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28 March 2024

Debt laws will put UAE in strong position to raise global finance

(GERMAN FERNANDEZ)

Published
By Abdel Hai Mohamed
The new UAE laws on government debt and corporate bonds will make it easier to raise finance for massive projects that are in the pipeline as the country renews its commitment to infrastructure development as a means of fuelling economic growth, analysts said.

They also facilitate the job of international evaluation and standarisation of institutions to make possible an accurate classification of the UAE for rating purposes.

The UAE Government can now obtain loans from abroad of up to 45 per cent of the country's gross domestic product (GDP), or less than Dh300 billion, after the Federal National Council passed a law to regulate public debt last week.

The regulation also allows local governments of individual emirates to obtain loans that do not exceed 15 per cent of their GDP. The law comes after two years of work that involved senior consultants of the World Bank and a number of international financial experts.

Last week, the FNC also passed other laws related to guarantees of deposits, bonds and public debt.

The new measures are being seen as key contributors to a comprehensive, integrated fiscal legislation in parallel with the fast-paced growth of the country's economy.

The regulations are being hailed as one of the most important ones the UAE has needed in a long time, especially since they make provision for funds needed for huge projects and create a market for government bonds.

Humaid Obaid Al Tayer, Minister of Financial Affairs, said: "This law does not mean the country faces a financial crisis. On the contrary, the government revenues are solid and it has the capability to finance its projects. However, if obtaining loans from abroad is permitted then why not utilise it to diversify the sources of financing."

He said the regulations do not pose a burden on the government for the future and will not be used to overcome budget deficits as there is no deficit to begin with.

Al Tayer said: "Every government in the world needs to borrow but should not use all its available cash on projects."

Analysts agreed on the advantages of the public debt law to provide enough financing to all infrastructure projects and establishing a market for governmental bonds.

They told Emirates Business that unlike other countries there is no possibility of the UAE falling into a debt trap.

The analysts said loans obtained through the new process would be directed towards projects that will generate income and the income will be used to repay the amount. Some experts though called for restrictions on lending to local governments so that no wastage of money takes place.

Nasser Al Saidi, Chief Economist of the Dubai International Financial Centre Authority, said: "The new law opens the door for better management of the country's revenues. Everybody knows crude oil is the major source of revenue in the UAE and the GCC.

"In economic terms, however, oil is not considered a revenue but a wealth that is injected into the market and transforms into money that has to be utilised well, since crude oil is a non-renewable resource that cannot be regenerated.

"It is important to separate oil money from the country's business operations. The UAE has done well by establishing its sovereign wealth fund that aims to invest its oil wealth, since such a fund manages the oil money and look for foreign markets to make that money grow.

"It does not make good economic sense to finance infrastructure projects and government spending with oil money, but to use the federal government's revenues or borrow from abroad, especially since the UAE is seen as a credit worthy country," said Al Saidi.

"In addition, infrastructure projects can be financed for the short- and medium-term until they are self-sufficient, such as electrical energy and sewage projects that provide an income that can be used to repay the loan. This is the right administrative model and it is not logical to spend your future wealth, especially when you have other options for financing."

He added that the public debt law will inject huge liquidity into the market and infrastructure projects would benefit from it.

The law opens the door for establishing a market for government bonds and such a market will be an indicator for private bonds as well.

It will give the Central Bank the authority to intervene in the financial market to maintain available liquidity, since the bank will have a fund of bonds and sukuks that it can keep.

Also, by selling or buying such bonds, it will be able to monitor and control the available liquidity in the market.

The presence of such a fund will consolidate the UAE's monetary and fiscal policy and control open market transactions so it can inject liquidity in the market whenever needed or hold back any liquidity to offer stability, added Al Saidi.

"The public debt law is a very important indicator for the financial development policy of the country. It is expected to diversify the sources of financing for the country, freeing up the dependency of the UAE's budget on the federal government's revenues that come from customs and allied fees, in addition to profit sharing from government undertakings such as etisalat," he said.

"A big percentage of foreign investors are keen on sovereign funds, mainly bonds and sukuks. They have always wanted such a law in order to establish a market for government bonds. Their wishes have come true and this will create a huge momentum for foreign investment in the country.

"A bonds and sukuks market, which is expected to be established soon after the activation of the new law, will be in the national currency of the UAE and this will strengthen its status regionally and internationally," said Al Saidi.

Mohammed Afifi, Director of Research at Abu Dhabi-based Al Fajr Securities, said fears that the UAE might fall into a foreign debt trap were out of context.

"Arab countries, such as Egypt and Lebanon, which face a heavy burden of loans and interests, are totally different. They borrow to fill up the gaps in their annual budgets due to a shortage of income.

