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

2. 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

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

4. The Weak US-Dollar

5. 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?

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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