Insight and opinion from The National’s editorial leadership
April 22, 2022
The UAE’s Finance Ministry on Wednesday announced the launch of dirham-denominated treasury bonds.
The initiative is expected to build a local currency bond market and raise alternative sources of funding for the government. But the move is particularly significant in the broader context of the UAE’s continued efforts to build a post-pandemic economy that is robust, diversified and durable.
Bonds worth Dh1.5 billion ($400 million) will initially be issued in two, three and five-year tenures. This is an understandably modest beginning for dirham debt markets compared to what is on offer in US dollars, the world’s de facto currency, whether by individual emirates or other sovereign nations around the globe, and therefore can attract a wider pool of investors.
However, the issuance of dirham-denominated certificates will have long-term benefits, as it is expected to boost the local financial and banking sector in the long run and provide safe investment alternatives for investors both local and foreign.
The continued advancement of the UAE's financial system should be viewed in the wider context
As Vijay Valecha, chief executive of the financial services firm Century Financial, said: “Developing a local currency bond market will allow for the provision of a safe investment vehicle in dirhams, hence increasing the currency's liquidity.” This, in turn, is expected to raise demand for the dirham in the GCC region.
The Finance Ministry’s move comes six months after it began issuing sovereign bonds, in US dollars, for the first time in the history of the federation. It put in place a national bond programme, building on each emirate's own debt issuances. Any debt programme, open to local, regional and international investors, not only diversifies revenue, it also increases levels of transparency and efficiency. The reward for this will be the ability to borrow at cheaper rates.
That the UAE raised $4bn in October last year is a testament to the strength of the economy and the management of the pandemic and recovery. Wednesday’s announcement of the launch of dirham bonds marks a further maturing of the economy and financial landscape.
It also provides another building block to the federal structure.
As the UAE, like every other country, looks to maximise the opportunities in the post-pandemic recovery, these bonds are expected to provide an additional source for the federal government. It had already introduced Value Added Tax in 2018, and is set to put in place a corporate tax regime in 2023.
On Thursday, moreover, the Abu Dhabi Global Market, the emirate’s financial centre, issued a “consultation paper” to seek feedback on a raft of proposals it has made to enhance its capital markets and the virtual asset regulatory framework.
The continued advancement of the financial system should be viewed in the wider context of the UAE’s endeavour to build an economy geared towards the decades ahead.
Even before marking its 50th anniversary last year, the country had been shifting its focus to the next half century. With the Covid-19 pandemic having fast-tracked a number of changes in the way we live, work and do business, the government has shown great agility in building its digital economy, service industry and post-oil future. It has also enacted a series of legislations over the past two years with the purpose of making the UAE an even more attractive destination for investors and workers from around the globe.
Wednesday’s announcement is another important step that the country has taken towards building bonds for the future.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
