Secondary market for UAE bonds creates depth
Decree on sovereign bonds provides right framework to tap available liquidity
Any initiative capable of delivering a boost to the UAE economy is particularly welcome at the current time. The new law enabling the federal government to issue sovereign bonds has arrived like a breath of fresh air.
It is an important step in the development of the country’s financial and debt capital market, as it allows the government to raise debt and benefit from the UAE’s strong fundamental position. This will bring substantial returns to the state, not just economically but also by enhancing governance procedures and improving coordination between fiscal and monetary authorities.
Being able to purchase government bonds in dirhams or foreign currencies, UAE banks will gain highly-valued assets with which they can manage their liquidity.
Issued last month, the Federal Decretal Law No. 9 of 2018 paves the way for a secondary trading market that will be established in the coming months, when bankers in the region will be able to sell federal bonds. The development of the secondary market will assist in the diversification of the existing funding of government-related entities (GREs) and large corporates, which are currently highly dependent upon banks for financing.
At the same time, this will also reduce the systemic risk within the economy and provide banks with more flexibility in compliance with central bank regulations, which limit the exposure of banks to not more than 100 per cent of their capital base.
The local debt market will help the sterilisation of large capital inflows and improve the implementation of the national monetary policies. It will also help mitigate exchange rate risks by providing an alternate source of multi-currency financing, without the need to resort to foreign sources of capital.
The law creates a more resilient financial market, benchmarks the yield curve, and provides diversified sources of financing and encourages transparency while mobilising additional domestic savings and attracting capital inflows.
■ Sunil Thacker is a Senior Partner at STA Law Firm.