Rising Importance of Corporate Bonds in Yemen and the Whole Arab Region [Archives:2000/22/Business & Economy]

Prof. Salem Al-Abdul Rahman
Univ. of Science & Technology
Sana’a, Yemen

The Arab bond markets are still in their early stages of development. With the total value of issues out-standing not exceeding $150 billion, most of it are in government debt instruments denominated in local currencies. Government bonds issued by Saudi Arabia are estimated at around SR430 billion ($115 billion) and those of the other GCC countries at $15 billion.
The total value of corporate Arab bonds is put at around $5 billion, of which the Euro dollar bonds account for $2.78 billion and the balance of $2.22 billion is issued in local currencies.
The corporate bond markets in the region are likely to gain added depth and versatility in the coming few years. From the borrowers’ point of view, bond finance increases the flexibility of a debt management and allows for terms and conditions different than those available in the loan market.
Bonds typically have a longer maturity value than bank loans and they amortize in one bullet payment. Furthermore, the majority of bonds have a fixed coupon which many companies prefer as it facilitates longer-term financial planning and protects them from unanticipated interest rate changes. For banks, the issuance of bonds provides the opportunity to generate new sources of funds of longer maturities and at fixed rate to match assets of similar maturities on their balance sheets.
Several pre-requisites for the development of bond markets in the Arab region have been put in place recently in Morocco, Egypt, Jordan, Lebanon and the Gulf countries. Investment banks have been established at the national and regional level to act as intermediaries between borrowers and investors and provide underwriting and trading services. In several cases, governments have been tapping the domestic bond market, establishing in process a benchmark for further pricing of corporate bonds; Several regulatory reforms have been introduced although much more needs to be done in this respect.
Standards of reporting are improving, yet more is needed to enhance the transparency of Arab corporate. To encourage the development of bond markets in the Arab region, corporates should get ratings.
Arab private and institutional investors would be reluctant to invest in unrated paper of other institutions whether Arab or otherwise. International and regional rating agencies have started to carry periodic credit analysis on Arab incorporated companies and provide investors with reliable and up to date information on these companies.
The region, including Yemen, needs to develop its corporate bond markets so that they will be able to substitute for the decline in bank financial intermediation and limit the effect of economic shocks if and when they occur.
Had a functioning capital market existed in several East Asian countries, the crisis there may have been far less severe. Because Sweden has a developed corporate bond sector with a variety of non-banking funding sources, the Crisis that bit banks in the early 1990s, when real estate prices there collapsed, did not impact the ability of corporates to borrow.
In contrast, because the Japanese financial system now mainly banks as financial intermediaries with the corporate bond market, playing a much smaller role than elsewhere, the crisis there has taken a much longer period to be resolved, leading to protracted credit crunch.
The Egyptian local bond market is relatively the most advanced among its neighboring Arab countries with 30 corporate bonds outstanding worth around EGP3.1 billion ($908 million), in addition to government bonds of EGP10 billion ($2.9 billion). Hoechst Orient was the first comer to the market with a EGP330 million ($8.7 million) issue in May 1994, and Victoria United Hotels company followed suit in April 1995 with EGP70 million (20.3 million) worth of seven-Year bonds. In the light of these successful issues, commercial banks, appetite for medium – term bond financing grew, with thirteen banks so far issuing a total of EGP3.-8 billion ($890 million) worth of bonds in the Egyptian market. The last two issues that came to the market were those of Orascom Construction Industries (OCI) who raised EGP280 million ($81 million) in February 1999, and LAKAH Group who tapped the market also in February 1999 for EGP400 million worth ($116 million) bond issue.
The Jordanian corporate sector tapped the local fixed income market in May 1998, with a JD 3.5 million (4.93 million) issue by the International Tobacco and Cigarettes company. This was followed by Jordan Cement Factories company with a JD10 Million ($14.1 million) bond issued in June 1998, while the international, Industrial, Commercial and Tourist Investment company issued a JD7 million ($9.9 million) bond in October 1999. Furthermore, Union Chemicals for Vegetables and Oil Industries issued a small JD3.5 million convertible bond in March 1999. The banking sector made a debut in the JD corporate bond market with a JD10 million ($14.1 million) move by Cairo Amman Bank in September 1999.
On the international scene, two corporate Eurobonds are currently outstanding: Jordan Telecommunications Company’s $50 million offer in August 1998, is a case in point.
Kuwait’s fixed income market was revived in December 1992 with a small bond issue by the Commercial Facilities Company. The company made a second draw on the bond market with a larger issue in December 1997, and Kuwait Real Estate Bank raised subsequently over KD55 million ($181 million) from bonds issued in 1993, 1994 and 1999.
Moreover, Kuwait Investment Project Company and National Investment Company both offered smaller size issues for KD12 million ($39 million) and KD8-25 million ($27.2 million), respectively in 1994 and 1996. The National Industries group issued KD35 million ($114 million) worth of bonds in February 1999.
Lebanon’s experience with the corporate bond market has been limited to foreign currency issues, with the banking sector accounting for over 92% of the total. Banque Audi Made a debut in November 1996, with a $1000 million Euro note offer, and other commercial banks followed suit with subsequent issues worth $840 million. The $85 million issue by Societe des Ciments Libanais is the only non-banking outstanding bond in the market.
The Moroccan market started to develop in August 1991, following the government’s decision to revoke its guarantee from previously state – owned entities. Credit Immobilier Hotel (CIH) issued three Dinar denominated bonds in 1997 and 1998, followed by Credor, Taslif, Banque Nationale de Development Economique and Banque Maocaine due Commerce Internatinale for a total of MD1,535 million ($159 million). Bahrain made its debut local currency issue in July 1994, with Bahrain Commercial Facilities Company, Selling BD7 million ($18.5 million) worth of bonds to public, followed by Aluminum Bahrain with BD100 million bond ($260 million) and Bahrain International Bank (BD 120 million).
Qatar which broke new grounds in December 1996 with a large $1.2 billion Eurobond issue by Ras laffan liquefied Natural Gas Company (Rasgas), in order to finance a large-scale liquefied natural Gas (LGN) project. The UAE was the newest comer to the market with A AED350 million ($95 million), three-year issue, by BMW us Capital Corporation, to be listed on the UAE stock market.
In conclusion, one can realize that the importance of corporate bonds in the Arab region is rising, and if put into good use, may be one of the main factors for a prosperous economy in Yemen and the whole Arab region.

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