Overview of Local Currency Bond Market in GCC
The local currency bond market has potential to become one the important sources of funding in many emerging markets including Middle East. The prime reason for this has been the strong fundamentals of many emerging economies and absence of currency risk as all GCC currencies are pegged to the US dollar.
The GCC countries' (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman) local currency bond market is in a developing stage. The strong regional bond market helps in handling the crisis like situation should bank lending collapses in the future. The development of a vibrant local bond market provides local corporates and governments an access to an alternative capital. This results in an efficient money management within economies, and is a positive for expansion of wealth management activities. Global asset management firms also prefer these kinds of developments for their investments.
The Middle East region lacks diversification of funding sources. The banks particularly rely on short term customer deposits to fund long term infrastructure projects. There would be a strong interest for the Gulf local currency bonds as all GCC currencies [Emirati Dirham (AED), Kuwaiti Dinar (KWD), Qatari Riyal (QAR), Saudi Riyal (SAR), Bahraini Dinar (BHD), and Omani Riyal (OMR)] are pegged to the US dollar. This mitigates the exchange rate risks unlike many other emerging economies, like in Asia. Saudi Arabia relies more on local currency issuance versus hard currency issuance unlike Qatar, Abu Dhabi, and Dubai. In fact, there are no foreign currency sovereign bonds issues outstanding for Saudi Arabia, Kuwait, and Oman.
Authorities like local central banks should initiate and sell local currency bonds in the regional market by offering attractive terms like higher coupons compared to international bonds available in the market. This would definitely attract investors' interest. Also, they need to focus on developing a robust secondary market for local currency bonds. Listing of these securities on the local stock markets would pave a way for successful local currency markets. Experts believe that the emergence of the bond market is the last stage of economic development. The early stages of development are largely funded by banks or domestic savings. Despite witnessing macroeconomic stability and liberal market policies, the GCC economies face challenges like the lack of a deep investor base. The GCC countries also suffer from several negative factors including lack of credit rating culture, data transparency, and lack of benchmark sovereign credit curves.
Many local corporate entities are over leveraged. The economies like Dubai are vulnerable to the possibility of banks inability to lend or refinance in the difficult times. Unlike many emerging economies, the GCC economies have stable inflation rates. This should work in favour of local market bonds.
The creation of active secondary markets also involves bringing together many institutions including insurance companies, pension funds, central banks, and regulators. Therefore, building a dynamic and liquid local currency bond market with diversified investor base cannot happen overnight.
The GCC countries' (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman) local currency bond market is in a developing stage. The strong regional bond market helps in handling the crisis like situation should bank lending collapses in the future. The development of a vibrant local bond market provides local corporates and governments an access to an alternative capital. This results in an efficient money management within economies, and is a positive for expansion of wealth management activities. Global asset management firms also prefer these kinds of developments for their investments.
The Middle East region lacks diversification of funding sources. The banks particularly rely on short term customer deposits to fund long term infrastructure projects. There would be a strong interest for the Gulf local currency bonds as all GCC currencies [Emirati Dirham (AED), Kuwaiti Dinar (KWD), Qatari Riyal (QAR), Saudi Riyal (SAR), Bahraini Dinar (BHD), and Omani Riyal (OMR)] are pegged to the US dollar. This mitigates the exchange rate risks unlike many other emerging economies, like in Asia. Saudi Arabia relies more on local currency issuance versus hard currency issuance unlike Qatar, Abu Dhabi, and Dubai. In fact, there are no foreign currency sovereign bonds issues outstanding for Saudi Arabia, Kuwait, and Oman.
Authorities like local central banks should initiate and sell local currency bonds in the regional market by offering attractive terms like higher coupons compared to international bonds available in the market. This would definitely attract investors' interest. Also, they need to focus on developing a robust secondary market for local currency bonds. Listing of these securities on the local stock markets would pave a way for successful local currency markets. Experts believe that the emergence of the bond market is the last stage of economic development. The early stages of development are largely funded by banks or domestic savings. Despite witnessing macroeconomic stability and liberal market policies, the GCC economies face challenges like the lack of a deep investor base. The GCC countries also suffer from several negative factors including lack of credit rating culture, data transparency, and lack of benchmark sovereign credit curves.
Many local corporate entities are over leveraged. The economies like Dubai are vulnerable to the possibility of banks inability to lend or refinance in the difficult times. Unlike many emerging economies, the GCC economies have stable inflation rates. This should work in favour of local market bonds.
The creation of active secondary markets also involves bringing together many institutions including insurance companies, pension funds, central banks, and regulators. Therefore, building a dynamic and liquid local currency bond market with diversified investor base cannot happen overnight.
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