Globally, the post-crisis economic environment has considerably increased reliance on the bond market. Governments are financing record amounts of stimulus that is being released into domestic economies. Corporations, unable to access credit from banks due to continued weakness amongst financial institutions, have come to rely on alternative forms of financing. In an unprecedented shift, current trends indicate that corporations will raise more capital from the bond markets than from syndicated loans in 2009. Such reliance on alternative forms of financing is especially visible in the Gulf region.
As Dubai continues its $20 billion capital raise to shore up liquidity and meet debt obligations, the government now has its focus on the bond markets; Sheikh Mohammad Bin Rashid Al-Maktoum has made strong public statements in support of Dubai’s bond issuances. In the largest Islamic bond offerings this year in the Gulf, Dubai’s government raised $1.93 billion in October and is back in the market again in November. Other governments in the region have successfully issued bonds this year as well: Abu Dhabi had very strong investor demand for its $3 billion issuance in April, with reports of the issue being four times oversubscribed; Qatar completed a $3 billion issuance in April; and Bahrain came to the market with a $750 million issue in June. Other regional governments have also moved forward with issuances of bonds.
Corporate bond markets have also been active in 2009. To highlight one deal in particular that reflects renewed regional confidence, the $850 million issuance by the National Bank of Abu Dhabi executed in September became the first dollar denominated benchmark sale by a Gulf lender since 2007. According to Reuters, the deal was nearly five times oversubscribed and distribution was geographically dispersed, with 71 percent of buyers coming from outside the Middle East and North Africa region. The strength of this issue and similar ones reflects the same confidence seen in the sovereign bond issuances regarding regional economic stabilization.
Furthermore, two multi-lateral development banks have also helped soften the market for bond issuances. The Islamic Development Bank successfully issued an $850 million Sukuk in September. The book was oversubscribed and sold not only to investors in the Gulf Cooperation Council but also in Europe and Asia. Similarly, in October, the International Finance Corporation (IFC) listed a 5 year $100 million Sukuk with the Nasdaq Dubai and Bahrain stock exchanges. The IFC Hilal Sukuk is aimed at attracting investors to the Gulf Region. The funds will target Islamic finance projects in health, education, and infrastructure. These successful transactions should serve as a conduit for continued attraction of international investors to the region.
Certainly oil revenues help mitigate investor risk and can directly be linked to the entities best able to raise capital. However, the nature of risk appetite we are witnessing demonstrates investor confidence in the long-term prospects of the broader, diversified regional economy. The successful issuances by the governments of Bahrain and Dubai reflect continued investment in non-oil based economies. Banks and regional corporations are also finding willing investors. Although the most successful issues continue to be to those corporations with governmental ties, firms across the Gulf region are showing signs of resilience after the economic downturn. Third quarter earnings began to stabilize, and if the fourth quarter continues this trend, credit should start to flow more freely in the region.
While the active bond market does reflect improved market sentiment, problems remain. The Gulf region continues to face challenges similar to those cited by economists and investors before the financial crises. Reliance on local investors, weak institutional demand, and transparency hamper the broader development of capital markets in the region. These weaknesses are especially exacerbated in the current economic environment because of continued hesitance on the part of local investors who have suffered major losses after the dramatic fall in asset prices that occurred last year. The problems caused by these structural faults are increasingly visible when one compares capital flows to the Gulf with those to Latin America and East Asia; economies in the latter two regions have attracted greater amounts of capital in recent months.
As international investors continue to diversify, waiting for the U.S., U.K., and Europe to handle the economic challenges beset upon them by the financial crises, the Middle East, and the Gulf region particularly, will continue to attract capital through the bond markets. Capital raised from the bond markets presents opportunities to inject liquidity into the regional economy and help stimulate the flow of credit. The success of bond issuances in 2009 coupled with the continued troubles facing banks indicates that this trend will continue in 2010.
London based researcher specializing in finance and the political economy of emerging markets.
