▶ Spe­cial­ist unit cre­ated at Min­istry of Fi­nance to as­sess bor­row­ing risks and pro­pose man­age­ment strate­gies

The National - News - - BUSINESS - SARAH TOWNSEND

The UAE is­sued a law per­mit­ting the Fed­eral Govern­ment to is­sue sov­er­eign debt for the first time, help­ing to boost bank­ing liq­uid­ity and en­able in­di­vid­ual emi­rates to ben­e­fit from higher is­suer rat­ings than they could achieve on their own.

The Pub­lic Debt Law will “sup­port the es­tab­lish­ment of a [pri­mary and sec­ondary] mar­ket for govern­ment se­cu­ri­ties through which pub­lic debt in­stru­ments can be traded in UAE fi­nan­cial mar­kets, and long-term bonds can be is­sued to con­trib­ute to al­ter­na­tive sources of fund­ing for fed­eral govern­ment projects,” said Sheikh Ham­dan bin Rashid Al Mak­toum, Deputy Ruler of Dubai and Min­is­ter of Fi­nance, in a state­ment yes­ter­day from the Min­istry of Fi­nance.

Abu Dhabi and Dubai al­ready sell bonds in in­ter­na­tional mar­kets. But less wealthy emi­rates would ben­e­fit from be­ing able to is­sue fed­eral bonds that carry higher credit rat­ings.

“The fed­eral debt law is an im­por­tant step in the de­vel­op­ment of the coun­try’s fi­nan­cial and debt cap­i­tal mar­ket, by al­low­ing the fed­eral govern­ment to raise debt and ben­e­fit from the UAE’s strong fun­da­men­tal po­si­tion,” Mon­ica Ma­lik, chief econ­o­mist at Abu Dhabi Com­mer­cial Bank, told The Na­tional.

Un­der the law, UAE banks will be able to pur­chase govern­ment bonds in dirhams or for­eign cur­ren­cies, which will help them to com­ply with in­ter­na­tional Basel III re­quire­ments, the min­istry said.

The is­suance of sov­er­eign bonds will sup­port the UAE Cen­tral Bank in bet­ter man­ag­ing bank­ing liq­uid­ity. The is­suance of govern­ment debt se­cu­ri­ties will also help to bench­mark the dirham’s yield curve and “deepen the lo­cal fi­nan­cial mar­ket for the fi­nanc­ing of com­pa­nies op­er­at­ing in the state”, the min­istry added.

The UAE does not need to is­sue fed­eral debt at present – its con­sol­i­dated fis­cal deficit, in­clud­ing the seven emi­rates of Shar­jah, Abu Dhabi, Dubai, Fu­jairah, Aj­man, Umm Al Quwain and Ras Al Khaimah, is fore­cast to re­main sta­ble at about 1.6 per cent of GDP this year, says the In­ter­na­tional Mone­tary Fund.

This deficit is ex­pected to turn to a sur­plus next year as higher oil prices, which have been around $80 per bar­rel this year, in­crease govern­ment rev­enues and boost the lo­cal econ­omy, the Wash­ing­ton lender said. How­ever, the UAE may choose to sell fed­eral bonds in the com­ing months to kick-start the de­vel­op­ment of a sec­ondary bond trad­ing mar­ket.

“Over­all the UAE has a low debt level and the law will en­able ad­di­tional bor­row­ing to sup­port fed­eral spend­ing,” Ms Ma­lik said. Like the IMF, the lo­cal lender ADCB ex­pects the UAE’s fis­cal deficit to re­turn to a sur­plus in 2019.

“Sys­tem-wide bank­ing sec­tor liq­uid­ity re­mains am­ple with the rise in govern­ment de­posits, which is likely sup­ported by the higher oil rev­enues,” she said. The is­suance of fed­eral debt is likely to in­crease the num­ber of highly rated as­sets in which banks can in­vest, Ms Ma­lik added.

Un­der the new law, a Pub­lic Debt Man­age­ment Of­fice will be es­tab­lished within the Min­istry of Fi­nance to mon­i­tor and eval­u­ate the risks of bor­row­ing and trad­ing pub­lic debt.

The of­fice will be re­spon­si­ble for propos­ing pub­lic debt man­age­ment strate­gies in co-or­di­na­tion with the UAE Cen­tral Bank, and is­su­ing govern­ment bonds and trea­sury bills.

It will also co-or­di­nate with lo­cal gov­ern­ments in each emi­rate to de­velop a pri­mary and sec­ondary fi­nan­cial mar­ket. Each must set up its own pub­lic debt of­fice as in­stru­ments are is­sued. The min­istry did not say when the law would be en­acted. Usu­ally new leg­is­la­tion is en­forced fol­low­ing its pub­li­ca­tion in the Of­fi­cial Gazette.

The debt law is ex­pected to bring “sub­stan­tial re­turns for the state” – not only eco­nom­i­cally but also in terms of boost­ing gov­er­nance pro­ce­dures and im­prov­ing co-or­di­na­tion be­tween fis­cal and mone­tary au­thor­i­ties, Sheikh Ham­dan said.

“The Pub­lic Debt law will help en­hance the state’s com­pet­i­tive­ness rank­ing, boost in­vestors’ con­fi­dence in the na­tional econ­omy and raise trans­parency re­gard­ing the man­age­ment of pub­lic fi­nances to al­low for greater op­por­tu­ni­ties for the na­tional econ­omy and bet­ter in­te­gra­tion into the global econ­omy,” he said.

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