Economic Research Forum (ERF)

Capital raising in the Arab world

How do firms in Arab countries use equity, corporate bond and syndicated loan markets to obtain finance? This column reports research that provides a first documentation of issuance in domestic and international markets over a 25-year period from the early 1990s.

In a nutshell

While the total amounts raised in equity and syndicated loan markets in Arab countries compare well with other regions of the world, corporate bond issuance lags behind.

Well-developed government bond markets would provide a cornerstone for the development of domestic corporate bond markets, acting as benchmarks for pricing and creating an infrastructure for trading.

Boosting the development of domestic bond markets would reduce reliance on international markets, making Arab countries less vulnerable to external economic shocks.

Since the early 1990s, many countries in the Arab world have embarked on significant financial and economic reforms. These have involved internal and external financial liberalisation, as well as efforts to increase the depth, scope and efficiency of national financial systems.

As a result, Arab financial systems have shown considerable improvements over the last two decades. Most countries in the region have realised the importance of expanding the breadth of their financial systems and of operating active capital markets.

Nevertheless, Arab financial systems are often accused of being underdeveloped. In particular, financial markets are still highly bank-based, thin, tightly regulated and dominated by government ownership. Moreover, it has been reported that financial systems in the members of the Gulf Cooperation Council (GCC) tend to be more developed and globally integrated than those elsewhere in the region.

Our research analyses a unique dataset to provide a first documentation of the use of capital and syndicated loan markets by Arab firms since the early 1990s (Cortina Lorente et al, 2017). We also investigate how the issuance activity of Arab firms compares with other regions in the world, and if there are considerable differences between countries within the Arab region.

In particular, we ask: what is the total amount raised in equity, bonds and syndicated loans by firms in the region? How much of this capital is raised in domestic markets, as opposed to international markets? At which maturities do firms issue debt and where do they obtain the longest maturities? What are the yields to maturity of debt instruments? And how do the main patterns and trends in the region compare with other regions in the world?

To answer these questions, we assemble a comprehensive transaction-level dataset on equity, corporate bonds and syndicated loans issued in domestic and international markets over the period from 1991 to 2014. The analysis focuses on 12 Arab countries, but covers 719,242 individual security issuances conducted by 138,091 (listed and non-listed) firms from 96 different countries.

The overall evidence suggests that while the level of activity in equity markets stands well with respect to other regions in the world, bond market activity lags behind. Syndicated loan markets in the Arab world have been very dynamic, with the highest amounts raised to GDP among all other developing regions in the 2000s.

Nevertheless, in the aftermath of the global financial crisis of 2008-09, the total amount raised in syndicated loan markets has plunged whereas the amount raised in bond markets has increased, indicating a shift in the nature of firms’ debt financing from loans to bonds.

This pattern is in line with recent research highlighting a second wave of global liquidity (from banks and towards bonds) in developing countries after the crisis. Moreover, capital and syndicated loan market activity in the Arab region exhibits considerable heterogeneity across countries, with GCC members capturing 80-90% of the total amounts of new issuances.

Several patterns underlie the maturity structure of new debt issuances in the Arab world. Financial firms tend to go shorter than non-financial ones, with almost double the average maturity length for the latter. This holds for both types of debt issuances: bonds and loans.

Moreover, corporate bonds tend to have longer maturities than syndicated loans. With 11.5 years of average maturity, corporate bonds issued by non-financial firms in the Arab region are the longest in the world, while syndicated loans present the second longest, at 8.9 years. Behind this pattern is the prominent use of bonds for the energy and transport sectors, and of loans for project finance purposes – both of which involve demanding infrastructure projects.

We find that corporate bond issuances by Arab countries display a low level of credit risk as per Standard and Poor’s credit ratings. Moreover, yield spreads over risk-free rates of US-dollar-dominated bonds are low with respect to international standards, especially in such countries as Qatar, Saudi Arabia, Tunisia and the United Arab Emirates. These low levels of bonds’ credit risk suggest that it might be the very large and mature firms that are involved in their issuances.

In fact, one interesting feature of bond markets in the Arab region is the exceptionally large size of its bond issuances. While the amounts raised in bond markets in the region are comparatively low with few issuances, the median proceeds per a new bond issue are large with respect to international standards. This pattern is especially evident in domestic markets, which is consistent with the fact that Arab domestic bond markets are highly dormant with very low firm competition.

Overall, we observe that the development of bond and syndicated loan financing in the Arab region has mostly been funded by international investors and banks. The reliance of Arab countries’ firms on international markets to obtain debt financing makes their economies more prone to external shocks.

