Business | Economy
Deluge of bonds promises market boost
Underworked regional bond traders will soon be handed a much-needed fillip by a deluge of sovereign bond issuance by Gulf governments.
- By Robin Wigglesworth, Financial Times
- Published: 23:01 April 3, 2009
- Sultan Bin Nasser Al Suwaidi (right), UAE Central Bank Governor, and others during a meeting in Abu Dhabi. Last month, the Central Bank subscribed to $10 billion of the Government of Dubai's $20 billion bond programme.
- Image Credit: Ravindranath/Gulf News
Dubai: Underworked regional bond traders will soon be handed a much-needed fillip by a deluge of sovereign bond issuance by Gulf governments.
Kuwait, Qatar, and Abu Dhabi and Dubai in the United Arab Emirates are all planning to issue billions of dollars worth of bonds. These are primarily to secure financing for important development projects and government-owned subsidiaries, and in some cases to plug budget deficits.
Yet analysts say the most valuable contribution from fresh government bonds would be to provide a vital benchmark yield that Gulf companies can use to improve pricing and kick-start a badly needed regional corporate bond market.
"It's a golden opportunity. Government borrowing will be the first building block for a regional debt market," says Anthony Mallis, chief executive of SICO, a Bahrain-based investment bank.
"A capital market here in the region has just been the equity market, but you really need the whole range of capital markets," he said.
There is about $111 billion (Dh407.69 billion) of outstanding sovereign and corporate bonds in the Gulf, the majority issued by governments and financial institutions.
However, this only equates to about a 10th of the bloc's gross domestic product, considerably less than comparable markets elsewhere. The tenor - or duration - is usually short in the Gulf, and little is traded.
Saudi Arabia has been busy repaying debt incurred after the previous oil boom, and only Bahrain has a viable - though small - bond programme, bankers say. Credit ratings agencies also complain about a lack of transparency and access to company books.
"With respect to the domestic bond market, it is small and shallow and there is quite a lot that needs to be completed in terms of transparency," says Declan Mcgrath, Royal Bank of Scotland's regional head of credit markets.
The main reason for the relatively underdeveloped state of the bond market is that the region until recently simply has not needed one.
Hydrocarbon wealth has sent capital gushing into the region and governments have thus had little need to borrow. Companies that need financing have generally preferred to list shares in buoyant stock markets or borrow directly from relationship banks - both cheaper and easier options.
Furthermore, debt and interest-based instruments are viewed with suspicion in Muslim countries. Islamic bonds - or sukuk - have become increasingly popular but the market received a blow last year when a prominent Muslim cleric said many were un-Islamic.
But with traditional funding doors slammed shut, bankers, analysts and the authorities are predicting a resurgence of bond issuance.
A positive market response to the sale of government debt - and the generation of a benchmark yield curve - could prompt a flurry of corporate bond issuance, says Nish Popat, head of fixed income at ING Investment Management. "Pricing will be watched very carefully," he says.
Longer-term issuance would be particularly useful to develop the regional debt market. Long-term lending comes at a cost these days, but the dominance of short-term credit instruments has been "the biggest weakness of the Middle East debt markets", says Mcgrath.
Government issuance is the first step, but not the last, bankers say. A viable secondary market where bonds are actively traded needs to be developed and more companies need to obtain the ratings that are often required by institutional investors.
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