Bonds worth $35.6bn were issued in the GCC during 2010, and fundraising through conventional bonds continues to be a core practice, representing 83% of the total bond issuances (both conventional and Islamic bonds) during this period. However, what is interesting is the superior growth recorded by sukuks over conventional bonds. Total bond issuance in the GCC increased at a CAGR of 24.5% during 2005–2010; sukuks recorded a CAGR of 50.5%, while  conventional bonds grew at 21.6% CAGR.

Fixed income (debt) securities have for many years comprised just a small portion of the capital markets in the Mena region. According to the IMF Global Financial Stability Report (released in September 2011), debt securities accounted for 38% of global capital market activity in 2010, while in the Mena region they accounted for only 13%. The share of debt securities in the Mena region, though, has more than doubled from 6.4% in 2008.

Historically, banks have been the largest source of corporate funding in the Mena region. However, a majority of this lending has been short-term in nature. Short-term bank lending in Saudi Arabia, for instance, dominated overall bank lending during 2005–2010, accounting for 59% of the total lending portfolio in 2010. Bonds, therefore, are a viable long-term funding option for institutions.

Surge of sukuk

There is huge demand for Islamic financial instruments, both from the funding and investment perspectives. For example, the $1bn sukuk from Saudi Aramco Total Refining and Petrochemical Company (SATORP), launched on 16 October this year, was more than three times oversubscribed. Data from Zawya indicates that sukuk issuances in the GCC region have recorded a more than seven-fold increase to $6bn in 2010 from $0.8bn in 2005.

In the past few years, the share of bonds, both conventional and sukuk, in the GCC investors’ portfolio (bonds, bank deposits and market capitalisation of listed stocks) has increased to 5.1% in 2009 from 1.7% in 2005, reflecting the growing interest in fixed income securities in the GCC. The strong performance of bonds during the recent financial crisis makes a good case for inclusion in any portfolio, as they offer the dual benefit of diversification and better returns.

The HSBC/NASDAQ Dubai Middle East Conventional US Dollar Bond Index (MEBI) – which tracks 105 securities in the region – declined just 2% during July 2008–July 2009, while other regional indices such as Dubai Financial Market (DFM), Kuwait Stock Exchange (KSE) and Saudi Arabia’s Tadawul tanked 67%, 48% and 40%, respectively. Also, year-to-date, MEBI is up 5.8% compared to declines of 16.7% in DFM, 15.2% (KSE) and 7.1% (Tadawul).

Future-proofing the market

Some Mena countries (such as UAE and Bahrain) are pursuing ambitions of becoming regional financial centres. Having a well-developed bond market is critical for the overall development of a financial centre, and hence, these countries are keen on developing an active bond market. The NASDAQ Dubai already has a bond-trading platform. Last year, the Bahrain Financial Exchange also established Bait Al Bursa, an exchange operated platform dedicated to Islamic financial products, and the Qatar Exchange is expected to launch a secondary market for bonds and sukuks by the end of this year.

According to media reports, the UAE is planning to issue debt on a federal level and local level to make the most of rising demand for bonds of the Gulf region amid a slowing US economy and a worsening debt crisis in Europe. However, the existing platform for bonds in the Mena region is small, draws few trades and, hence, could be termed as thin on liquidity. In 2010, Saudi Arabia’s Tadawul secondary sukuk market had just 70 transactions worth $116m.

The Saudi market currently has seven listings by three issuers. During the same year, the Muscat Securities Market (MSM) of Oman reported 869 secondary bond transactions worth $112m. The MSM currently has 12 listed bonds by four issuers. According to reports, the UAE is planning to kickstart mortgage lending through the sale of bonds, which could help increase trading activity in secondary markets. 

The Mena region in general and the GCC countries in particular have been investing heavily in infrastructure development, using their massive petrodollar incomes for economic diversification. Bonds are popular with respect to infrastructure funding in advanced countries. With uncertain and possibly declining petrodollar surpluses (due to oil price volatility), governments in the GCC may also use bonds to fund these massive projects. 

Thus far, the bond market in the region has been largely restricted to governments and a few large companies. Most sukuks issued before 2005 were sovereign ones, as governments used them as a means to fund expenditure in times of low oil. Post 2005, the increased focus of governments on diversification saw many non-oil sector projects, including petrochemical, real estate and retail, take off, thereby resulting in greater participation from the corporate sector. 

All in all, the Mena bond market seems to be generating a lot of investor interest. According to Zawya, the total value of Mena bonds and sukuks issued during the first nine months of 2011 stood at $20.9bn compared to $21.5bn over the same period of 2010, and according Moody’s, nearly $28bn worth of debt owed by companies in GCC (mainly in the UAE) will mature in 2012. These are good numbers, especially considering the unrest which has plagued the region this year. We expect bond issuances in the Mena region to gather pace, citing the growing need for companies to refinance debt going forward.