A new UAE federal public debt law could be ratified by the end of the year, which would pave the way for the government to tap the bond market, similar to what its Gulf neighbours have done.
A draft debt law was approved by the Federal National Council (FNC) in December 2010, but it was not sent to the UAE’s president for ratification, as it was still being discussed by the seven emirates, the federal government, and the Central Bank of the UAE.
“We are still discussing it with the central bank,” Younis Al Khoori, undersecretary at the ministry told the media in August. “There is one remaining article under discussion about debt ceiling and debt servicing. Once we have a rating, there will be an issuance,” he said, noting that the central bank may issue bonds worth AED 100 billion (US$ 365 billion) once the law comes into effect.
The absence of a debt law restricts sovereign bond sales in the UAE to the seven local governments. Abu Dhabi raised US$ 5 billion in an international bond sale in April.
The new law would also encourage the government to issue bonds in the local currency, which is widely considered a key priority for many emerging markets. The size of domestic capital markets is considered a barometer of the health of the private sector and the ability of companies to obtain financing, grow and create jobs, according to the World Bank.
Emirates such as Dubai, which is gearing up to host the World Expo in 2020, will benefit from the new debt rule. Dubai has not issued a bond since mid-2014 when it raised a US$ 750 million sukuk, but media reports suggest it is looking to raise more funds.
There are positive spin-offs that could result from the federal government's decision to embark on a concerted sovereign bond-issuance programme, according to the Economist Intelligence Unit.
“One is that it will diminish the ‘crowding out’ effect on the domestic private sector that current deficit financing strategies could potentially foster,” the EIU said.
“So far domestic credit growth to the private sector has held up, at 6.9%, year on year, at the end of May, but with deposits flattening out overall owing to the government withdrawals, the authorities are worried that loan/deposit levels will rise and banks will eventually cut off credit.”
Like most oil-exporting nations, the UAE saw its oil receipts falling dramatically over the past year. The country’s net oil export revenues declined from US$ 53.1 billion in 2014, to US$ 28.5 billion last year, according to the US Department of Energy.
Reports indicated that the UAE government slashed public spending by 27% in the first nine months of 2015, according to the Ministry of Finance’s most recent data available.
However, ratings agency Moody’s Investors Service believes Abu Dhabi, the economic powerhouse within the UAE, will not cut spending too much as it looks to strike a balance between austerity and infrastructure projects.
“We expect Abu Dhabi government’s fiscal consolidation effort to slow because of the need to balance the two objectives of supporting growth and curbing the budget deficit," said Mathias Angonin, a sovereign analyst at Moody’s. “We [expect] that in 2016, there will be a lower decrease in spending than the 20% achieved in 2015."
TAPPING CREDIT MARKETS
Many government-related entities (GREs) are gearing up to launch the next phase of their growth and will likely be tapping credit markets soon.
Abu Dhabi National Energy Co, or TAQA, recently said it plans to return to the bond market later this year or early 2017 to manage maturing debt – the company has a US$ 750 million bond due in March 2017 and another US$ 500 million bond in October 2017.
Earlier in the year, the company sold a US$ 1 billion two-tranche bond for general corporate purposes to pay back a US$ 1 billion bond maturing in October this year. A number of UAE banks are also looking to issues bonds.
GREs are a key driver of economic growth in both Dubai and Abu Dhabi and their assets account for at least 132.5% of the UAE’s GDP in 2015, according to International Monetary Fund (IMF) estimates.
Since the global financial crisis, many GREs have taken measures to cut their debt and improve profitability by cutting costs, merging and reining in unnecessary projects.
“Available data on GREs’ outstanding bond debt suggest that it is higher than in most GCC countries and emerging economies, though much lower than in many developed European countries, US and Canada,” the IMF said.
The IMF notes that Dubai and Abu Dhabi have US$ 80.5 billion of debt maturing in 2016-18.
“These are large maturities in a context of tightening domestic liquidity, competition from other governments in the region to finance deficits, and possible reversal of capital inflows,” said the IMF.
However, the UAE has large financial assets held by its sovereign wealth funds and therefore is among the top countries globally in terms of net financial assets.
In the future, the federal debt law should serve as a key financial instrument for the government to finance a new wave of infrastructure projects and deepen the capital market base.