Debt market opportunities

The Middle East region's debt markets have often been overlooked, and have never been firmly placed in the investment remit of emerging market fund managers nor global bond portfolios.

On the one hand the region's credit has been too good, its economic fundamentals too strong and yields too low to include it in emerging market portfolios. On the other hand the markets were neither deep nor liquid enough to warrant the attention of global bond investors. Hence the opportunity we have before us.

Approximately US$100bn in corporate debt is currently outstanding, a third of which is Sharia-compliant. Corporations in the MENA region have significant funding needs (US$148bn of new credit issued in 2007) and are taking active measures to attract long-term funding.

The issuance of Sharia-compliant securities is proving popular with issuers and investors alike and is likely to increase going forward.

Less than 40% of corporate issues and less than 30% of corporate Sukuks are currently rated.

This creates an exciting opportunity to benefit from in-depth research as the market evolves and rating agencies start rating and upgrading existing and new issues. The region is in a positive credit cycle.

Leverage is increasing but earnings and profits are increasing at a significantly faster rate than debt servicing.

MENA debt markets have, since 2005, exhibited positive returns with very low volatility and correlation to traditional equity and fixed income indices.

The region's debt markets have, during the past five years, been growing at an annual rate of 54%. Corporate bonds have been growing fastest at 70%, sovereign bonds and syndicated loans at 45% and 54%, respectively.

The amount of debt created annually is approaching US$200bn and expected to rise further. Algebra Capital estimates for 2008 include US$95bn in new bond issuance, two thirds of which will be corporate. Sukuk issuance could approach US$30bn in 2008.

Now our policymakers' primary challenge is how to address rising inflation. With more than US$1 trillion in large infrastructure and power projects projected in the next five years alone, real GDP growth averaging 6% across the region, and inflation north of 7% in Saudi Arabia, and significantly higher than 10% in Qatar and the UAE, policymakers are struggling with their 30-year marriage to the US dollar.

The risk of a revaluation is certainly on the table, but we believe GCC central banks should not and probably will not, in the short term at least (12 months), abandon the peg.

Changing the foreign currency regime and introducing significantly higher domestic interest rates will certainly affect, if not derail, current attempts to diversify GCC economies away from oil and keep economies on the high growth trajectory required for significant job creation.

Abandoning the peg immediately without the necessary infrastructure will come at a significant cost and ultimately prove unwise.

The prospect of developing a local currency bond market certainly presents attractive opportunities for investors and is very necessary for the development of the MENA region's capital markets and broader economies.

Mohieddine Kronfol is managing director of Asset Management at Algebra Capital. The firm was set up in 2006 in the Dubai International Financial Centre and its activities include asset management and advisory services.

Print | Email | Discuss this article |

READERS' COMMENTS

View all comments (0)

Have your say

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Security Code *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM