29 September 2016

By Martin Dokoupil

The United Arab Emirates finance ministry expects to finalise the federal public debt law with the central bank within the next two months, which could pave the way for the draft to be approved by early next year, a senior official said.

A long-awaited public debt law, which has been going through the government consultative process for several years, would allow the federal government to issue bonds. The seven emirates that make up the UAE federation already do so individually.

"The most important element is the agreement with the central bank, which should take hopefully next two months. So early October or November we should finish with the central bank,” Younis al-Khouri, undersecretary at the federal Ministry of Finance, said in a telephone interview on Wednesday.

Once agreement is reached on a “few remaining subjects”, the draft would have to be reviewed by the justice ministry and the federal cabinet, he said, without providing details.

Asked whether it was possible that the draft could become a law early next year, after going through the legislative process and receiving presidential approval, Khouri said: “I do not see any doubt because we want to act fast.”

Despite the UAE's strong fiscal policy response to adjust to the sharp drop in oil prices, the Gulf Arab oil producer’s fiscal balance turned to a deficit of 2.1 percent of gross domestic product in 2015, according to International Monetary Fund (IMF) estimates.

The deficit was mainly financed by drawing down government deposits.

ISSUANCE LIMIT

The proposed limit for the issuance of federal bonds once the law is approved currently stands at 80 billion dirhams ($21.79 billion), Khouri said, at the lower end of 80-100 billion dirham range reported in the local media in August.

“(It is) the proposed limit. Eighty billion (dirhams) will be the total size of the debt but it does not have to be one (bond) or issue at one time,” he said. "The issuance will be in phases according to requirements.”

Individual emirates have tapped the market with sovereign debt issues. Abu Dhabi, which produces almost all of the UAE’s crude oil and is the biggest contributor to the federal budget, raised $5 billion in an international bond sale in the last sovereign debt market foray in April.

Dubai has not issued debt since a $750 million Islamic bond in April 2014. However, the government’s Investment Corporation of Dubai (ICD) is considering raising as much as $1 billion this year, media reported in July.

The IMF said in its July consultation report with the UAE that further external bond issuance should be pursued, while increased domestic sovereign issuance, including by Abu Dhabi, would help deepen the domestic debt market and provide the local and federal governments with a new funding source and banks with a new instrument to manage liquidity.

BANK LIQUIDITY

Government officials said in the past that UAE banks could also buy the dirham-denominated government debt to help meet liquidity requirements being phased in under the Basel III global banking standards.

"It's only to start a liquid market, not for the budget,” Khouri said.
"The budget is running very smoothly. We are in the balanced budget environment. I do not expect any cuts."

The federal government planned to spend 48.6 billion dirhams in 2016, slightly less than 49.1 billion dirham budget plan for 2015.

The UAE’s oil revenues plunged by nearly 47 percent to an estimated 193.8 billion dirhams in 2015, according to the IMF, and are projected to decline to 171.0 billion dirhams this year. Receipts from hydrocarbon exports accounted for half of the UAE consolidated budget revenue in 2015, down from 66 percent a year before.

© Zawya 2016