Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Local Bond Markets as a Cornerstone of Economic Development Strategy Dr. Nasser Saidi, Chief Economist, DIFC Authority 24th January, 2010 1 Agenda Local Bond Markets as a Cornerstone of Economic Development Strategy DIFC Economic Note # 7 by Nasser Saidi, Fabio Scacciavillani & Aathira Prasad Introduction Bond and Sukuk Market Development 2003-09 Importance of Debt Market Development Policy Recommendations Role of the DIFC in Debt Market Development 2 Financial Depth Across Regions • In the Middle East, capital markets are dominated by bank assets and equities • Debt securities make up just 5.6% of the Middle Eastern capital markets Financial Depth Across Regions $214.4 trn 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% World Bank Assets $83.2 trn European Union $61.5 trn $21.9 trn $5.5 trn North America Emerging Asia Latin America Total Debt Securities $2.2 trn Middle East Stock Market Capitalization Source: IMF Global Financial Stability Report, Oct 2009 4 International Bonds Outstanding Bond financing in MENA is tilted towards sovereign issuers, as opposed to a relatively more balanced distribution in other regions. (in USD bn) All countries Developed countries Developing countries Africa & Middle East Asia & Pacific Latin America & Caribbean Bahrain Kuwait Sovereign Corporate 2113.5 2813.7 1598.7 2562.8 477.8 214.0 43.7 35.7 57.2 89.8 206.0 55.5 1.1 - Financial Institutions 20186.2 19503.7 512.1 82.3 208.3 97.0 5.1 3.2 Total 25881.0 23665.2 1203.9 161.7 355.3 358.6 6.2 3.2 Oman - - 1.0 1.0 Qatar 4.4 5.9 3.3 13.6 - 1.9 7.8 9.7 8.8 14.4 42.5 65.7 Saudi Arabia United Arab Emirates Bahrain 3% Lebanon 14% Egypt 4% United Arab Emirates 40% Qatar 9% Kuwait 2% Morocco 0% Oman 1% Saudi Arabia 7% Tunisia 2% South Africa 18% Source: BIS Quarterly Bulletin, Sep 2009 5 Bond Market Development 2003-09 • Bond issues have risen dramatically since 2003, but as in the rest of the world, 2008 recorded a dip in the number and size of issues. • Total issuance in 2009 shows a significant pick-up in issues post-Ramadan. 50 45 40 35 30 25 20 15 10 5 0 Total amount outstanding: 2003-09 Total number of bond issues:2003-09 number number USD bn 155 180 40.00 160 35.00 140 74 120 58 100 40 0 BH 2004 KW 70.0 60.0 25.00 50.0 28.2 40 10.00 20 5.00 11 2005 OM 2006 2007 QA SA 2008 UAE 2009 GCC (RHS) 80.0 30.00 60 15.00 23 90.0 84.4 80 20.00 33 2003 USD bn 40.0 22.5 13.1 0.5 30.0 12.7 20.0 3.7 10.0 0.00 0.0 2003 BH 2004 2005 KW OM 2006 QA 2007 SA 2008 UAE Source: Bloomberg, Reuters, DIFC Economics 2009 GCC (RHS) 6 Sovereign Issues Dominate in 2009 Conventional Sovereign Issues formed 72.4% of debt issuance* Corporate Sukuk, 0.26% Sovereign Sukuk, 5.81% BH, 3.4% KW, 11.6% OM, 3.5% Conventional Corporate, 21.6% Conventional Sovereign, 72.4% QA, 29.9% UAE, 24.0% * data as of Nov 22, 2009 Source: Bloomberg, Reuters, DIFC Economics 7 The Emergence of the Sukuk Market Issuance of Sukuk dampened in 2008 and 2009 compared to 2007 • Sovereigns and government-related issuers were Corporate and Sovereign Sukuk Issuance in 2009 USD mn the most common Sukuk issuers – for funding 2500 programs amid declining economic activity, fiscal Sovereign sukuk deficits and lower commodity prices. 2000 • Share of US dollar-denominated Sukuk dropped from 85% in 2002 to 10% of issuance in 2008; 1500 Speculation of GCC currencies de-pegging directly led to a shift in currency choice Corporate sukuk 1000 • • Malaysian ringgit was the top currency choice in 2009 Among the GCC countries, Bahrain dominated the number of Sukuk issues in 2009 while Saudi Arabia raised the maximum value of issues 500 0 BH SA Source: IFIS Sukuk Database, DIFC Economics UAE 8 Comparison of Bond Returns • The impact of the Lehman tsunami on the markets is clearly evident. • Emerging market returns are catching up; outperformance of lower-rated, higher-yielding bonds in 2009 Bond performance: Global vs. Emerging Markets 1 Jan 08 =100 Bond market returns took a hit post- Lehman 140 120 110 130 100 120 90 110 80 100 70 90 60 8/16/2007 04/01/2008 26/05/2008 12/11/2008 08/04/2009 01/09/2009 Merril Lynch High Yield & Emerging Markets Total Return Index JP Morgan Aggregate Bond Index 80 1-Jan-07 1-Jul-07 1-Jan-08 Middle East 1-Jul-08 GCC 1-Jan-09 Source: Bloomberg, Reuters, HSBC-DIFX indices, DIFC Economics 1-Jul-09 UAE 9 Underdeveloped Debt Markets in MENA The markets in the MENA region are still underdeveloped: Lack of breadth, depth and liquidity, Creane, Goyal et.al. (2004) underscore A small investor base six broad themes identifying more Absence of a clear legal & regulatory framework specific drawbacks in: Lack of credit rating culture Unsatisfactory market transparency Lack of benchmarks Lack of long maturities Lack of a broad spectrum of institutional investors Monetary policy Banking sector Nonbank financial sector Regulation and supervision Financial openness Institutional environment Absence of a derivatives market for managing interest rate and credit risk. 10 Local Debt Markets: Cornerstone of Development Policy Potential drivers of MENA Debt Market: • Finance infrastructure and development projects in the region • Corporate Debt: Well