The UAE issued a law permitting the Federal Government to issue sovereign debt for the first time, helping to boost banking liquidity and enable individual emirates to benefit from higher issuer ratings than they could achieve on their own.
The Public Debt Law will “support the establishment of a [primary and secondary] market for government securities through which public debt instruments can be traded in UAE financial markets, and long-term bonds can be issued to contribute to alternative sources of funding for federal government projects,” said Sheikh Hamdan bin Rashid Al Maktoum, Deputy Ruler of Dubai and Minister of Finance, in a statement from the Ministry of Finance on Saturday.
Abu Dhabi and Dubai already sell bonds in international markets. But the less wealthy emirates would benefit from being able to issue federal bonds that carry higher credit ratings.
"The federal debt law is an important step in the development of the country's financial and debt capital market, by allowing the federal government to raise debt and benefit from the UAE's strong fundamental position," Monica Malik, chief economist at lender Abu Dhabi Commercial Bank, told The National.
Under the law, UAE banks will be able to purchase government bonds in dirhams or foreign currencies, which will help them comply with international Basel III requirements, the Ministry of Finance said.
The issuance of sovereign bonds will support the UAE Central Bank in better managing banking liquidity. The issuance of government debt securities will also help benchmark the Emirati dirham’s yield curve and “deepen the local financial market for the financing of companies operating in the state”, the ministry added.
The UAE does not need to issue federal debt at present – its consolidated fiscal deficit, including each of the seven emirates of Sharjah, Abu Dhabi, Dubai, Fujairah, Ajman, Umm Al Quwain and Ras Al Khaimah, is forecast to remain stable at around 1.6 per cent of GDP this year, according to the International Monetary Fund.
This deficit is expected to turn to a surplus in 2019 as higher oil prices, which have been around $80 per barrel this year, increase government revenues and boost the local economy, the Washington-based lender said. However, the UAE may choose to sell federal bonds in the coming months if conditions are favourable, to kick-start the development of a secondary bond trading market.
“Overall the UAE has a low debt level and the law will enable additional borrowing to support federal spending,” Ms Malik said. Like the IMF, the local lender ADCB expects the UAE’s fiscal deficit to return to a surplus in 2019.
“System-wide banking sector liquidity remains ample with the rise in government deposits, which is likely supported by the higher oil revenues,” she said. The issuance of federal debt will likely increase the number of highly rated assets that banks can invest in, Ms Malik added.
Under the new law, which has been in the pipeline for several years, a Public Debt Management Office will be established within the Ministry of Finance to monitor and evaluate the risks of borrowing and trading public debt, and suggest appropriate solutions.
The office will be responsible for proposing short and long-term public debt management strategies in coordination with the UAE Central Bank, and issuing government bonds, treasury bills and other instruments.
It will also coordinate with local governments in each emirate to develop a primary and secondary financial market. Each local government must set up its own public debt office as local public debt instruments are issued.
The ministry did not say when the law would be enacted. Usually new legislation is enforced following its publication in the Official Gazette.
The Public Debt law is expected to bring “substantial returns for the state” – not only economically but also in terms of boosting governance procedures and improving coordination between fiscal and monetary authorities, thereby strengthening the UAE’s investment environment, Sheikh Hamdan said in his statement.
“The Public Debt law will help enhance the state’s competitiveness ranking, boost investors’ confidence in the national economy and raise transparency regarding the management of public finances to allow for greater opportunities for the national economy and better integration into the global economy,” he said.