1. 1 October 2009Presented by: Mustafa Aziz Ata The role of a Bond Market in an Economy

2. Aftermath of the crisis - the new world order Financial integration is deepening, both globally and regionally, making decoupling effectively impossible Despite the coordinated efforts by governments globally to support the international banking system in various forms of liquidity and capital injections, bank lending continue shrinking –Balance sheet deleveraging, implementation of more conservative risk metrics/policies –Access to (new) bank capital remains scarce and expensive Debt capital markets are becoming the main source of liquidity for refinancing / funding gap –Re-pricing of risk spreads makes corporate bonds an attractive investment proposal for investors –Despite the higher spread environment, low underlying risk free rates reduces the nominal cost of debt for borrowers The migration of borrowers from bank lending to debt capital markets seems to be systemic move rather than a temporary deviation from their traditional borrowing mix –New bond sales volumes, across all market and geographies, have exceeded the historical highs year-to-date 2009 –The new issue supply to remain robust for the remainder of the year although banks show more willingness to lend thanks to recovering macroeconomic environment since March 2009 We have witnessed economies with active local currency bond markets resumed to growth much quicker than economies with a very high share of bank lending (e.g.. Asian economies)

3. Capitals flow in the wake of the crisis Financial globalization went into reverse with capital flows falling by 82 percent In worst-hit countries, foreign bank credit contracted by as much as 67% Total cross-border capital inflows (% of World GDP) One of the most striking effects of the financial crisis was a steep reduction in cross-border capital flows Total capital flows as a percentage of the World GDP has dropped to 1.9%, lowest in the last decade The sudden disruption of capital flows caused severe liquidity crises and shocks to the regional banking systems The majority of the drop reflects withdrawal of bank lending to non-bank borrowers, particularly in emerging markets *Source: McKinsey, Global captial markets: Entering a new era, September 2009

4. MENA Capital Structure The Middle East lacks balance among various channels of financial intermediation; although improving, the region continues to be dominated by the banking sector This creates systemic vulnerability during times of crisis; albeit no asset class has been spared from the recent turmoil Japans lost decade provides an excellent example of the perils of a bank dominated market And Korea, with an active bond and stock market, recovered more rapidly than their peers following the 1997 crisis *IMF Global Financial Stability Report (2004 & 2008), HSBC Analysis Stock Mkt CapDebt SecuritiesBank Assets 20042007 MENA Global The optimal capital structure, exhibited by the global aggregate, is a balanced distribution Due to equity market growth, the balance improved from 2004 to 2007; however, over the past 12 months, regional stock market capitalizations have decreased significantly

5. MENA External Financing Structure BondLoanEquity MENA Global UAE Egypt 200320052007 Globally the asset class mixed is balanced Banks dominate throughout the MENA Region The UAE has improved dramatically Egypt remains the most balanced in the region According to IIF estimates, the gross foreign assets governments, banks and NBFIs in the GCC alone rests at US$1.5 trillion, c. 130% of GDP at June 2008 In addition to its capital structure, the MENA region needs to diversify its sources of external financing *IMF Global Financial Stability Report 2008, HSBC Analysis

6. Regional Issuances and Redemptions 2009 GCC International Redemption Profile* *GCC Analysis, assuming bullet redemptions and refinancings US$m MENA International Debt Issuance (Country)MENA International Debt Issuance (Product) The GCC faces c. US$48.5 billion in redemptions and refinancings over the next year Conventional loans have been the main funding channel for the Middle East The GCC has been the largest borrower out of the MENA region

7. Debt market environment in the GCC Regional CDS Spreads Bank appetite for long dated loansa mainstay of the project finance marketis reduced, the region must evaluate the long dated project bond markets in order to finance the infrastructure requirements of the region Name lending into family businesses will eventually diminish, these companies will need to enter the capital markets Spreads for GCC issuers are normalizing as Qatar, Saudi and Abu Dhabi CDS levels are back to sub- 100 levels Global investor base is keen to add GCC exposure as oil prices have stabilized around USD 65 per barrel

8. Looking Forward

9. Local Currency Markets Development International institutions can play a important role in establishing local currency markets Egypt is an excellent example of a newly introduced and highly successful primary dealer system As international liquidity conditions stay volatile, the regions government must foster an active primary and secondary government securities market Benefits to the Economy and Markets MENA Central Banks should develop the local currency bond market by establishing a risk free yield curve that reflect the opportunity costs of funds at each maturity This can be achieved through the issuance of the following security types: –Treasury Bills (T-bills): Issued by the Government short-term financing requirements. –Government Bonds (Bonds): Issued by the Government in the 2year, 3year, 5 years and 10 years –10year maturity with fixed rate coupons to meet medium to long-term financing requirements Many regional banks already invest in Certificated of Deposits issued by the Central bank to manage liquidity Development of the Yield Curve Significant Government access to local currency funding Observable/Transparent Government Yield Curve allows corporate risk to be priced Eventual Development of Non-Government Dept Markets Enhanced Asset/Liability Management among Financial Institutions Efficiency in Monetary Policy, better control of Money Supply Creation of long maturity assets for NBFIs Long dated government debt will provide the liability profile necessary for regional projects

10. Summary The MENA region has a healthy and rapidly developing banking sector; however, access to capital markets remains key for infrastructure investments and economic growth We believe that the development of an efficient Local Currency Debt Capital market is required to ensure a sustainable growth environment for GCC economies Existence of a full fledged corporate bond market will reduce systemic risk and the probability of a crisis. A market for direct debt also improves the incentive for banks to remain efficient and innovative. A well functioning corporate debt disciplines and ultimately strengthens the banking system by providing competition for information-intensive bank loans at the margin. The absence of a corporate bond market of sufficient size has two principal effects. –First, the effects of misdirected credit preferences will tend to be magnified. –Second, the absence of a sizable corporate bond market will aggravate the imperfections present in any financial regulatory system. The associated inferior risk assessment by the over-sized banking system and that systems other weaknesses will tend to overwhelm, leading to productive over-capacity and non-performing loans