The new law on government debt marks an important step forward in the UAE's economic course. The legislation, passed on Wednesday by the Federal National Council, enables the Federal Government to borrow by selling bonds and establishes limits on that government borrowing. This mirrors efforts elsewhere in the US and Europe to put the brakes on government borrowing. In the US, for example, the state of California has recently found itself saddled with so much debt that ratings agencies are saying it is dangerously near default, after the financial crisis crippled the state's income and made new sources of cash scarce. Officials say the UAE's new law is designed to prevent such a situation from happening here, by limiting the amount of money that individual emirates can borrow on their own.
Aside from regulating the country's debt levels, the new law will also have the added benefit of allowing the Government to create a situation in which it can use the bonds to control money supply. By selling bonds denominated in local currency, the Government can effectively mop up any excess money flowing through the economy. If the Government deems it necessary to do the opposite, it could effectively inject cash into the country.
"A better bond market gives the Central Bank more instruments to conduct open market operations," said Eckart Woertz, an economist at the Gulf Research Centre. Once available, such a system would represent an important development for the UAE, which has relatively little control over its own monetary policy due to its peg to the dollar. Once such monetary policy tools are in place, the Government will be able to more feasibly consider de-pegging its currency from the dollar, a move that many economists have been calling for.
The new law seeks to limit each emirate's own debt to 15 per cent of its economy. At present, most of the emirates have very little borrowing, but Dubai has pursued a more aggressive borrowing policy. One consequence of the global credit crunch has been to strengthen the links between the emirates, while also exposing some of the anomalies. According to the most recent publicly available information, Dubai has as much as US$20 billion (Dh73.45bn) in debt, which excludes borrowing by government-related companies of about another $70bn. Dubai may already exceed the law's new limits on public indebtedness. Discounting the corporate debt, Dubai's borrowing could approach 20 per cent of its GDP, which stood at $82bn last year.
Dubai's Department of Finance declined to comment on the new law, while the Ministry of Finance did not respond to requests to elaborate on the law's implications on Dubai's debt. The apparent predicament is just one of several important implications of the new legislation. Issuing debt will arm the Central Bank with new tools for stabilising prices. Economists and executives are also hopeful that more regular government bond issuance will help local companies issue their own bonds as an alternative to borrowing from banks.
Perhaps most significantly, the new law raises the Federal Government's profile in national development, giving it the ability to better co-ordinate the nation's finances. "The Federal Government seeks a more federal approach to matters, with less of an emphasis on independent policy from each of the emirates," said Fahd Iqbal, a research analyst at EFG Hermes in Dubai. "This federal perspective is not meant as a constraint on individual emirates, but we believe it is more about presenting the UAE as a unified federation."
Debt levels vary from emirate to emirate. Abu Dhabi has very little debt, although it issued a sovereign bond in April of $3bn. Last November, Mohamed Alabbar, the chairman of Emaar Properties, provided an official breakdown of Dubai's debt, saying it had $10bn in government debt. Since then, Dubai has also issued a $10bn bond to the Central Bank, with an additional $10bn to come. "In the past, most of the debt in the UAE was corporate - there wasn't much government borrowing to speak of," said Giyas Gokkent, the chief economist at the National Bank of Abu Dhabi.
In recent months, the GCC finance community has paid close attention whenever a large, Dubai-related company has been scheduled to repay debt. Although such debt payments have gone smoothly so far, some anxiety remains over the single largest Dubai government-related debt: Nakheel's $3.5bn sukuk, which comes due in December. Nakheel was reported to be considering restructuring the debt, leading several ratings agencies to warn that such a move would constitute a technical default, and casts doubt on Dubai's support for other "Dubai Inc" companies.
The ability of such government-related entities to borrow on their own does not appear to be affected by the law. Some analysts expressed scepticism, therefore, about the law's ability to control future debt issuance. They note that most government-directed development comes not from governments directly, but through government-linked corporations such as Aldar, Emaar, Nakheel and Sorouh. Limits on emirate debt, therefore, may not have much effect in limiting any emirate's overall indebtedness, they said.
But other analysts said the new law could reduce the capability of those companies to borrow excessively by reducing their ability to borrow against their government's name. While debts owed by companies that are partially or even fully owned by the Government are not technically government debts, many lenders and credit ratings agencies have assumed that they could count on government help if they ended up having trouble repaying.
"This will create a bit more clarity when it comes to where corporate debt ends and government debt starts, and that will be good for the system," one UAE analyst said. Restrictions on emirate bond issuance could also eliminate a long-held assumption among investors that government-linked companies can count on government backing in times of financial stress. With constrains on their own ability to borrow, emirates may no longer be able to provide the same level of backing, and government-linked companies may be forced to become even more transparent and even issue corporate governance to raise funds.
SJ Seymour, a financial services company, said in a note to clients yesterday that the new law could force emirates such as Dubai to sell off assets to bring their debt levels within the new limits. Dubai World, which said last month it was in talks to sell part of its DP World stake to the private-equity firm Abraaj Capital, may speed up the sale as a result of the new law, SJ Seymour noted. warnold@thenational.ae
tpantin@thenational.ae