functioning debt markets will help reduce dependence on bank finance at a time when the banking sector is in a process of deleveraging • Government Debt: Diminish macroeconomic and financial vulnerability from energy price fluctuations by providing governments with an alternative source of funding to smooth out volatile revenues • Enable monetary policy by providing central banks with a market to conduct open market operations & control liquidity • Mortgage Markets: cornerstone of housing finance • Local currency bond markets are a cornerstone of development strategy Why Local Currency Market Development? Developing debt markets in local currencies would allow to: • Deal with currency mismatching & exchange rate risk • Absorb volatile capital flows and reduce financial instability • Provide institutional investors instruments that offer safe and stable long term yields in local currency • Develop a stable source of capital to fund public and private ventures • Provide Central Banks an effective monetary policy tool: open market operations feasible => help maintain an inflation target without a peg to a major currency • As a by-product, debt market would: enhance transparency in pricing and intermediation, facilitate constant monitoring of macro-economic expectations, ensure disclosure of information and periodic communication regarding public policies. 12 Role of Central Bank & Ministries • Ministry of Finance (MoF) has key role as the developer and executor of the state budget and sovereign borrower for the country • Fiscal authorities have to consider how important projects will be funded; choices on how to fund projects – domestically, internationally, bond or loan market - will impact the level of market development. • The Central Bank role as monetary authority => operate in the market to inject or withdraw funds using market mechanisms • The Central Bank is the designated fiscal agent of the government => conduct the sale of securities; may also maintain and operate the securities depository • The Central Bank as a regulator of the banking system => involve in the creation of a liquid yield curve => allow banks to price their assets more accurately • The Central Bank could boost the market if banks were required to hold a minimum percentage of their statutory liquid reserves in government paper • Establishment of a repo market could facilitate open market operations and also facilitate banks / participants to manage their own liquidity flows 13 Policy Recommendations • Government bond issuance across the maturities spectrum (eg.1, 2, 5, 7, 10 and 30 years) can provide the building blocks for a yield curve. (“market breadth”) • The issuance must be conducted systematically over a number of years with appropriate pre-announcement of auction dates, size &characteristics of the issue etc. • The calendar interval should be conveniently spaced with three objectives in mind: creation of a critical mass of tradable paper (“market depth”) avoid the drying up of longer dated maturities prevent concentrated refinancing activity from straining markets’ absorptive capacity. • Issuance must be large and liquid enough to be traded actively by a number of agents; features should maintain consistency across maturities (“market liquidity”) • Primary market could be activated through an auction mechanism once the Authorities establish a Primary Dealer system • To allow for maximum liquidity and participation, bonds and Sukuk can be either listed on exchanges as well as traded in OTC markets. 14 Role of DIFC in Debt Market Development • The DIFC has put in place a financial platform incorporating international best practice and characteristics: Legal and regulatory infrastructure embodying international best practice Multi-currency Trading platform and Settlement System Transparency and disclosure are predominant criteria for issuers, with timely flow of information Sound insolvency and creditor rights regime Experienced debt market participants (e.g. GBSA) • NASDAQ Dubai is a fully integrated electronic regional securities exchange that operates to international standards and is strategically located in the DIFC. The Asset Classes traded on NASDAQ Dubai 15 Development of Debt Markets is a Policy Imperative • Debt markets required for financing for Infrastructure & development projects • Monetary Policy: tool for central banks to conduct monetary policy and control liquidity • Fiscal Policy: essential tool for deficit financing & to smooth volatility of revenues • Corporate finance: diversify from reliance on bank financing • Real estate & housing finance • Pension funds & assets for expatriate population • GCC bond market attractive to international investors: • backed by the region’s energy commodities reserves, accumulated private and public wealth & political stability. • value of the GCC fixed income securities would be underpinned by strong fundamentals: positive growth prospects, economic diversification, shift of the epicenter of the world economy • Safe haven & hedge against episode of extreme risk aversion. • Boost after the launch of a common currency in the Gulf: new international financial architecture 16 Thank You! Q&A