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28 March 2024

GCC urged to develop debt markets

Published
By Staff

Gulf oil producers need to develop local debt markets to ensure sufficient financing for projects and cut funding costs as part of all over reforms prompted by the 2008 global fiscal turmoil, a key Western financial centre has said.

The reforms should also include curbing public expenditure in the long term following a steep rise in spending over the past years as regional nations were tempted by a surge in crude prices, the Washington-based Institute for International Finance (IIF) said in a study.

Its figures showed funds raised by the six-nation Gulf Cooperation Council (GCC) through external bonds rocketed to nearly $28.5 billion in 2009 from only about $4.2 billion in 2008 but were expected to tumble again to $6.2 billion in 2010.

IIF, which groups major banks in industrial nations, said the default of the two family-affiliated conglomerates in Saudi Arabia and Dubai World’s debt problem have been a sort of “wake-up call” for policymakers in the region.

It said the region’s development model of rapid growth during the 2002-2008 oil boom, which depended on leverage and debt, will need to change significantly.

“Progress in structural reforms, including in the legal and regulatory environment, and enhancement of transparency and governance of the corporate sector along with a benign global market environment, could put the economy back again on a higher growth path without compromising stability,” the study said.

“The fiscal sustainability analysis suggests that the GCC governments’ expenditure paths need to be lowered in the tedium term to ensure long-term sustainability. While fiscal consolidation tends to have contractionary effects n output in the short term, it is beneficial over the long term.”

The study noted that higher spending in the GCC countries has raised substantially the breakeven oil prices that balance budgets.

For example, even with a modest decline in the pace f government spending growth the breakeven price of oil for Saudi Arabia is projected to rise to $108 per barrel by 2020, well above the projected constant oil prices in real terms.

“Development of local debt markets could reduce reliance on banks in financing large infrastructure projects and help lower funding costs, which have recently risen as a result of  more difficult liquidity environment…..development f a debt market could facilitate developing a yield curve and help GRE’s (government related entities) improve their debt maturity profile and liquidity positions…. it could also enhance corporate governance as capital markets demand more rigorous financial disclosure and transparency.”

According to IIF, significant progress in prudential regulation and banking supervision in the 29-year-old Gulf political and economic group has been made, but there is still scope for further improvement.

“More robust risk management systems, including stress testing, close monitoring of high-frequency data and early warning systems are needed to detect and correct problems that could become systemic,” it said.

“This requires closer supervision of off-balance-sheet operations of banks, household indebtedness, real estate lending, and corporate health. Corporate
governance codes need to be more firmly enforced.”

Besides bonds, external financing by the GCC countries include syndicated loans, which stood at around $20.2 billion in 2009 and are expected to recede to nearly $14.1 billion this year, the study showed.

Another source is equities, which raised about $1.8 billion in 2009 and are estimated at nearly $800 million in 2010.

The report showed total external financing for the GCC stood at $50.5 billion in 2009, far higher than the 2008 level of nearly $44.7 billion but below 2007 and 2006, when they stood at $67.2 billion and $67.8 billion respectively. In 2010, total external financing is estimated at $21 billion.

The UAE has no organized debt market but the central bank said recently it was working on a plan to set up a bond market that will complement the existing stock market, the largest in the Arab regional after the Saudi bourse.

In a circular sent to banks, the Central Bank sought nominations for a committee to devise a strategy for building such a market, according to bankers.

"The cornerstone for the development of a local currency bond market is the creation of a risk free yield curve resulting from government bond issuance," said Deepak Kohli, head of capital markets for Middle East North Africa (MENA) & South Asia at Standard Chartered bank.