When developed, the Middle East and North Africa’s (Mena) debt market holds huge potential to support fiscal growth and prepare the region for future economic crisis, said the chief economist of the Dubai International Financial Centre (DIFC) Authority.
Dr Nasser Saidi, who is also board member of DIFC’s Hawkamah-Institute for Corporate Governance, revealed that debt securities account for a measly 5.6 per cent of the region’s $2.2 trillion (Dh8trn) capital markets, which are currently dominated by stocks and bank assets.
“The regional debt market is severely underdeveloped as corporations and sovereigns are highly dependent on bank borrowings. This is an enormous problem, especially at a time when the banking sector, regionally and internationally, is heavily deleveraging,” says Saidi.
The banking industry has suffered a massive blow since the financial crisis shook economies across the globe in 2007. According to the International Monetary Fund (IMF), estimated losses of major global banks will fetch over $2.8trn from January 2007 to the end of 2010 due to toxic assets and bad loans.
IMF also reported that as of end-2009, US banks’ writedowns have reached 60 per cent while UK and other European banks have lost 40 per cent of their assets.
The world’s worst economic crisis has also seen financial giants such as Lehman Brothers going belly up and numerous banks seeking government bailout to keep their businesses afloat.
Modifying Mena’s financial structure
Saidi believes that because of pressure from the credit crunch, the banking sector in the near future will not have the ability to finance government and private sector projects in the region.
In order to cope with the anticipated need for further financing, governments must work to change their financial structure – moving increasingly away from bank borrowing and developing the money and debt markets.
InvestorGlossary.com defines debt market as a market where debt securities such as corporate bonds, government bonds, municipal bonds, negotiable certificates of deposit and other money market investments are traded.
WiseGeek.com notes that investors who avoid riskier ventures, but are in favour of making smaller yet guaranteed returns may find trading in debt securities to be right up their alley.
Saidi meanwhile justified that by developing debt markets in local currencies, governments could deal with currency mismatching and exchange rate risks, provide investors with products that offer safe and stable long-term returns in local currency, while at the same time absorb volatile capital flows and reduce financial instability.
In addition, debt markets could enhance transparency in pricing, ensure disclosure of information regarding public policies and facilitate constant monitoring of macro-economic expectations.
“Debt markets could provide institutional investors with long-term assets, which are very important. Take insurance companies for instance. Most of them do not have local assets they can invest in. As a result, they invest their premiums outside the region,” he explained.
The same holds true for the region’s expatriate population, the DIFC chief economist added. Because there are no available long-term debt assets that residents can invest in, they opt to remit their income, which in turn negatively affects the region’s balance of payment flows.
“A lot of savings, instead of going to the economic development of our region, goes outside. Our central banks should have instruments they can use to control local money growth and liquidity,” he said.
Infrastructure drives debt market growth
Spending on infrastructure, particularly in the GCC region, has boosted debt market activities in the greater Mena region.
Interestingly, the region has been witnessing continued infrastructure spending despite the ongoing fiscal slowdown, thus helping stabilise economies and avoid a wildfire effect from the credit crunch.
According to Meed Projects, the value of infrastructure and network projects planned and underway in the Gulf as of January 18, 2010 is estimated at $2.26trn. UAE accounts for the bulk or about 44 per cent of infrastructure activities in the GCC, followed by Saudi Arabia at 27 per cent, Kuwait at nearly 12 per cent and Qatar at about 10 per cent.
Saidi mentioned that most of the financing for these projects would have to come from the debt markets. And as infrastructure projects become integrated across the GCC region, cross-border deals will be very significant in stirring more activities.
“Governments in the region are facing highly volatile revenues [because their economies] are mostly dependent on oil and gas prices, which have been fluctuating. To answer that volatility in revenues, [they] need a buffer, which would be the development of the debt market,” he said.
Consider also reading:
Gulf needs mortgage finance agency: DIFC forum
Dubai to spend $3bn on 2010 transport projects
Saudi Arabia to keep spending steady: official
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