UAE bond plan ushers in new flexible financial policy

Plans by the UAE Federal Government to issue bonds for the first time to fund domestic projects are the beginning of a new flexible policy towards the financial sector and the nucleus of a real bond market in the country, said analysts.

The plan will also give a shot in the arm to the UAE banking sector and this will have a positive impact on the overall economy, they said. While the government has not provided details of the bond issue or whether the funds will be raised locally or internationally, the plan will ensure a less costly financing tool for the UAE and boost national savings.

"Bonds have become an essential instrument for obtaining liquidity and using them for more than one purpose. Most Gulf states have issued such bonds and I don't think there has to be a deficit or liquidity shortage to issue such bonds," said Mohammed Al Asumi, a UAE-based Gulf economist.

"I believe the plan by the UAE Government to issue sovereign bonds is a new fiscal approach by the Emirates. It reflects strategy changes aimed at taking advantage of available liquidity and a more flexible policy by the government in its dealing with the local financial sector." Younis Al Khoori, Director, Finance Ministry, said late last week law will be enforced soon to specify where the raised funds would be spent.

He also said the federal government had not yet determined the timeframe or the size of the issue of such bonds.

He added the ministry will handle the bond issue on behalf of the government and will seek sovereign rating.

Abu Dhabi, the main oil producer in the UAE, raised $3 billion (Dh11bn) in late March as part of a $10bn bond programme planned over the next two years.

Dubai also sold $10bn of bonds to the Central Bank in February and is planning to raise another $10bn.


Long-term bonds

In press remarks this week, Central Bank Governor Sultan bin Nasser Al Suwaidi said the planned issue will be mostly long-term bonds ranging between 10 years and 15 years. He said such tools can be used by the Central Bank in its monetary policy, indicating that the bonds can target only the local market. According to Suwaidi, the bond programme will largely benefit the UAE banking sector and can create a benchmark for bond issues by banks.

"I think the UAE started to recognise the need for a local bond market following the global crisis. Domestic liquidity is improving but its growth is still slow, it is important now that banks resume their normal lending activity and I believe federal spending through those bonds will support that trend," said Humam Al Shamma, a financial advisor at the Abu Dhabi-based Al Fajr Securities.

No shortage

Another expert said the UAE is not short of liquidity to fund its own projects given its high oil exports but added plans to issue bonds have become necessary following the global credit crunch and the more conservative lending policy adopted by local banks because of the crisis.

"The Central Bank represents the Federal Government and I think it started to feel that there is a pressing need for such financing tools. I think this is in the strong interest of the country," said Ziad Dabbas, a financial advisor at the government-controlled National Bank of Abu Dhabi.

"With such plans, the government is creating a new funding tool in the country and I believe it will resort to long-term bond issue. And such issue will benefit all parties as they will ensure funds for the government at lower costs, give banks a new investment source, and allow local investors to make more profits as they will normally receive higher interest rates on these bonds. All this will support the country's financial sector and consequently, its economy."

The UAE, which controls more than eight per cent of the world's extractable oil resources, was among a handful of Arab nations that have not resorted to introducing tax or issuing bonds even when oil prices were at their lowest levels.

Assets return

Unlike Saudi Arabia and other Gulf oil producers, the country has financed its federal budget deficit through return from its overseas assets and extra contributions from the oil producing emirates of Abu Dhabi and Dubai. As a result, the UAE has one of the region's lowest domestic debts and the largest overseas assets of about $545bn at the end of 2008, controlled mostly by the Abu Dhabi Investment Authority (Adia).

Saudi Arabia, the world's oil powerhouse, had the highest regional public debt, which exceeded its gross domestic product in late 1990s. Strong oil prices in the following years allowed the kingdom to reduce it to below 15 per cent in 2008.

In recent comments, a Dubai-based finance official said the bond issues by the Emirates could pave the way for a UAE debt market and a larger bond market in the six-nation Gulf Co-operation Council (GCC).

