Abu Dhabi yesterday called for the creation of a UAE bonds market to mop up domestic liquidity that has jumped by nearly 70 per cent over the past two years mainly because of an upswing in the local economy.
The Abu Dhabi Economic Development Council also urged investors to channel their funds into small and medium productive enterprises to support the economy, warning of a growing trend for speculation and high risk investments.
In a report issued yesterday, the Council said a massive construction drive by property developers in the UAE has failed to reverse a steady increase in liquidity, which is believed to be associated with soaring inflation.
"There is a need now for a large and developed bonds market as an effective way to absorb part of the money supply to be used in more useful and productive sectors instead of rushing for quick profits and high risk sectors," it said.
The strong demand for investment in the real estate sector has not had any effect on liquidity, which has been on the rise over the past period according to reports by the UAE Central Bank.
The establishment of a bonds market, which has been recommended by the World Bank and other international institutions, could constitute a significant fiscal policy tool given its major role in absorbing liquidity and creating low-risk and more stable revenue.
The UAE has two stocks exchanges but has not yet set up an official bonds market on the grounds such an activity is still relatively low.
Bonds issued by key companies in the country are traded through the Abu Dhabi and Dubai bourses and through local banks but there is no dedicated electronic system for regular bonds dealing. According to traders, authorities are considering such an idea following a surge in bonds issue in the past two years. The Council, which oversees Abu Dhabi development policies, said there is a need for diversification of investment instruments in the UAE to dissuade investors from entering high-risk sectors and speculative trading.
"There should be efforts to create the right groundwork for transforming this huge liquidity in the country into direct investment through increasing investment awareness and finding attractive opportunities for investors," it said.
The recent government trend on the local and federal levels to encourage investors to enter small and medium enterprises has not achieved its objectives yet.
Providing more incentives is not enough as there should be intensified efforts to pinpoint and identify investment fields for investors.
Investing in such enterprises remains an effective way to curb liquidity and preventing it from heading to high-risk sectors and unforeseeable speculative businesses. Central Bank figures showed money supply M3 in the UAE jumped by nearly 68 per cent to Dh696 billion at the end of 2007 from Dh415 million at the end of 2005. Credits swelled to an all time high of Dh792bn at the end of March from Dh722bn at the end of 2007 and Dh379bn at the end of 2005. In recent statements, Central Bank governor Sultan bin Nassir Al Suweidi voiced concern about the sharp rise in money supply but he denied it has to do directly with rising inflation in the UAE. The UAE has not yet released inflation figures for 2007 but the rate was expected to have exceeded 10 per cent compared with around 9.3 per cent in 2006 and as low as half that level in 2005.