Reflecting on the current standing of the GCC debt capital markets.
The low oil price of the last 12 months has clearly affected the availability of credit in the Middle East, as financial institutions’ deposits are progressively constrained and international issuers face repricing pressure. However, this challenging macroeconomic environment does not point to a crisis or default scenario, it is more a repricing of credit and in some cases an overcorrection in response to sustained low prices. The GCC credit markets are actually at an exciting stage in their evolution.
Despite seeing an overall reduction in issuance volume over the last year, there have been encouraging developments. Governments have started to issue again, which is a potential game changer. It may not give immediate benefit to the corporate, but it helps to support the creation of a local yield curve and signifies a maturing of the market. While the UAE may still face challenges in terms of issuing a Federal bond, the individual Emirates continue to see interesting activity.
Dubai recently overtook Malaysia as the world’s leading hub for listing Islamic bonds, with a total of $36.7bn on the NASDAQ Dubai and DFM combined. This is a significant accomplishment. However, the region’s standing in the sukuk market should not be measured solely on listings volume, since Dubai has long been building a name for itself as an Islamic financial centre, embedding the necessary infrastructure in terms of human capital, production skills and deal structuring. Dubai has the potential to be a significant global sukuk hub, but it needs to ensure a solid foundation is in place.
The next year will be key for the region and we see two developments as particularly vital. Firstly, while the regulatory framework is not yet having a huge effect on the local debt capital markets, there is continuing progress in this area. The main disadvantage to the current framework is its fragmentation, with some markets having prescriptive regulation, while others take a more relaxed approach. A standardised regulatory framework would be preferable given the amount of common legislation across the Gulf region (especially in company law), hence individual markets may converge over time.
Secondly, we hope to see an increase in private companies and family offices using the debt capital markets as a reliable way to diversify their funding sources. Companies like Majid Al Futtaim continue to show the benefits of such a strategy and other major family businesses are in the process of preparing themselves for the financial rigour that comes with seeking an external credit rating. This progress in terms of transparency and corporate governance reflects positively on the entire region.
In summary, I expect another exciting year in the Middle East debt capital markets. The region needs to continue building a sound business climate by focusing on regulatory clarity, security of investment (political and economic stability) and strong governance frameworks.
You can hear more of Michael Grifferty, President of The Gulf Bond and Sukuk Association at the ACT Middle East Annual Conference
