Excess liquidity a challenge

Khalid Howladar, Vice President-Senior Analyst with Moody’s and a well-known name in the international finance area, was in Muscat recently to conduct a workshop on “Asset-Backed Debt Market”, in association with OER. He talked to Mehre Alam on certain key issues concerning the debt market in Oman and the region. Excerpts:

How important are awareness programmes/seminars on Asset-Backed Debt Market in a place like Oman?
Such programmes are very important, especially the ones on topics such as Asset-Backed Finance. The first step in any market for both issuers and investors is education. Moody’s have over 100 years’ experience in looking at Credit Risk and are well placed to give market participants the tools (such as Credit Ratings) and the skills needed to help understand and evaluate the risks.

Very briefly, what are the key features of Asset-Backed Debt Market?
The performance of such bonds is dependent on the credit quality and income of the assets, the way the income of these assets is distributed, and the legal structure that supports investor ownership of the assets and their cash flows. These are the key features.

How different are these instruments from the debt market that is not asset backed?
The risks are very different. Asset Backed Security depends on the assets. Regular bonds are ‘unsecured’ or not backed by specific assets, hence the risk depends on the credit quality of the borrower.

How important is the concept of securitization for the Middle East market?
At the moment there is a lot of liquidity in the region, which in turn does make financing less difficult to raise. But the region is rich in assets. It is experiencing a consumer finance boom and undertaking many capital-intensive projects, which will eventually overwhelm the loan market. They are well suited to make securitization more attractive. Securitization is a key part of any CFO’s financing toolbox along with equity and debt and should not be neglected.

What are the main challenges facing the Middle East securities market today?
Legal and regulatory environment, investor knowledge and too much liquidity are the main challenges. Uncertainty in the financing environment can really impede the growth of new capital markets.
Many regulators have made great efforts in this area but many lawyers will tell you that there are still many grey areas.

What will be the fundamental implication of Basel II on financial institutions in the emerging markets?
Basel II is meant to better align economic risk and regulatory capital. No two banks are the same so one cannot really generalise.

What is the future of Shariah-based products in the global market?
Very bright! The demand is there. These are not state driven initiatives (although they are getting some help). If shown two similar products, say mortgages, many of the (Muslim) people in the region are favouring Islamic products. This has led to Islamic innovation across the region and issuances outside the region like Germany and the USA.

How soon will Moody’s have a local/representative office in Oman?
While there are many factors, a key one is the demand. If there is significant issuance of rated debt in Oman, then usually, it’s best to be local and near the borrowers to better understand the market. We are always evaluating the need for our presence but it is primarily investor/issuer driven

In terms of Moody’s Country Rating, where does Oman stand?
As per Moody’s Rating, Oman has currently Baa1 rating for the government but A2 for the country. So, a strong securitization, bank or corporate can be rated higher than the government.

What are the main credit strengths and credit challenges for Oman?
The credit strengths for Oman include high and rising GDP per capita, robust non-oil growth, the government’s status of a significant net creditor, domestic political stability and strong international relations. As for the credit challenges facing the Sultanate, they are the country’s economic reliance on volatile hydrocarbon exports, relatively high unemployment, risk of contagion from regional geopolitical instability and the fact that oil and gas reserves are limited in size and expensive to produce.

What can push Oman’s rating up?
According to Moody’s sovereign report on Oman, the key lies — in the long term — in a sustained period of high oil prices and the maintenance of fiscal and external current account surpluses, leading to the further accumulation of net public assets. Plus, further rapid and sustained growth of the non-hydrocarbon sector would reduce the Omani economy’s reliance on oil and gas exports. The abatement of regional political tensions is the other factor that can change the rating.

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