(MENAFN - Khaleej Times) Spurred by tight liquidity and "prohibitive" bank borrowing cost, the volume of GCC bonds and Sukuks surged to $60.8 billion during the first 10 months of 2009, reflecting a remarkable rebound in the region's corporate and sovereign debt market, chief economist of the Dubai International Financial Centre Authority said on Sunday.
In the wake of the financial crisis, the GCC debt market has emerged as an attractive financing alternative in the region, Dr Nasser Saidi, Chief Economist of the DIFC Authority, said in an Economic Note. The year 2009 saw a substantial increase in debt market activities compared to the previous year when the total volume had dropped by about 40 per cent. "The GCC's corporate debt market is going through a revival while the sovereign debt market — conventional and Sukuk — is re-emerging strongly after the crisis in 2009," he said.
"Tightened access to liquidity, losses in the region's equity markets; and the prohibitive cost of long-term bank borrowing in the face of the global liquidity crunch has led to a substantial increase in debt market activity," he said.
In the UAE, the debt market received a major boost in July 2009 with the passage of federal law to regulate the issuance of government debt and corporate bonds.
The law sets limits on how much the UAE's federal government and individual emirates can borrow. Under the law, the federal government can borrow 45 per cent of the gross domestic product, while individual emirates can borrow 15 per cent, setting a theoretical maximum of 60 per cent of the country's overall GDP.
With GCC countries investing heavily in infrastructure, which according to estimates requires some $2.3 trillion in financing, the development of debt markets is vital, as it would enhance the ability of governments and corporate to raise funds "efficiently and cost-effectively," he said.
"The development of local currency debt markets represents a vital investment in the economy, similar to any other public investment. Even in the absence of a pressing need among governments to borrow, the creation of a debt market is a key milestone on the road to the development of an advanced economy," said Dr Saidi.
He argued that the debt market provided an instrument for the banking system in the region to manage liquidity and risk in an effective manner. "It will allow central banks to control liquidity. Diversification of financing and investment options contributes to the stability of financial markets and to greater corporate and government transparency."
The development of debt markets promotes market discipline, transparency and accountability because governments, companies, and projects financed through tradable bonds are subject to constant scrutiny by market participants, he said.
Dr Saidi pointed out that the Middle East region traditionally had a low dependence on debt markets unlike advanced and emerging economies where debt markets represent the leading channel of liquidity for governments and financial institutions.
According to a recent International Monetary Fund report, while debt securities make up 38.9 per cent of global capital markets, they make up just 5.6 per cent of Middle Eastern capital markets.
"Markets in the region are still underdeveloped, with a lack of breadth, depth and liquidity, a low investor base and the absence of a clear legal and regulatory framework," he said.
Dr Saidi argued that a well functioning debt markets would help reduce dependence on bank finance at a time when the banking sector is in a process of deleveraging.
An active debt market, he said, enable monetary policy by providing central banks with a market for open market operations; and be the cornerstone of housing finance through an active mortgage market. "All these make local currency bond markets a cornerstone of development strategy." The note observes that the development of a debt market in the GCC will have profound implications for global financial markets.
By Issac John