What Role Could Bonds Have in the Quest for New Sources of Finance in the GCC? (Registration required)

On February 22, the government of Dubai announced that it was issuing $20 billion in five year bonds to meet its financing needs and maintain spending The central bank of the UAE subscribed in full to the entire first tranche of $10 billion and is likely the buyer of first (and perhaps only) resort for the rest given the capital needs of the Dubai property sector. Despite the fact that this may be a bailout - particularly as it includes a relatively low (4%) fixed interest rate over the four years- there is a possibility that it could point to another long-term goal, increasing the role of the bond markets in financial development, not only in the UAE, but also in the GCC. On February 26, Bahrain announced that it will it will sell nearly $800m worth of bonds to finance house building projects. Developing a deep bond market may still be a long way off, given global and local trends, but this source of capital in the region could provide a way to strengthen economic insitutions and reduce distortions in domestic markets.


The shortage of liquidity in the GCC and lack of credit for the massive pipeline of projects, many of which have now been deferred, was the first and sharpest been the most significant spillover from the global financial crisis. The effect of job losses on consumption, slowing construction and reduced oil production has subsequently amplified the effect of liquidity shortages. GCC banks and corporations, which less than a year ago were fending off ample credit are now being forced to look for new sources. As the difficult capital raising of Borse Dubai makes clear, there is limited credit available for Dubai-based corporates, particularly in global capital markets. Borse Dubai was only able to raise about half of the $3.4 billion credit facility from foreign banks, with its parent, the Investment corporation of Dubai (ICD) making up most of the remainder of the debt financing and throwing in a capital injection. Although Dubai’s capital raising should be sufficient to meet most upcoming refinancing, there will be further calls on liquidity even as the reserves of the central bank of the UAE may need to be replenished, they fell to $35 billion at the end of November ( the most recent data). Yet, the more concerted efforts of the UAE as a federation will likely lower the default risk As we indicated in the past, governments will have to take on a larger role in meeting the region’s financing needs.

Despite investment in non-hydrocarbon sectors, capital inflows and investment returns of GCC government funds were quite correlated to the oil price, as were the domestic property and equity markets, furthering the need for capital to enhance investments which would buoy the region’s economic growth.