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Capital Markets

Lack of institutional investors holds back Gulf bond markets

The biggest issue hindering the growth of the Gulf’s debt capital markets is the lack of a thriving local institutional investor community, says the head of the region’s leading fixed-income trade body.

Michael Grifferty, president of the Gulf Bonds and Sukuk Association (GBSA), says that the size of the "institutional buy side could be immense" but is hampered by structural problems.

Funds under management in the Gulf constitute only about 1% of the region’s GDP, way below the levels in advanced economies. "Apart from sovereign wealth funds there aren’t enough organized institutional investors," says Grifferty.

He is confident, however, that pension funds and insurance companies will become bigger players in the debt markets as they become subject to best practices. "Traditionally, insurance companies’ portfolios have comprised real estate and local equities," says Grifferty, "but there is a growing consciousness of the need to better manage assets."

Despite the lack of hard data, anecdotal evidence suggests that most Gulf bond transactions, even by sovereigns, are largely distributed to accounts in the US, Europe and increasingly Asia, and only find themselves in regional investors’ hands – usually the banks – through secondary market trading.

Only about 20% of Dubai’s recent $500 million, 10-year bond was sold directly to Middle East investors, for example.

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