Bonds 'will keep expat savings in UAE'

Financial analysts have stressed the need to speed up the establishment of a market for UAE government bonds, saying it will be an active tool to attract foreign investments as well as a large part of the savings of people working in the country.

Such a market will provide the government with finance that is sufficient to complete its projects. Also, the presence of a bond market will enable the government to control the issue and evaluation of bonds, they said, commenting on the government's move to issue a debt law that will govern the bond market.

Mohammed Ali Yasin, Managing Director of Shuaa Securities, told Emirates Business that the government bond market is very important and it has become an urgent necessity for the UAE. Such a market will give the government full control over the pricing and evaluation of bonds, and it will set the basis upon which companies will price their bonds, he said.

Yasin said that at present, big companies such as Mubadala and the National Bank of Abu Dhabi launch bonds in the European markets, especially Britain, to finance their projects. And most often, foreign investors control the subscription process in the primary market, their subscription being no less than 70 per cent.

When UAE or Gulf nationals want to subscribe, their percentage is small and they subscribe in the secondary market. This is in addition to the fact that those companies or banks often have no control over the launch and the subscription process. If the foreign investors have a negative view of the UAE economy, the subscription does not take place, which is exactly what has happened over the past few months, said Yasin.

"But if there is a market for government bonds, organised and supervised by the Ministry of Finance and the Emirates Securities and Commodities Authority (Esca), for instance, such bonds would be launched in line with the interest of the country, its economy and companies, regardless of whether foreigners would benefit or not. Also, such a market would most certainly attract many Gulf investors who do not want to subscribe in European markets," he said.

Yasin believes the importance of the government bond market comes from the fact that it will attract a large part of the local liquidity, especially as the majority of small investors – both nationals and expatriates – prefer such a market, trusting the government and believing the risk to be very small.

Dr Humam Al Shamma, financial consultant of Al Fajer Securities, agrees that government bonds will be a very good tool for garnering funds from nationals and expatriates to finance government projects.

He pointed out that skilled expatriates have high liquidity (savings), which is transferred to their countries because they do not find suitable investment tools in the UAE other than the stock market and real estate. A government bond market may stem the flow of remittances out of the UAE.

"There are many expatriates living in the UAE for many years; they are keen to stay longer and want to invest their savings in the UAE. Unfortunately, they do not venture into investing in the stock market or the property market, whose value has gone down. Also they do not deposit their money in banks because of the small return of some two per cent," he said, adding that the expected return on government bonds will be six to seven per cent. "We have to invest our funds inside [the UAE], and foreigners have to be encouraged through better investment [tools] in our country," he added.

Even the labour force in the UAE transfers a cumulative sum of billions of dollars to their native countries, and at least a part of this money could be drawn into the bond pool if there were a state-backed guarantee, the analyst said.

The UAE and many of its companies have a strong credit classification, which enables the government to set up a bond market, said Al Shamma. Many companies, he added, borrow from outside the UAE to finance their projects, and it is important to have a bond market that would allow those companies to borrow from the local market."

The market, said the analyst, should be established whether the government has immediate need of funds or not. "The important thing is to develop a market… and we should benefit from foreign expertise in this respect," said Al Shamma. "The government leadership is important because it inspires confidence."

The bond as a financial tool is still not widely used in the UAE, said Majd Maaitah, Head of Securities Services Department of the National Bank of Abu Dhabi. "To make it an excellent investment alternative for institutions and individuals alike, it is important to enact a law."

He cited the Egyptian experience of issuing bonds. Despite some negative aspects, Egypt launched "several investment tools that ensured the financing of infrastructure projects", said the analyst, pointing out that bonds issued by government banks have ensured funds for millions of ordinary people.

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