Arab Capital Markets: Developing Fixed-Income Markets in Non-GCC Arab Countries – Part V

Wafik Grais, 05 Mar 2015

Part V of this six-part series examines the structure of developing fixed-income markets in non-Gulf Cooperation Council (GCC) countries of the Arab world. In this section we examine a few examples of challenged Arab fixed-income markets and explore systemic weaknesses that persist.

 

Among Arab countries outside the GCC region, Egypt, Jordan, Lebanon, Morocco, and Tunisia have made the most progress in developing debt markets. Since the end of the 1990s, they have taken steps toward building a domestic debt market, with varying degrees of success. More reform is needed.

 

In Egypt, net government domestic debt amounted to LE 1,079.6 billion (less than USD156 billion), or 60.7 percent of GDP at current market prices, at end-September 2012. This amount reflected a total of outstanding treasury bonds and bills of LE 1123.7 billion (US$163 billion) and a decline in net indebtedness with other entities of LE 44.1 billion. Bonds and treasury bills accounted for 63 percent and 37 percent, respectively, of the outstanding total. However, only 42.5 percent of the bonds were tradable on exchanges.[1] Outstanding external debt stood at US$34.7 billion at end-September 2012. -- The public and private sectors owed 95.1 percent or US$33.0 billion, and 4.9 percent or US$1.7 billion, respectively. Bonds and bills amounted to US$2.6 billion, or 7.5 percent of total external debt.

 

In Morocco at the end of 2012, the central government debt amounted to US$58.5 billion, or 59.6 percent of GDP. The major part of the debt—45.5 percent—was domestic debt, and the rest was external. Treasury bonds issued on the domestic market, which are not traded on the exchange, represented about 95 percent of the central government domestic debt. Less than 24 percent of the external debt is contracted through the issuance of bonds.[2]

 

In Egypt, Jordan, Lebanon, Morocco, and Tunisia, systemic weaknesses remain. Money markets continue to be shallow. Primary markets provide an unbalanced choice of maturities favoring longer-term and illiquid securities, instead of a systematic approach to gradually lengthening the yield curve while supporting secondary market liquidity, except in Egypt. There is little activity on secondary markets as a result of shortcomings in the issuance strategy, excess liquidity that promotes buy-and-hold investment, and bottlenecks in the institutional organization of the market. Further, investor base diversification is limited and mostly captive as a result of the dominance of bank- and state-owned institutions and excess liquidity. Institutional investors, such as mutual funds are often supported by regulatory, accounting, and tax arbitrage that distort their role as competitive players in debt markets. Foreign investors, with the exception of Egypt, are almost nonexistent, since they are being crowded out by local captive investors and discouraged, depending on the case, by low liquidity and poor market infrastructure (Garcia-Kilroy and Caputo Silva 2011).

 

Following the last five parts review of structures and issues of Arab equity and fixed-income capital markets, Part VI of this series looks at how these markets are regulated and what could be done to improve their efficiency and stability.

 

Read Part IPart II, Part III, Part IV, Part VI

 


[2] Figures drawn from the websites of the Central Bank, http://www.bkam.ma/; and the Ministry of Economy and Finance, http://www.finances.gov.ma/.

 

 


Wafik Grais is an International Senior Adviser specializing in Islamic finance, financial regulation, investment financing, private equity management, and corporate governance with expertise in SMEs and green growth financing. He was co-founder and chairman of Viveris Mashrek, a Cairo-based, financial advisory services company specialized in private equity investments in SMEs, licensed by Egypt's Financial Supervisory Authority. He spent 28 years in international finance notably with the World Bank in Washington DC where he held several senior positions both in operations and at corporate levels. He holds a Ph.D. in Economics.

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