Middle East debt-to-GDP only 3%, bond markets tiny
Posted on 01 October 2009 with no comments from readers
At a time when global indebtedness is causing vertigo for most observers with US/UK debt-to-GDP running at 200-350 per cent depending on your calculation, it is remarkable to observe that bond markets in the Middle East are so incredibly under developed that debt-to-GDP is only around three per cent.
This figure emerged in a presentation by Dubai International Financial Centre chief economist Dr. Nasser Al Saidi this morning after the announcement of a deal with the World Bank to underwrite Islamic and other bond issues.
Such a low level of bond market activity is both a weakness and a strength in these troubled times for financial markets, as well as an opportunity.
Bubble trouble
On the one hand, the recent local real estate bubble might have been much bigger with a bond market to support it, and it is a strength that local economies are not even more burdened with debt as a consequence, as in the West and Japan.
On the other hand, the small size of the existing bond market leaves considerable room for growth, and a method of refinancing syndicated loans left over from the ’sudden stop’ to the boom as Dr. Al Saidi described it.
Having the World Bank underwrite these issues clearly protects investor interest, and with sovereign states effectively shareholders in the World Bank they are less likely to default in any case. It helps to bring transactions that would be outside the global banking system back inside, and even to make them possible.
However, if the Middle East is to develop its bond market then investors are probably still going to be far more demanding in their terms and conditions than before the financial crisis and before the oil boom bubble imploded.
World Bank due diligence
They are likely to be far more project specific and targeted in what the funds are going to be used for, and indeed the World Bank has always been famous for its due diligence process on project lending, so having them on board makes good sense for this reason too.
Of course, that does not have to be the case. As Dr. Al Saidi pointed out in the developed markets right now central banks are lending to banks who then the money back to the government by buying bonds, leaving the private sector still short of funds.
If that scenario was followed in this region then bonds would be a way of channelling money back into mega projects of sometimes challenging business economics, although they might provide some safeguards especially with the World Bank on board.
no Comments posted by readers:
Unfortunately Dubai’s debt to GDP is 148%. Much of the reason it has zero credit.
Also, US debt to GDP is 76%, using the same calculations as Al Saidi did.
Ed Note: I am reporting on Dr Al Saidi’s statement today – and checking back he used a measure of ‘total debt securities’ that must include corporate and well as public bonds, so that accounts for the variation from your figure. The point is still very clear – Middle East bond markets are very small indeed. In fact, nowhere in the world, except Africa are they smaller.
Yes, using accurate accounting the US debt to GDP ratio is around 400%. The accountants here are very clever in their obfuscation.
That’s okay, the US also runs the world’s reserve currency. Dubai is not a sovereign state, UAE debt to GDP is something like 50% or less, runs a current account surplus, etc.
Obviously on balance this absence of indebtedness is a major plus. Should the UAE try to issue more debt? No, this can only lead to malinvestment and more property speculation.
What the UAE needs is liberalization of property ownership rights and immigration laws. If policy in these areas were made more rational, it would encourage FDI. The country needs more FDI, not more property bubbles fueled by debt.
Ed Note: I wonder how much you actually know about the UAE, and I am afraid some of your recent comments are so wide off the mark that I am not going to publish them. What do you mean about ‘immigration’? The UAE has the most liberal residency rights I know of any country in the world.
Immigration, for one dual nationality is not recognized. There are problems in holding UAE passport if you hold a foreign passport. Doesn’t matter if you have a UK/US/EU passport, but it certainly does for those who it impacts.
For quite a while the government reneged on its free hold visa program, leaving many in the lurch. Now the scheme requires property owners to leave the country every six months. Not a stable or particularly logical immigration policy.
Seems like I must have struck a nerve with something I said criticizing the UAE government there. Believe me, I am a great admirer of this country and would like to see it succeed and prosper.
There are so many foes of the UAE and the Arab world in general around, it’s a pity that this is how you treat your friends.
Ed Note: When you get into the detail all governments are flawed. But why is it people feel that correction of inaccurate criticisms is some kind of censorship? I think it comes down to some kind of cultural superiority complex – do you not think perhaps that UAE people know better than you what suits them? Why should you suppose to know better? You are just an anonymous reader. I suppose friendly advice is always welcome but it is seldom framed in those terms.
&>> I think it comes down to some kind of cultural superiority complex – do you not think perhaps that UAE people know better than you what suits them?
So here’s a question. If an Arab from Jordan for example criticizes the UAE for being relatively undeveloped politically let’s say, using polite language, does that Jordanian have a cultural superiority complex?
This is the weakness of your explanation, UAE is widely viewed in the Arab world as run by formerly nomadic tribespeople who only recently came into proper civilization. Crying racism is really a strawman.
Ed Note: Cultural superiority has nothing to do with racism – the US has proved that by electing a non-white president. It is more akin to intellectual arrogance.