Moreover, almost all the funds raised with bonds and loans by firms in Arab countries are denominated in foreign currency. Debt denominated in foreign currency can be risky if not properly hedged as capital flights and currency depreciations could severely affect the balance sheet of Arab firms and increase their credit repayment burdens. The overreliance of firms in Arab countries on international markets suggests that they look for substitutes overseas to overcome the incompleteness of their domestic markets.

Consequently, Arab countries could benefit from further developed domestic bond markets. Well-developed bond markets would allow firms to access alternative sources of funds other than bank finance, promoting a more inclusive and broader use of long-term finance. Moreover, they would increase competitive pressures on banking systems, improving efficiency and capital allocation in Arab economies.

As a starter, well-developed government bond markets can be considered as a cornerstone for the development of domestic corporate bond markets. They would act as benchmarks for bond pricing and help to create the necessary infrastructure for trading. Furthermore, by boosting the development of domestic bond markets, less reliance would be placed on international markets, reducing the vulnerability of Arab countries to external shocks.

Further reading

Cortina Lorente, Juan Jose , Soha Ismail and Sergio Schmukler (2017) ‘Capital Raising in the Arab World’, ERF Working Paper No. 1095.

Most read

The impact of hosting refugees on the labour market

What are the labour market effects of a massive influx of people on members of the host community? This column examines the experience of Jordan resulting from the conflict in neighbouring Syria. Evidence shows that Jordanians living in areas with high concentrations of Syrian refugees had no worse labour market outcomes than Jordanians with less exposure to the influx.

Economies of agglomeration and firm productivity in Egypt

There is a strong body of international evidence that firms are more productive when they cluster near one another geographically. This column reports new findings on the substantial productivity benefits of such agglomeration in Egypt. The results have important implications for policy, including the value of establishing specialised industrial zones for promising business clusters with high growth potential.

Unemployment in Tunisia: why it’s so high among women and youth

Why is unemployment among women, youth and educated people so high in Tunisia? Drawing on a new ERF book – The Tunisian Labor Market in an Era of Transition – this column explores three key factors - labour supply pressures; weak demand for skilled labour; and rigidities in the core institutions of the labour market – as well as potential policy responses

Lebanon’s austerity budget of 2019: a last resort to avoid crisis?

Lebanon’s high and rising public debt has become unsustainable. This column explains why it is essential that the austerity measures in the draft budget of 2019 are approved in order to avert imminent debt and exchange rate crises.

Return migration and income mobility in MENA

The emigration and return migration of working-age men in the Middle East and North Africa have significant effects on national economies. This column summarises new evidence on the contribution of moving to another country for work and later returning home to the lifetime earnings and intergenerational socio-economic mobility of workers in Egypt, Jordan and Tunisia.

Falling rents should make way for institutional reforms in Arab states

Can the development prospects of the Arab countries be separated from the natural resource endowments that have been shaping their economies for so long? This column outlines the likely downward trajectories of per capita natural resource rents to 2030 – and the sense of urgency that those numbers should bring to discussions of the need for institutional reform.

Why reforms in the Middle East are unavoidable

One striking feature of the recent economic history of the Middle East is high-income Gulf economies financing the persistent external imbalances of its geo-strategically important neighbours. This column asks what happens when, as a consequence of the technological disruptions of the global fossil fuel market, the current account deficits of key countries in the region are no longer sustainable.

Unemployment in Tunisia: why it’s so high among women and youth

Why is unemployment among women, youth and educated people so high in Tunisia? Drawing on a new ERF book – The Tunisian Labor Market in an Era of Transition – this column explores three key factors - labour supply pressures; weak demand for skilled labour; and rigidities in the core institutions of the labour market – as well as potential policy responses.

France’s headscarf ban: the effects on Muslim integration in the West

What is the effect of religious bans on the economic and social integration of Muslim minorities in Western countries? This column reports evidence on the effects of France’s 2004 legislation banning conspicuous religious symbols in schools, which particularly affected the headscarves worn by Muslim women. There has been a damaging impact on the educational attainment and later life outcomes of young Muslim women affected by the ban.

Women, work and social norms in Saudi Arabia

Employment rates for women in Saudi Arabia are very low. By custom, they cannot decide for themselves whether to work or not – they need the consent of their male guardian (either their husband or father). Whether men permit their wives or daughters to work depends crucially on social norms. This UBS Center column reports evidence that most Saudi men privately believe that women should be allowed to work, but that they underestimate the extent to which other men share their views.