"But I believe the UAE will be safe from such fears and concerns due to several factors: the UAE government has huge revenues and borrows to finance infrastructure projects that are expected to generate income to re-pay the loans. The federal government is also expected to guide the local governments on restrictions for obtaining loans from abroad so that there is no excessive borrowing that could be used in low-revenue projects, since such projects would not generate enough revenue to re-pay the loans. It would be nice if such loans can be used on huge service projects with continuous revenues as the Dubai Metro."

Afifi said: "We have found in the UAE and the GCC in recent years a strong vision towards reforming monetary policies. There is a strong intention in these countries to have economic legislations that provide a contemporary monetary policy - considered the base for issuing government bonds or sukuks.

"That is why the public debt law was a core demand to provide the legal and legislative groundwork especially at a time when the UAE Central Bank announced a total restructuring of the country's monetary and financial policies. It also comes at a time when Saudi Arabia has announced it will establish a market for bonds.

"A bond market in the UAE will increase direct and indirect foreign investment in the country. The new law will elevate the monetary policies of the UAE to international standards. It will provide the foundation for a stronger credit rating on the international level."

Mohammed Ali Yasin, Chief Executive Officer, Shuaa Securities, said: "The UAE has a market for bonds, but it is a small one compared to other markets in the world. This is primarily because there is no governmental market for bonds. It is important to strengthen such a market.

"Unfortunately, we have seen in recent years that most big governmental companies in the UAE go to the United Kingdom, the United States, Singapore or other countries to list their bonds with the excuse that these markets are active while the domestic bond market is not.

"Such misconceptions should be overcome by establishing a strong local market for bonds where the government and companies from the private sector participate together. And companies should be encouraged to list their bonds in the local or regional markets first.

"Liquidity problems that the UAE has been suffering from could have been due to the withdrawal of liquidity by big investors from the UAE market in favour of London and New York. If we encourage local companies to list their bonds in the local market, we will attract the liquidity that the market needs and no sudden crisis like the present one may happen."

Yasin said: "The public debt law is very important and there should be restrictions that outline and determine the reasons for borrowing and the mechanisms of how such loans would be repaid.

"There should not be wasteful borrowing, especially by the local governments in the UAE, especially since borrowing will be a preferred approach for them to execute their projects. Such projects should be held liable to repay their dues through their own income, and not by the federal government or any other local government."

Yousef Ali Fadel, Head of the Industrial, Economic and Financial Affairs Committee at the FNC, said: "The UAE federal government has set eight objectives that include outlining the general guidelines that control and regulate the issuance and management of the country's public debt.

"This would assist the cabinet, when endorsing infrastructure and developmental projects, to finance such projects, and also support the development of public debt bonds that are considered part of the government's plan for developing and diversifying the financial market in accordance with the central bank's monetary policy.

"The law will assist in refinancing or exchanging a standing public debt and covering any guarantee the government had issued and paying any other government urgent dues. The UAE has never gone borrowing before. But borrowing in the current time is neither a shame nor a reflection of any weakness in the country's economy. Such laws are already in place in countries such as Saudi Arabia, Bahrain, Kuwait and Egypt."



Egypt and Lebanon top borrowers

Egypt and Lebanon are the highest borrowers among Arab countries. An FNC report said most Arab countries have public debt laws and have been borrowing from abroad for many years. The report also mentioned that eight Arab countries – Iraq, Djibouti, Sudan, Somalia, Mauritania, Oman, Libya and the UAE – do not borrow from abroad. But the remaining 13 countries do.

According to a survey from the year 2000 to 2007, Lebanon and Egypt are the biggest international borrowers among Arab countries. In 2000, Lebanon reported a public debt of $180 billion (Dh660.6bn), while its GDP reached $164.9bn, making its debt to GDP ratio 109.3 per cent. The ratio was 77 per cent in Egypt, 68 per cent in Saudi Arabia, 34 per cent in Kuwait and 30 per cent in Qatar.

In 2007, the ratio of public debt to GDP for all Arab countries as a whole was 35.6 per cent. Egypt was on top with a ratio of 88 per cent, followed by Lebanon at 84 per cent, Jordan at 32.9 per cent and Tunisia at 21.2 per cent. Yemen was the lowest at 8.4 per cent.

The report said that four GCC countries – Saudi Arabia, Qatar, Kuwait and Bahrain – borrow from abroad.

The public debt to GDP ratio in Bahrain was 15.7 per cent for the year 2007, and in Kuwait it was 7.5 per cent. Bahrain and Kuwait are the GCC's top borrowers. Saudi Arabia recorded 13.4 per cent for the year 2006.

 

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