The Market for Debt Securities in mena

In mena, the amount of credit available through debt securities is limited compared to the dominant share of the banking sector. However, as described above, the rate of growth in different segments of the financial sector varies. Bond issuance is accelerating significantly. Taking the example of the GCC, where capital markets are developing faster, bond issuance volumes have been increasing at a rate of 30 per cent for more than a decade, from a mere usd 9 billion total issuance in 2003 to usd 57 billion in 2012, and an accelerating trend leading to expected bond issuance levels of more than usd 80 billion in 2015.

Another important phenomenon is the growing Sukuk (Sharia-compliant debt equivalent securities) market. Between 1996 and 2010, a total of 276 Sukuk bonds were issued in the gcc. For the year 2011 alone, 150 Sukuk bonds were issued. Domestic Sukuk amounts reached usd 120 billion in 2014, from a level of usd 5 billion equivalent in 2001, while the international Sukuk market saw issues increasing from usd 1.6 billion in 2003 to usd 28 billion in 2014, and increasing interest from non-Islamic or non-GCC or mena participants—both sovereign and corporate issuers (iifm, 2014; Markaz, 2010).

Debt issue trends observed in both conventional bond markets and more importantly in the Sukuk market point to strong and accelerating momentum, attracting international borrowers and investors. While the international Su- kuk market remains small, its development—matching the pace of domestic and global issues from GCC -based borrowers—is an important indicator of the fact that these markets are gaining depth and credibility, an important factor in the further acceleration of growth.

Access to credit made available via capital markets remains limited; but the probability of a widening of the perimeter of new participants entering credit markets is increasing in line with the growth of the debt capital market. Furthermore, the existing actors involved in credit are changing the nature of their relationships, going from trust based on pre-existing relationships to an exchange of rights and obligations via instruments that are regulated and supervised within a set of rules and pricing mechanisms, and reflecting a trading activity that makes price, and its evolution, transparent to a wider set of potential participants.

The development of capital markets-based finance is in turn helping create additional rules and regulations and pushing the improvement of the regulatory and legal environment of the credit activities delivered through these channels. While the financial crisis in 2008 significantly slowed growth for two years, it also created in certain cases a need for restored credibility and the incentive to improve the regulatory environment. The quick recovery of issuance and volumes is testimony to the strength and potential of these markets.

The development of capital markets and credit has taken place within an environment of high oil prices in the last decade, generating tremendous cash reserves and making the need for credit less essential for economic activity. In the new context of significantly lower price levels, and considering the stress that this puts on the spending budgets of many mena countries, credit is expected to play a more central role, accelerating the growth of its share in the financing of economic activities.

As credit growth accelerates, it will progressively shape and improve a governance framework that will provide a stronger foundation for increasing reliance on capital market debt. If the currently observed trends continue, we should see the ratio of credit to mena countries’ gdp rise, approaching levels observed in OECD economies. This will encourage a more open economic playing field, where people who do not necessarily have personal connections can trust each other, progressively influencing the way economies function and how they are fuelled by credit.

The rising market for debt eventually encourages the uptake of behaviour that resembles voting processes in the economic and financial sphere. This fosters changes in economic structure, which can also progressively promote democratic features in the political spheres of mena.

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