What drives local currency bond market development in Saudi Arabia: do macroeconomic and institutional factors matter?

Jamel Boukhatem

doi:10.1186/s43093-021-00110-8

Jamel Boukhatem

Open Access

https://doi.org/10.1186/s43093-021-00110-8

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Abstract

The main objective of this study is to empirically determine which factors are related to the development of local-currency bond market (LCBM) in Saudi Arabia over the period 1990–2019. Using ARDL modeling, the results reveal long-run cointegrating relationships between LCBM capitalization and macroeconomic, financial, and institutional factors. Unlike institutional ones, macroeconomic and financial factors seem to matter more in developing LCBM in the short run. However, in the long run, larger economic size more government spending, low inflation levels, broader and deeper banking system, higher bureaucratic quality, and better investment profile, all play a crucial role in the determination of Saudi LCBM. Policy implications include measures toward sound macroeconomic fundamentals, broad and deep banking system, efficient stock market, and high-quality governance institutions.

Highlights

Over the last 20 years several international initiatives have been launched to develop local currency bond markets (LCBMs) in developing, emerging, and advanced economies, mainly after the Asian financial crisis of 1997–1998 (G8 action plan 2007, G20 action plan 2011)
Unit root test results Before testing of cointegration, we apply the augmented Dickey–Fuller (ADF) test and the nonparametric Phillips–Perron (PP) test to determine the stationarity of variables and their order of integration
These results demonstrate that, rather than the Johansen cointegration model, the autoregressive distributed lag (ARDL) model is appropriate in analyzing the data,4 to investigate the impact of macroeconomic, financial, and institutional factors on the Saudi government bond market development (BMD)

Summary

Introduction

Over the last 20 years several international initiatives have been launched to develop local currency bond markets (LCBMs) in developing, emerging, and advanced economies, mainly after the Asian financial crisis of 1997–1998 (G8 action plan 2007, G20 action plan 2011). The theoretical literature initiated by Eichengreen et al [6] and developed by Goldstein and Turner [7] and Ma and Remolona [8], underlines the need to develop domestic bond markets to overcome the problem of double mismatch. These reasons, among many others, led policymakers in Emerging Asia Economies (EAE) to accelerate the development of their bond markets. Since the endorsement of this initiative, regional and LCBMs have developed quickly and achieved remarkable growth in terms of size and diversity of issuers, despite the fact that during the peak of the subprime crisis (2007–2009), the quasi-major EAE have known sharp domestic bond outflows

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