The financial system was put through the test during the financial crisis of 2008, as financial institutions started to become less prudent with their financing criteria, risk management and dissemination of risk. Moreover, the drop in oil market prices of 2014 put the GCC countries under financial and budgetary constraints, instigating huge social and political pressures to reform. Hence, the need to establish and develop a platform and a comprehensive legal environment for the debt capital markets to grow in the GCC region.
There are two options to bridge the budget deficit gap without upsetting the social fabric: either to draw on the general reserves or borrow from the markets. Different countries in the GCC took steps to remedy the situation with proactive financing strategies and plans, while others were slower in following suit.
There is a growing need for the GCC to finance its expansionary budgetary policy that targets industry, energy, infrastructure and security and social needs. The governments of the GCC region need an accessible and efficient debt capital market to address financial policy decisions and options covering regulation, supervision and oversight of the financial systems. This includes markets and institutions with the view to promoting financial sustainability, stability market efficiency and consumer protection. This will impact debt capital market evolution and growth. It was examined how Islamic debt capital market techniques could positively impact the global debt capital market industry by offering alternatives for interest-based assets. This will lead to the establishment of a framework for the development of capital markets in emerging and GCC areas in particular.
Sukuk issuances in 2019 in the international debt market were up by 6% compared to 2018. Sukuk represent 25% of the total GCC fixed income issuances and Sukuk are on the rise, as issuers seek to develop the Islamic debt market and diversify their funding mix. Even though more than US$45 billion-worth of Sukuk were issued over the past three years in the GCC, the challenge is still to balance debt sustainability with the need for public expenditure.
The key drivers of the ecosystem for a robust and comprehensive debt market in the GCC region are the establishment of legal and regulatory frameworks, a widened investor base and benchmarking the issuances of bonds and Sukuk, with incentivization and facilitation of foreign investors. In addition, our discussion thus far raises one critical factor needing further analysis, that is, a pragmatic and visionary leadership. The uniqueness of the GCC is being ruled by monarchs that have strong leadership founded on pragmatism and vision. Monarchs are known to rule by virtue of their sovereign quality or divine rights. With pragmatic and visionary leadership, the monarchs may have to be adaptable to fundamental reforms — some of which can lead to political power reconfiguration between the monarchs and the rest of the political economic factors. And this leads us to the policies to predict the shape and form of these reforms, and these may include, but are not limited to, regulatory framework, political practices, market education, investments and taxation.
The immediate consequence from undertaking these reforms is a more empowered civil society. This is often overlooked when discussing fundamental market reforms. As the economy becomes more sophisticated, participants naturally demand for transparency and accountability. What this means politically for leaders is that checks and balances are continuously assessed. Leaders’ privileges are no longer given but linked closely to the ability to discharge leadership responsibilities to satisfy the rights of the people.
Developing the debt capital market should be part and parcel of discharging such leadership responsibilities. A well-developed debt capital market allows for broader investor participation. It can provide capital access to those SMEs, hence potentially elevating the socioeconomic wellbeing of the rest of society. A transparent and orderly debt capital market can help allocate economic resources more efficiently, thus eliminating waste or mismatch of financial and economic resources.
All these impacts are important for economic stability. In the case of GCC countries, a debt capital market can even help strengthen the state’s position by making it more relevant through necessary political economic reforms. When the state together with large corporates realize that a developed and functioning debt capital market is an important function of their survival, then changes to things taken for granted will send strong signals to the rest of society about the importance of debt capital market legitimation.
The importance of the development of debt capital markets in the GCC will have a direct impact on improving the efficient mobilization of resources and allocation in the economy, thus providing liquidity management tools for both short-term and long-term objectives and finally developing a benchmark on the income earned on government issues as risk-free returns. The development of debt capital markets would benefit various stakeholders, issuers, investors, regulators and customers.