Introduction

It has become axiomatic to state that the bond markets of the Arabian Gulf have traditionally underperformed equity and especially bank lending for attention as a source of finance. That having been said, progress in developing the fixed income market has been rapid and the potential for further growth is enormous. Longstanding issues in the Arabian Gulf region with allocation of resources, financial market depth and stability as well as corporate and government transparency all came into sharp relief during the global credit crisis. A deeper bond market would have helped to absorb its impact and speed the region's exit from crisis.

Mature and liquid debt markets improve resource allocation by channeling national and regional savings into domestic investments and can diversify the choices available to both institutional and individual investors. Diversification of financing and investment options contributes to the stability of financial markets as well as to corporate and government transparency. This, in a nutshell, is the rationale for being concerned over the development of bond markets in the Arabian Gulf region. It can be expected that, with official and private sector consensus and commitment, bonds will become a key lever of economic growth and financial stability. In this paper, most references to “the bond market” will include the markets for both conventional bonds and sukuk or sharia-compliant securities. While the structures of conventional bonds and sukuk may differ significantly, their roles in the macroeconomy are virtually identical. Lastly, an attempt to describe the bond market in any brevity risks generalizations that will be tested by the considerable diversity of the Gulf economies and markets.

1. The Relative Underdevelopment (or Rapid Development?) of Bond Markets in the Gulf

Depending on which aspects are stressed, the Gulf fixed income market can be correctly described as either extremely nascent, or alternately, as experiencing unprecedented growth. As a share of regional GDP, bonds are underrepresented at only 13 percent, versus 42 percent across emerging markets and 159 percent globally. And while growing, capital markets debt in the MENA region still represents a disproportionately small share of the overall capital structure.