1 October 2009 Presented by: Mustafa Aziz Ata The role of a Bond Market in an Economy
Mar 29, 2015
1 October 2009Presented by: Mustafa Aziz Ata
The role of a Bond Market in an Economy
Aftermath of the crisis - the new world order
Financial integration is deepening, both globally
and regionally, making decoupling effectively
impossible
Despite the coordinated efforts by governments globally to support the international banking system in various forms of liquidity and capital injections, bank lending continue shrinking
– Balance sheet deleveraging, implementation of more conservative risk metrics/policies
– Access to (new) bank capital remains scarce and expensive
Debt capital markets are becoming the main source of liquidity for refinancing / funding gap
– Re-pricing of risk spreads makes corporate bonds an attractive investment proposal for investors
– Despite the higher spread environment, low underlying risk free rates reduces the nominal cost of debt for borrowers
The migration of borrowers from bank lending to debt capital markets seems to be systemic move rather than a temporary deviation from their traditional borrowing mix
– New bond sales volumes, across all market and geographies, have exceeded the historical highs year-to-date 2009
– The new issue supply to remain robust for the remainder of the year although banks show more willingness to lend thanks to recovering macroeconomic environment since March 2009
We have witnessed economies with active local currency bond markets resumed to growth much quicker than economies with a very high share of bank lending (e.g.. Asian economies)
Capitals flow in the wake of the crisis
Financial globalization went into reverse with capital
flows falling by 82 percent
In worst-hit countries, foreign bank credit
contracted by as much as 67%
Total cross-border capital inflows (% of World GDP)
One of the most striking effects of the financial crisis was a steep reduction in cross-border capital flows
Total capital flows as a percentage of the World GDP has dropped to 1.9%, lowest in the last decade
The sudden disruption of capital flows caused severe liquidity crises and shocks to the regional banking systems
The majority of the drop reflects withdrawal of bank lending to non-bank borrowers, particularly in emerging markets
*Source: McKinsey, Global captial markets: Entering a new era, September 2009
MENA Capital Structure
The Middle East lacks balance among various
channels of financial intermediation; although
improving, the region continues to be dominated
by the banking sector
This creates systemic vulnerability during times of crisis; albeit no asset class
has been spared from the recent turmoil
Japan’s “lost decade” provides an excellent
example of the perils of a bank dominated market
And Korea, with an active bond and stock market,
recovered more rapidly than their peers following the
1997 crisis
*IMF Global Financial Stability Report (2004 & 2008), HSBC Analysis
Stock Mkt Cap Debt Securities Bank Assets
2004 2007
MENA
Global
The optimal capital structure, exhibited by the global aggregate, is a balanced distribution
Due to equity market growth, the balance
improved from 2004 to 2007; however, over the past 12 months,
regional stock market capitalizations have
decreased significantly
MENA External Financing Structure
Bond Loan Equity
MENA
Global
UAE
Egypt
2003 2005 2007
Globally the asset class
mixed is balanced
Banks dominate
throughout the MENA
Region
The UAE has improved
dramatically
Egypt remains the most
balanced in the region
According to IIF estimates, the gross foreign assets governments, banks and NBFI’s in the GCC alone
rests at US$1.5 trillion, c. 130% of GDP at June 2008
In addition to its capital structure, the MENA region
needs to diversify its sources of external
financing
*IMF Global Financial Stability Report 2008, HSBC Analysis
-
2,000
4,000
6,000
8,000
10,000
Janu
ary
2009
Feb
ruar
y20
09
Mar
ch20
09
Apr
il 20
09
May
200
9
June
200
9
July
200
9
Aug
ust
2009
Sep
tem
ber
2009
Oct
ober
2009
Nov
embe
r20
09
Dec
embe
r20
09
Financials Corporates Sovereign Sovereign Linked
Regional Issuances and Redemptions
2009 GCC International Redemption Profile*
*GCC Analysis, assuming bullet redemptions and refinancings
US
$m
MENA International Debt Issuance (Country)MENA International Debt Issuance (Product)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Conventional Bonds
International Sukuks
Islamic Loans
Conventional Loans
The GCC faces c. US$48.5 billion in redemptions and refinancings over the next
year
Conventional loans have been the main funding
channel for the Middle East
The GCC has been the largest borrower out of the
MENA region
Debt market environment in the GCC
Regional CDS Spreads
0
100
200
300
400
500
600
700
800
900
1000
J ul-08 Sep-08 Nov-08 J an-09 Mar-09 May-09 J ul-09 Sep-09
Abu Dhabi CDS Qatar CDS
Saudi CDS Oman CDS
Bahrain CDS Dubai CDS
Bank appetite for long dated loans—a mainstay of the project finance market—is reduced, the region must evaluate the long dated project bond markets in order to finance the infrastructure requirements of the region
Name lending into family businesses will eventually diminish, these companies will need to enter the capital markets
Spreads for GCC issuers are “normalizing” as Qatar, Saudi and Abu Dhabi CDS levels are back to sub-100 levels
Global investor base is keen to add GCC exposure as oil prices have stabilized around USD 65 per barrel
Looking Forward
Local Currency Markets Development
International institutions can play a important role in establishing local currency
markets
Egypt is an excellent example of a newly
introduced and highly successful primary dealer
system
As international liquidity conditions stay volatile, the region’s government must
foster an active primary and secondary government
securities market
Benefits to the Economy and Markets
MENA Central Banks should develop the local currency bond market by establishing
a risk free yield curve that reflect the opportunity costs of funds at each maturity
This can be achieved through the issuance of the following security types:
– Treasury Bills (T-bills): Issued by the Government short-term financing
requirements.
– Government Bonds (Bonds): Issued by the Government in the 2year, 3year, 5
years and 10 years
– 10year maturity with fixed rate coupons to meet medium to long-term financing
requirements
Many regional banks already invest in Certificated of Deposits issued by the Central
bank to manage liquidity
Development of the Yield
Curve
Significant Government access to local currency funding
Observable/Transparent Government Yield Curve allows corporate risk to be priced
Eventual Development of Non-Government Dept Markets
Enhanced Asset/Liability Management among Financial Institutions
Efficiency in Monetary Policy, better control of Money Supply
Creation of long maturity assets for NBFI’s
Long dated government debt will provide the liability
profile necessary for regional projects
Summary
The MENA region has a healthy and rapidly
developing banking sector; however, access to capital
markets remains key for infrastructure investments
and economic growth
We believe that the development of an efficient Local Currency Debt Capital market is required to ensure a sustainable growth environment for GCC economies
Existence of a full fledged corporate bond market will reduce systemic risk and the probability of a crisis.
A market for direct debt also improves the incentive for banks to remain efficient and innovative.
A well functioning corporate debt disciplines and ultimately strengthens the banking system by providing competition for information-intensive bank loans at the margin.
The absence of a corporate bond market of sufficient size has two principal effects.
– First, the effects of misdirected credit preferences will tend to be magnified.
– Second, the absence of a sizable corporate bond market will aggravate the imperfections present in any financial regulatory system. The associated inferior risk assessment by the over-sized banking system and that system’s other weaknesses will tend to overwhelm, leading to productive over-capacity and non-performing loans