Gulf-based banks, law firms and other market participants are close to launching a professional bond market organisation, a US Treasury envoy told a regulators' conference in Dubai. Michael Grifferty, a regional adviser for government debt issuance, said a bond and sukuk market would be the "spare tyre which needs to be inflated" to help in the economic crisis.
"In the next months, we will see a market organisation where market players and service providers will... provide input to regulators," said Mr Grifferty. The body would have "an initial 20 to 50 members" said Giambattista Atzeni, in charge of strategic business development for the Middle East at The Bank of New York Mellon. Mr Grifferty's comments echo calls by a broad range of financial market participants, who say the credit squeeze could be alleviated substantially with a functioning bond market. As a result, the region, some of whose governments will post a budget deficit this year for the first time, should use this phase of fiscal expansion as an opportunity to set up a bond market.
"Debt is not playing its role yet," Mr Grifferty said. "Governments facing fiscal deficits will be looking to this market. Both the corporate and the government debt market require more attention from the regulators. The market is still young and undefined, it should quickly set out parameters on a GCC basis... this is critical for monetary union." Tom Healy, the chief executive of the Abu Dhabi Securities Exchange, said recently that "at the moment the only real source of liquidity for people is the stock market. Ideally, the establishment of a domestic bond market should be driven by the government".
The organisation would represent the industry on regulatory and legislative issues and initiatives, and convey ideas to regulators and central banks concerning issues such as how bond contracts can be enforced, which assets can be taken as securities and how to protect bond holders. "This replicates what is happening in international markets," said Mr Atzeni. International players would bring their expertise and share their best practices. "It will be an open association looking at international best practice adapted to local needs."
In the US, the the Securities Industry and Financial Markets Association (SIFMA) includes more than 650 securities firms, US-registered broker-dealers and asset managers, while its European counterpart, the International Capital Market Association (ICMA), has more than 400 members. "The main goal is to give market participants a single voice that can spur action in regional governments and regulators who see the benefits in talking to one organisation," Mr Atzeni said. "The market could support the macroeconomic goals of the region's governments."
Last month, Nasser Saidi, the chief economist at the Dubai International Financial Centre, told a panel: "This is the time for GCC countries to break the boom-bust cycle by developing a debt market. This is the time to reform public finances, to be proactive, continue funding infrastructure and public works projects. The private sector is not going to do that, it faces too much risk." A lively government bond market would create a benchmark for corporate bonds, economists believe.
"We need a yield curve to price other financial institutions," Mr Grifferty said yesterday, adding that "public debt allows the highest quality of infrastructure development". A lively bond market could also help attain the GCC's goal of creating a monetary union similar to developments in Europe, he said. "The development of a debt market is one of the key elements that made [European] monetary union possible... and it should be important here."