current environment," explains Khalid Howladar, a Moody's vice-president - Senior Credit Officer and author of the report.

Real estate is still key to the future growth for many of the governments in the region. "Funds are needed for the construction of these homes, but many local banks are over-exposed to the sector. As a result, the market - including securitisation - is likely to cover an increasing portion of the financing going forward."

Moody's also notes that the loan and equity market has been so far the dominant form of financing in the GCC. "Currently the local debt/sukuk capital market is small at around $70 billion [Dh257.46 billion], of which only around $4 billion are securitisation transactions," Howladar said.

"This compares with the $12 trillion of outstanding asset-backed financing globally. The local bond market, in all its various forms including Sukuk and securitisation, is essential to the region's future development."

Securitisation also offers banks a means in meeting their financial/balance sheet objectives such as risk transfer and reducing asset/liability mismatches. Despite the currently difficult environment, the first half of 2008 has still seen approximately $1.5 trillion of global securitisation issuance from (mainly) banks as they restructure their balance sheets and take advantage of central bank liquidity facilities available for rated asset-backed bonds.

Positive factor

A further positive factor is that some of the local regulators have taken note of the potential of asset-backed financing.

"The Dubai International Financial Centre Authority has been passing legislation facilitating the creation of the special purpose vehicles that are key for structured financed transactions. Central banks too have recently made statements regarding such 'vehicles' to help provide liquidity. Government entities in Kuwait and Saudi Arabia have also been considering laws to help facilitate transactions in their own markets," says Howladar.