Complex Made Simple

Here’s why UAE’s new debt law is really really smart

The recently announced new debt law lays foundations for a bond market in Dirham denomination, creates deeper, more resilient financial markets, benchmarks the yield curve, and provides more diversified sources of financing, according to Mubarak Rashed Al Mansouri, Governor of the Central Bank.

That’s not all.

To immediate effect

Local media agency WAM reported that the development of vibrant public and private bond markets – including Sukuk – will also facilitate compliance with Basel III liquidity requirements, and allow investors to balance risks in more diversified portfolios, quoting Al Mansouri.

“Overall, this is in line with the nation’s vision to press ahead with further diversification of the economy, and will underpin the UAE’s position as a growing regional and global financial center, and further improve the UAE’s credit rating,” he added

Read: GCC debt issuance on track to exceed $50 billion in 2018

To more pressing needs

Michael Fahy, ZAWYA, writes that the new federal government debt law is an alternative to tapping capital markets on an individual emirate basis and in US denominated fiat, to which the UAE and the GCC are pegged.

Philipp Good, CEO and head of portfolio management at Fisch Asset Management, told Zawya that the benefit of the new law would be to “build a local debt market and reduce dependence on foreign investors”.

Answering questions from Zawya, Raghu Mandagolathur, head of research at Kuwait Financial Centre, Markaz, said that raising debt at a federal, as opposed to the individual emirate level would “help smaller emirates in the country to raise funds with a better credit rating than the ones they are assigned as individual emirates”.

Mandagolathur said a number of factors may lead GCC countries to rethink their peg in the long-term, justifying the move to develop a strong local currency bond market.

“Another motivation for the new law is to help create a secondary market in UAE bonds, which would allow UAE banks to hold them without suffering from any liquidity constraints under Basel III global banking rules (as bonds would be tradeable), argues the article.

Read: Oliver Wyman report: What next to manage debt successfully?”

Largest Issuances to date

A Monday report by Refinitiv, the parent company of Zawya, showed that the three biggest issuances to date this year have been by the states of Qatar ($11.97 billion in April), Saudi Arabia ($10.9 billion, also in April) and Oman ($6.5 billion in January) – all of which were U.S. dollar-denominated.

Debt capital issuance in the MENA for the first three quarters of the year stood at $73.1 billion, which was 11.8%t lower year-on-year than the $82.9 billion issued in the same period in 2017.

Government and quasi-government organizations were responsible for 53% of this debt, or $39.2 billion, according to Zawya, while the rest was raised by banks and related financial institutions.

Read: Why Saudi’s wealth fund is raising $billions in commercial debt

Paul Calvey, a financial services partner at Oliver Wyman said: “With suppressed oil prices over recent years, sovereign debt is becoming an increasingly common financing tool in the region and it is here to stay. At present, debt managers and governments are still in the early stages of taking action to ensure they are set up to manage national financial stability in the future.”

According to a recent Oliver Wyman report, the increase in sovereign debt issuance now needs to be supported by robust management.

Most countries in MEA have been relatively slow in establishing and building out Debt Management Offices (DMO) and this should now be a priority for governments, mentions the new report.

Oliver Wyman expects MEA governments to continue issuing debt as a financing mechanism, complementing broader fiscal reforms.

“This will need to be supported by an upgrade in the skills and talent of DMO employees, as well as the supporting tools and infrastructure,” the report said.