The development of debt markets can enhance the ability of governments and corporates in Mena region to raise funds efficiently and cost-effectively for infrastructure and development needs, said an economic note by Dubai International Financial Centre. 

The note titled ‘Local Bond Markets as a Cornerstone of Development Strategy’says that an active and liquid local currency debt market brings several benefits including stable access to capital; diversification of monetary policy instruments; improved resource allocation; creation of a yield curve for pricing of financial assets and tailoring risk management tools; and increased choices for both retail and institutional investors.

Dr Nasser Saidi, chief economist of the DIFC Authority said: “The development of local currency debt markets represents a vital investment in the economy, similar to any other public investment. Even in the absence of a pressing need among governments to borrow, the creation of a debt market is a key milestone on the road to the development of an advanced economy.”

The debt market provides an instrument for the banking system in the region to manage liquidity and risk in an effective manner; and allows central banks to control liquidity, the DIFC report said.

Diversification of financing and investment options contributes to the stability of financial markets and to greater corporate and government transparency, it added.

Furthermore, the development of debt markets promotes market discipline, transparency and accountability because governments, companies, and projects financed through tradable bonds are subject to constant scrutiny by market participants.

In the GCC region, debt markets can also generate financing for much needed infrastructure projects, the report stated.

“With GCC countries investing heavily in infrastructure, which according to estimates requires some $2.3 trillion in financing, it is opportune to raise this financing through debt securities that are based on future cash and revenue flows, as is the case in project finance,” observed Dr Saidi.

In addition, well functioning debt markets will help reduce dependence on bank finance at a time when the banking sector is in a process of deleveraging,; diminish macroeconomic and financial vulnerability from energy price fluctuations by providing governments with an alternative source of funding to smooth out volatile revenues and enable monetary policy by providing central banks with a market for open market operations.

All these make local currency bond markets a cornerstone of development strategy.

In many advanced and emerging economies, debt markets represent the leading channel of liquidity for governments and financial institutions.

However, the Mena region has traditionally had a low dependence on debt markets. According to a recent International Monetary Fund report, while debt securities make up 38.9 per cent of global capital markets, they make up just 5.6 per cent of Middle Eastern capital markets, the note said.

Markets in the region are still underdeveloped, with a lack of breadth, depth and liquidity, a low investor base and the absence of a clear legal and regulatory framework.

Other critical issues include the lack of a credit rating culture, unsatisfactory market transparency; the lack of benchmarks, long maturities and a broad spectrum of institutional investors; and the absence of a derivatives market for managing interest rate and credit risk, the DIFC note added.-TradeArabia News Service