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New public debt law to help boost UAE financial markets

New public debt law to help boost UAE financial markets

The law will enable a deepening of the financial markets, allow the UAE to tap into a wider pool of financing options and create a government yield curve

The law will enable the UAE  to issue sovereign bonds that will help deepen its capital markets—which will eventually enable the country to tap into a wider pool of financing options and create a government yield curve to bolster is secondary debt market.

Ehsan Khoman, the head of Middle East and North Africa research and strategy at the Japanese MUFG Bank stated:“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.” He further added.

The UAE issued the law permitting the Federal Government to sell sovereign debt for the first time, a move that will boost banking liquidity and enable individual emirates – which currently issue debt at the state level – to benefit from higher issuer ratings than they could achieve on their own, stated Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and Minister of Finance, in a statement from the Ministry of Finance.

Emirates in the UAE, including Abu Dhabi, Sharjah, Dubai and the Ras Al Khaimah, in the past have utilised the debt capital markets to fund growth and bridge fiscal gaps. The UAE, unlike its GCC peers—that include Saudi Arabia, Oman, Bahrain and Kuwait—has not issued sovereign debt in the absence of a debt law.

New regulations in place means that the country can now approach fixed-income investors to sell bonds, both conventional and Sharia-compliant, giving it a diverse pool of global investors.

“It’s standardising according to the mature economies and it is a step in the right direction. For example, the US has its own sovereign bonds and its individual states also issue bond separately,” stated a Dubai-based treasurer at an international lender.

“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. Only the UAE is a confederation [in the GCC] where states were issuing their own bonds but the Federal Government wasn’t issuing any,” he further said.

The banker noted that while there was not much of a different between the yields on the bonds issued by some of the smaller emirates to those issued by the Abu Dhabi Government, the new law will “change the market dynamic and some of the individual emirates will get better ratings now.”

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 around 1.6% of gross domestic product this year, according to the International Monetary Fund.

The UAE, however, 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.

“Whilst 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,” stated Khoman.

With the new regulations, UAE banks will be able to purchase government bonds in dirhams or foreign currencies. This will help them comply with international Basel III requirements, according to the Ministry of Finance.

Khoman further added: “provide support for the Central Bank of the UAE to enhance its liquidity management in the banking sector.”

It is not known yet that then the debt law– which has been in the pipeline for several years, will go into effect. Once in place however, it will allow the establishment of a Public Debt Management Office (PDMO) what will work under the Ministry of Finance to monitor and evaluate the risks of borrowing and trading public debt– and suggest appropriate solutions.

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, stated the ministry.

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