UAE government approves new public debt strategy

A Public Debt Law allowing the issuance of federal government bonds was first passed in 2018

Abu Dhabi, United Arab Emirates, November 3, 2020.   The UAE flag, Corniche.
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The UAE's federal government approved a new public debt strategy at a cabinet meeting chaired by vice president and ruler of Dubai Sheikh Mohammed Bin Rashid on Sunday.

The goal of the strategy is to build a market for federal government debt securities denominated in UAE dirhams, and to "revitalise the financial and banking sector in the country", Sheikh Mohammed said in part of a series of tweets announcing decisions from the meeting.

The cabinet also approved the creation of a new body to oversee the UAE's circular economy strategy.

The UAE government does not currently issue debt, but individual emirates do tap bond markets. However, the federal government has been putting the infrastructure in place to issue debt denominated in dirhams for the past two years.

A Public Debt Law allowing the issuance of federal bonds was passed in 2018 and last month the Central Bank of the UAE said it would begin issuing dirham-denominated securities known as M-Bills in January.

The bills are a way of providing liquidity and a collateralised source of funds to local banks, but also "assist in the development of a dirham local market for securities issued by the public sector in the UAE in future", the central bank's deputy governor Saif Hadef Al Shamsi said at the time.

The introduction of the securities should begin the development of a secondary market for local currency debt, which could result in the creation of a risk-free pricing benchmark [yield curve] for dirham-denominated debt over the longer term”, ratings agency S&P Global said in a note earlier this month.

The UAE government received an AA- issuer rating with a stable outlook from Fitch Ratings in November.

The ratings agency said that the federal government "has no debt of its own but plans to start issuing debt soon, mainly for the purpose of building a yield curve and developing financial markets".

Moody's assigned an Aa2 rating to the UAE government in December, also with a stable outlook. The rating was the highest for a sovereign issuer in the region, the Ministry of Finance said in a statement.

The development of a locally-denominated bond market would be "a welcome development", Mohieddine Kronfol, chief investment officer for global sukuk and Mena fixed income at investment management company Franklin Templeton, said.

"Building a local currency bond market goes a long way in strengthening the UAE’s financial markets, increasing monetary policy options and attracting longer term portfolio flows, all of which support the very important efforts to mobilise private capital and build a more resilient and diversified UAE economy," he added.