DEBT LAW TO OFFER MARKETS IN UAE MORE FINANCE OPTIONS
▶ Wider range of choices to become available and individual emirates will have better ratings
The new Public Debt Law enabling the UAE to issue sovereign bonds will help to deepen capital markets in the second-biggest Arabian Gulf economy, enabling the country to tap a wider pool of financing options.
The UAE on Saturday issued the law, permitting the Federal Government to sell sovereign debt for the first time. This will boost banking liquidity and enable individual emirates to benefit from higher issuer ratings than they could achieve on their own, said Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and Minister of Finance, in a statement from the Ministry of Finance.
Ehsan Khoman, the head of Middle East and North Africa research and strategy at MUFG Bank, Japan’s largest lender, said: “The debt law represents a further fillip to the UAE’s plans to deepen the breadth of the financial and debt capital markets.
“The bonds [issued under the new law] will act as a central mechanism in the creation of a government yield curve in the secondary debt market.”
In the past, emirates in the UAE have tapped debt capital markets to fund growth and bridge fiscal gaps. However, the UAE, unlike its GCC peers including Saudi Arabia, Oman, Bahrain and Kuwait, has not previously issued sovereign debt in the absence of a debt law.
With the new regulations in place, the country can now approach fixed-income investors to sell bonds, both conventional and Sharia-compliant.
“It’s standardising according to the mature economies and it is a step in the right direction,” said a Dubai treasurer at an international lender. “For example, the US has its own sovereign bonds and its individual states also issue bonds separately.”
“It is not really similar to the what you have in the other parts of the GCC as Saudi Arabia, for example, is one state and so are the other Gulf countries,” he said.
“Only the UAE is a confederation [in the GCC] where states were issuing their own bonds but the Federal Government wasn’t issuing any.”
There is not much of a difference between the yields on the bonds issued by some of the smaller emirates to those issued by the Abu Dhabi Government. However, the law will “change the market dynamic and some of the individual emirates will get better ratings now”, the banker said.
The UAE does not need to issue federal debt at present – its consolidated fiscal deficit, including each of 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 gross domestic product this year, according to the International Monetary Fund.
However, the UAE may choose to sell federal bonds in the coming months, if conditions are favourable, to kick-start the development of a secondary bond trading market.
“While the UAE’s fiscal finances are in check with the fiscal position expected to return to surplus this year, this announcement will provide another lever of funding for the Federal Government from a diversified financing strategy perspective,” Mr Khoman said.
The new regulations will allow UAE banks to purchase government bonds in dirhams or foreign currencies. This will help them to comply with international Basel III requirements, the Ministry of Finance said.
It will “provide support for the Central Bank of the UAE to enhance its liquidity management in the banking sector”, Mr Khoman added.
It is not known when the debt law, which has been in the pipeline for several years, will go into effect, but once in place it will allow the establishment of a Public Debt Management Office that will work under the Ministry of Finance to monitor and evaluate the risks of borrowing and trading public debt.
The PDMO will work with the UAE Central Bank in formulating short and long-term public debt management strategies and issuing government bonds, treasury bills and other instruments, the ministry said.
The debt office will also work with the governments in each emirate to develop a primary and secondary financial market. This will take place as each government sets up its own public debt office as public debt instruments are issued at the emirate level.
The fall in oil prices from the mid-2014 peak of $115 per barrel to less than $30 per barrel in the first quarter of 2016 had forced the governments in the Gulf – which account for about a third of the world’s proven oil reserves – to sell debt in a bid to plug their budget deficits.
The rise of crude prices to more than $80 per barrel in recent weeks has helped Gulf states, which still count heavily on hydrocarbons proceeds for revenues.
However, sovereign debt as a financing tool will remain in play, according to an Oliver Wyman report released yesterday.
Although many countries were slow to set up debt management offices, the global consultancy argued that “robust management” of debt should now be a priority.
“With suppressed oil prices over recent years, sovereign debt is becoming an increasingly common financing tool in the region and it is here to stay,” said Paul Calvey, a financial services partner at Oliver Wyman.
“Debt managers and governments are still in the early stages of taking action to ensure they are set up to manage national financial stability in the future.”
Beyond the need for improved debt management practices, governments must start to cultivate and develop their local bond markets to further diversify funding options and maintaining a sovereign yield curve, according to the report.
With suppressed oil prices over recent years, sovereign debt is becoming an increasingly common financing tool PAUL CALVEY Partner at Oliver Wyman