The US’ monetary policy and fiscal health will continue to drive Middle East debt markets in the coming year, according to analysts.

The US’ Federal Reserve’s slowing of its bond purchasing-programme, also known as ‘tapering’, is expected to go on forming a major impact on GCC fixed income issuance.

“Middle East credit markets have remained strong in 2013 thanks to positive local news flow, such as Expo 2020 being awarded to the UAE, and slower than anticipated primary market issuance. In 2014, market direction will be primarily driven by moves in US benchmark rates,” said a report by Abu Dhabi Investment Company (Invest AD).

“After years of overestimating growth in the United States, the Fed and market participants continue to be hopeful that 2014 will usher in the next phase for the economy.”

The Fed announced in December that it would reduce its monetary stimulus by $10bn a month, though the pace of further tapering will be based on the US’ economic growth. Once that becomes clearer, that will determine how markets respond over the course of 2014.

Major shocks as seen in May 2013 – when the Fed’s first announcement of its tapering intentions led to regional bond issuance drying up for several months – are unlikely to repeat themselves in the coming year, however, as investors have already started factoring in less governmental monetary stimulus.

“Talks about tapering took investors by surprise in 2013, but currently the tapering effect is priced in. As such, we do not think that tapering will cause a disruption in primary issuance volumes,” says Eirini Tsekeridou, fixed income research analyst at Bank Julius Baer.

Tapering is also expected to impact regional stock markets as a stronger US economy could mean global investors decide to allocate more funds to developed rather than frontier and emerging markets. On the other hand, a strengthening dollar could lead to larger interest from investors in the Mena’s dollar-linked economies. With the majority of regional trading dominated by local retail investors, that is likely to have a greater effect on further potential inflows rather than lead to massive outflows.

For the moment growth in the GCC economy is likely to be the main driver behind stock market trends.