Debt market

"Issuing bonds by Abu Dhabi is the beginning of a real debt market in the UAE. This is a very positive development because it will allow the government to separate expenditure decisions from revenue decisions," said Nasser Al Saidi, Chief Economist at the Dubai International Financial Centre Authority.

"Besides, these bonds will allow Abu Dhabi and Dubai to pursue infrastructure projects and other necessary ventures.

"This is very positive as well because it means you have a monetary policy easing, you have the fiscal stimulus and you have a continuation of investment projects, which will improve the productivity of the economy. The debt market that will take shape in the UAE could also constitute a nucleus of a debt market in the Gulf."

In another comment, the Saudi American Bank (Samba) said the bond programme would help set a benchmark for corporate bonds in the UAE.

"The authorities hope that the successful issuance will provide a benchmark sovereign yield curve for companies wishing to raise funds in the global capital markets. This is good news for companies as it should reduce the costs of raising funds," said Samba.

Anti-crisis measures

The bond scheme is the latest in series of measures taken by the UAE to encounter the global financial crisis and keep growth in its economy following independent forecasts about a sharp slowdown in the GDP this year.

The other measures included the announcement of a record budgetary expenditure for 2009 and massive financial packages for banks, including the injection of $4.4bn into five Abu Dhabi banks to support their capital. The new bond policy coincides with plans to carry out projects worth more than $900bn in the medium term and a steep fall in the UAE's income from oil exports, overseas investment, Central Bank foreign assets and other sources. According to the International Monetary Fund, the projects involve investment of about $60bn in the real estate sector and $137bn in infrastructure.

The IMF's report also showed the country's income from its investments abroad dived to about Dh30bn in 2008 from Dh46.3bn in 2007 following a large decline in the assets of the Adia, one of the world's largest sovereign wealth funds.

Adia assets

Independent estimates showed Adia's assets fell by about $149bn during 2008 but the loss was partly offset by a new net inflow of nearly $59bn from the country's massive oil export earnings, which hit an all-time high of about $98bn last year because of a surge in crude prices and output.

As a result, Adia-controlled assets shrank to around $282bn at the end of 2008 from nearly $372bn at the end of 2007.

"The UAE needs to create a bond market to ensure enough liquidity for investors following the credit crunch caused by the global financial crisis," said Tom Healy, CEO of the Abu Dhabi Securities Exchange (ADX).

"Its importance becomes apparent particularly when liquidity is tight. At the moment, the only real source of liquidity for people is the stock market. Ideally, the establishment of a domestic bond market should be driven by the government in the UAE. Government bonds provide a benchmark for and encourage commercial bonds."

The UAE, the second-largest Arab economy after Saudi Arabia, has seen a spate of bond issues through 2007 and most of 2008 before the activity sharply declined due to the global credit crunch.

The issuance of the bonds was conducted through the local stock market and some banks while other companies included world markets in their bond issues.

Over the past two years, the real estate developer Aldar has been one of the largest bond issuers, with a total bond value of more than Dh40bn. The government-controlled Taqa was also a major bond issuer, releasing more than Dh10bn of conventional and Islamic bonds.

Strong finance

Although the Finance Ministry said it would seek rating before issuing the sovereign bonds, analysts believe there is not need for such a move on the grounds the government's finances remain strong and public departments are excluded by the federal laws from obtaining such rating.

In late 2008, UAE bourse authorities sought to organise bond operations when they told listed firms to get prior credit rating before issuing bonds within measures intended to ensure safety for investors and prevent market turmoil.

The UAE Securities and Commodities Authority (SCA), which supervises the Abu Dhabi and Dubai bourses, issued a circular stipulating that any listed company must obtain credit rating from the authority before issuing bonds. It excluded government institutions from the new rules.

According to the circular, permission could be granted by SCA's Chairman Sultan Al Mansouri, Minister of Economy, to a company to issue bonds without getting prior rating, especially government institutions.

"Unless the chairman authorises such an issue, the company, which intends to issue bonds, must obtain prior credit rating for its bonds from an agency that is authorised by the SCA before it applies for a permission to issue those bonds. Bonds guaranteed by the government are excluded from this rule," said Al Mansouri.

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