Abu Dhabi
May 23, 2012

Your Excellency, Ministers, and Ladies and Gentlemen:

It’s a great pleasure to welcome you all this morning to this conference on “Strengthening the Debt Capital Markets in the Arab World.”

The World Bank Group is honored to be one of the organizers of this conference, along with some of the world’s leading financial institutions: the Arab Monetary Fund; the European Bank for Reconstruction and Development; and our sister institution, the International Monetary Fund.

Let me add that the collaboration of the OECD and the Gulf Bond and Sukuk Association has been instrumental in organizing this important meeting.

Our team from the World Bank Group is especially pleased to be working closely with our colleagues at the Arab Monetary Fund.

We are building a strong partnership together on capital market development in the region – especially on bond markets, and also on payment systems, credit information systems and, more recently, housing finance.

Our work together is a sign of our shared commitment to encourage development in the Middle East and North Africa.

I feel confident that, working together, our efforts will advance the ideals of inclusion, democracy and development.

Most of all, I am grateful to all of you – from both the public and private sectors – for joining us today.

You are the ones who will truly make a difference in strengthening the way that the region’s markets will operate.

The World Bank Group attaches great significance to this Forum.

Your discussions will provide an excellent opportunity for market experts from throughout MENA to share experiences and perspectives.

This offers us all a chance to reflect on the important role that capital-markets development plays in this region’s development trajectory.

We meet at a time when the financial markets in the developed world are enduring a prolonged and painful crisis.

The turmoil in the Eurozone is inflicting severe anxiety over financial stability and growth prospects beyond Europe.

We are seeing a radical shift in credit risk and macroeconomic balances in Advanced Economies and Emerging Market Economies, in favor of the latter.

There is deep uncertainty over recovery in the Advanced Economies, and the potential impact on growth in the resilient Emerging Market Economies.

The consequences of this new scenario for global bond markets are, as yet, unknown – posing a challenge to all of us.

While the financial markets in the developed world have been suffering a setback, this is – by contrast – a moment of great opportunity for Emerging Markets.

In the major financial centers, yields are low – and the developed world’s central banks seem likely to ensure historically low interest rates for several more years.

A great deal of capital is now searching for higher yield and growth in stable markets, insulated from the Eurozone turmoil.

Emerging Markets are still perceived as a “risk play,” and their economic prospects have depended, until now, on growth in the Advanced Economies.

However, that perception is gradually changing.

When today’s uncertainty is gradually cleared away in the European Union, we can expect large capital inflows into those Emerging Markets that are best prepared.

Emerging Markets that have stable political and macroeconomic conditions, along with smooth-functioning capital markets, will be the main beneficiaries of international capital inflows.

Those flows may come from, not only Advanced Economies’ long-term institutional investors – like pension funds, insurance companies and mutual funds – but also from the Sovereign Wealth Funds of both Advanced and Emerging Market economies.

To offer just one example: Two months ago, in March, Norway’s $610 billion sovereign bond fund – the largest in Europe – announced that it is gradually shifting to a larger exposure in the Emerging Markets vis-à-vis the Advanced Economies.

Its aim was to better reflect the markets’ changing economic weight and growth prospects.

This scenario provides a tremendous opportunity for the MENA region.

Amid the region’s over-arching challenge – to develop a policy agenda to support growth, job creation and broader opportunities for the Arab people – this could be an enormous game-changer.

As the World Bank’s financial-sector flagship – which was published in 2011 – has suggested: MENA’s financial sector is dominated by banks, and it has been performing below its potential to mobilize savings or provide capital to finance the private sector.

Local-currency bond markets are still relatively young.

There have been promising results in the development of government bond markets in some countries – such as Egypt, Morocco and Tunisia – and there is certainly a challenging agenda to develop non-government bond markets.

Stronger and more efficient local-currency capital markets in the MENA region, specifically in bond markets, have the potential to complement the role of banks: both as alternative sources of funding, and as a way to enable banks, themselves, to lengthen the maturity of their liabilities by issuing bonds.

In addition, local-currency bond markets are an essential part of bringing MENA countries into a deeper integration with the global financial system.

Having more robust capital markets will help the region take advantage of capital inflows – channeling that capital toward productive investments. That’s especially true in financing infrastructure – which can improve productivity and employment.

Moreover, bond markets in Emerging Market nations have become increasingly important for global financial stability, since they can absorb global liquidity and reduce volatility.

Indeed: The financial crisis of 2008 demonstrated that relatively well-developed local-currency bond markets are better able to manage crises and avoid the most severe excesses of volatility.

Even as the MENA region develops its local bond markets, those steps can be complemented by broadening access to equity markets – thus allowing corporations in the region to more readily raise capital.

In addition, the region would benefit from developing Non-Bank Financial Institutions – like pension funds, insurance companies and mutual funds.

The further development of those still-nascent industries would contribute to financial deepening, would channel savings to productive investments, and would fund more resilient social safety nets across the region.

Simultaneously: Along with the development of more robust markets, policymakers should also recognize that they need to create even stronger supervisory institutions.

In many nations in the region, those institutions are still young, and they would benefit from stronger investment and sustained capacity-building. Stronger institutions are indispensable in promoting investor confidence and ensuring market efficiency.

A specific feature of the MENA region – shared with some other Islamic countries, like Malaysia – is its comparative advantage in one particular area: MENA has the opportunity to continue expanding the Sukuk market that is already vibrant in the countries of the Gulf Cooperation Council – extending it into markets beyond the GCC.

The availability of Sharia-compliant financial instruments would provide more opportunities to mobilize savings within the region for long-term infrastructure financing, which is so urgently needed.

The World Bank Group has been active in addressing the challenges of local-currency bond markets – providing country-specific Technical Assistance and advisory operations in many countries.

Since the Asian crisis of 1997, we’ve been working across all regions to help build more resilient bond markets.

We’ve recently been working through some newly designed programs – such as the GEMLOC initiative involving government bonds, and our ESMID program involving corporate bonds.

One measure of the impact of our initiatives, is the importance that the international community has assigned to local-currency bond markets in Emerging Markets – through the “Deauville Partnership” to support the MENA region, announced by the G8 following the popular uprisings of 2011 – and the G20 endorsement last year of an Action Plan on the development of local-currency bond markets in Emerging Market nations – as a pillar of stability in the international financial system.

The World Bank Group is committed to continuing our programs in government debt markets in the MENA region, which have so far been focused in Egypt, Morocco and Tunisia.

We are also committed to expanding our efforts to other countries – and to reinforce our support for programs to help develop non-government bond markets, including funding mechanisms for infrastructure.

The MENA region – poised for renewal and stronger development – is now preparing to take its rightful place among the world’s most promising growth areas.

As you do so, you will need even more efficient, resilient, transparent and well-regulated financial markets to help drive development.

This is a time to prepare to seize new opportunities.

As we work with policymakers and market participants like you, the World Band Group is eager to help support local financial-market development – a key factor in strengthening the growth prospects of the Middle East and North Africa.

Thank you for joining us, and for taking part in this stimulating day of high-level knowledge exchange.

Thank you very much.