GCC Bond Markets: Lessons from Asia GRC Program Manager Economics KIEP-GRC Workshop Dr. Eckart Woertz GRC Program Manager Economics May 1, 2006

The Necessity of a Bond Market Stable long term financing Investments of pension funds Better risk assessment Risk diversification for banks Tool of monetary policy Balancing and complementing of foreign trade relations

GCC Foreign Trade Relations Source: Gulf Organization for Industrial Consulting (GOIC)

The Weak US-Dollar

Bond Markets in the GCC No benchmark yield curves Size and share of GDP low Low secondary market turnover Rating culture underdeveloped Issues in USD dominant (International Markets) Role of pension and mutual funds underdeveloped ABS: Legal framework/ property titles. Quality of consumer credit?

The Asian Crisis 1997/ 98 No ABS market worth mentioning before 1997 Main markets at that time: Japan, Hong Kong, Thailand Currency and maturity mismatches Over-reliance on banking sector Discussions about the development of domestic bond and ABS markets gain steam

Bonds and ABS in Asia after 1998 New possibility to raise financing for distressed capital after 1997/98. Cherry picking by (foreign) vulture funds. Restructuring of companies The road ahead: Broad based securitization across various asset classes, provision of legal frameworks More sophisticated investor approach (e.g. equity tranches) Securitization in local currencies Liquidity. Development of domestic bond markets and benchmark curves, Rating culture

Asian Bond Markets 1) Hong Kong, Singapore 2) Korea, Taiwan, Malaysia 3) China, Philippines, Thailand, Indonesia Size: USD 800 BN (2001), 7% of USA, 12% of Japan Share of GDP mostly around 30% Secondary market turnover low Investor Base: Lack of institutions (e.g. pension funds) Initiatives to encourage local bond trading and investing: Asian Bond Forum

ABS in South Korea 1998: Asset Backed Securitization Law in Korea 1999: Mortgage Backed Securitization Law in Korea 1999: Korea Mortgage Corp. (KOMOCO) = Fannie Mae 2000: Percentage of ABS in Korea’s corporate bond programs jumps to 73.4% from 4.4% 2001: Korea’s 9 % share in Asian ABS markets rates second after Japan with 80% 2002: Explosion of credit card delinquencies in Korea causes major decline in GDP and stops triple digit growth in the related ABS market

ABS in Asia: Problems Contrary to the USA and Europe property securitization is not dominant Legal framework: Right of first recourse (Singapore), property rights (e.g. Pakistan, Indonesia) Mortgage markets underdeveloped. Share of GDP low, alternative institutions of funding important (e.g. savings clubs) Mortgage market except Malaysia dominated by state banks with often subsidized lending policies Mortgage quality is an issue in Pakistan, Philippines and Thailand

GCC + Asian Bond Markets Lack of benchmark yield curves Limited supply of quality bond issues Limited demand/ Captive investors Inadequate bond market infrastructure: - Auctions - Secondary market - Settlement and Clearing - Rating agencies - Hedging instruments

Necessary Reforms in the GCC Establish a Domestic Bond Market for Sovereign and Corporate Bonds Establish a unified GCC financial market in order to gain market size and depth Strengthen institutional investors and improve legal framework for ABS 4. Intensify mutual investments with Europe and Asia to complement trade relations