GCC debt markets poised for take-off: for the Middle Eastern economies domestic bond markets have traditionally played a fairly minor role in financial intermediation. However, as in other emerging market regions, the pace of innovation in financial products is now gaining momentum in the Arab World.(BUSINESS & FINANCE)

Publication: The Middle East

Publication Date: 01-DEC-05

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COPYRIGHT 2005 IC Publications Ltd.

Top-tier companies in the Middle East's financial services, telecoms, real estate and transport sectors are increasingly turning to rights issues on regional stock markets, debt securities and sophisticated Islamic financial instruments for their medium and long-term funding programmes, although conventional bank lending remains the dominant source of finance.

Thus far, modest volumes of international bond financing in the Middle East & North Africa (MENA) region remains mostly the preserve of sovereign issuers (i.e., the governments), who accounted for more than four-fifths of global bonds outstanding at the end of 2003; the financial and corporate sectors represented only 14% and 4%, respectively, of outstanding bonds.

Although average yields are broadly in line with other regions, the duration of bond maturities is markedly lower compared with benchmark government bonds issued by the Organisation for Economic Cooperation and Development (OECD) countries. That, in turn, reflects investors' lack of appetite for longer-term exposures, like the US Treasury long bonds, UK gilts or German bunds, where the maturity date exceeds 30 years. As of September 2004, the average yield on MENA bonds was 5.8%, with an average maturity of just 3.5 years. The lack, or immaturity of secondary markets, too, deters investment in long-term fixed-income products.

Bond market activity is concentrated in the Gulf Cooperation Council (GCC) countries, notably Qatar, the United Arab Emirates--led by Dubai--and Bahrain.

Qatar issued sovereign bonds worth $2.4bn in 1999/2000 to finance liquefied natural gas projects operated by Ras Laffan Liquefied Gas Company (Rasgas) and Qatar Liquefied Gas Company (Qatargas) and tapped again the Eurobond markets during 2004.

Last year, the government of Dubai, acting through the Department of Civil Aviation, raised $1bn via an Islamic Sukuk listed on the Luxembourg stock exchange--with non-Islamic investors buying 70% of the sukuk.

This year, the combined impact of soaring oil revenues and 'twin surpluses' on state budgets and balance of payments current-accounts has reduced external capital requirements in the GCC countries, although Bahrain and Oman might require increased funds for industrial and infrastructure investments over the medium-term.

Outside the GCC bloc, Iran issued its first-ever sovereign debt paper since the Islamic Revolution in July 2002; worth 500m [euro] and carrying a maturity of five years. Egypt has been absent from global debt capital markets since 2001, while Lebanon and...

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