The international bond markets have provided an important source of capital for large UAE corporates, FIs and the individual Emirates over the years. However, many companies have not been able to access this market for various reasons, which is why the UAE's recent decision to establish a local currency bond market marks a major milestone, not just in the evolution of our economy but in the opportunity it creates for UAE borrowers and investors alike.
Earlier this year, the UAE government announced , as part of its Federal Government Public Debt Strategy 2021 - 2023, its aim to establish a bond market in the local currency, provide financing alternatives for the federal government’s development projects and strengthen the country’s financial and banking sectors. The move follows that of the UAE’s Central Bank to start issuing dirham-denominated securities or “M-Bills” as part of its own Dirham Monetary Framework – which also represents a first step in creating the financial infrastructure necessary to allow dirham-denominated debt such as bonds.
Building economic resilience through dirham-denominated debt
The development and growth of local currency debt markets has become an important objective in the financial policies of many nations over the past decade or so and, historically, these markets have played a beneficial role in improving the resilience of domestic economies and financial systems.
Local currency bond markets in emerging Asian economies, for example, have expanded dramatically with the value of local currency government and corporate bond sales growing fourfold in the past 10 years, helping to fund much-needed infrastructure development as well as protect businesses from global financial shocks .
Closer to home, Saudi Arabia’s local debt market is well established. In March last year, the Kingdom said it had sold more than SAR15 billion in Islamic bonds, divided into three tranches that mature in five, 10 and 30 years , providing additional support for its Vision 2030 economic reform program and helping to fund spending in the low oil price environment.
Attractive to businesses and investors
For the UAE, the timing is now perfect to fuel the emergence of this asset class, given that various traditional assets have lost their appeal in the wake of the COVID-19 crisis, while many businesses are seeking additional financing routes.
Indeed, borrowers that are not able to meet the scale and other criteria for international issuance - and therefore were previously excluded from the international bond markets - are likely to be big beneficiaries of new local currency bonds.
Thus the domestic bond market will be particularly important for the large, privately held conglomerates that dominate the UAE corporate environment and the mid-market segment, both home to many extremely profitable and well-run businesses. This move will mean they can diversify their borrowing pool and strengthen their financial foundations by raising longer-term credit at a fixed rate, outside existing bank relationships and without turning to existing and new shareholders.
What is more, investors locally are far more likely to recognize domestic issuers than an international investor, for example, understanding the potential in popular homegrown brands, and feeling far more confident investing in a name they are familiar with and perhaps even customers of.
Meanwhile, for investors themselves, the move could open up a whole new attractive asset class. Unlike several other markets, the fixed income asset class has not been open to the average retail investor. The individuals here who typically invest in the bond markets are ultra-high-net-worth individuals putting in large sums of money through private banks.
But a dirham bond market could be an option for far more investors who are looking for higher yield assets without the risk of equities and might prefer fixed-income markets where they have clearer visibility on returns.
A robust domestic bond market can serve investors across varying market segments, investment objectives and risk profiles.
In most developed markets like the US and UK, the development of local currency bond markets has meant retail investors have been able to buy bonds safe in the knowledge that they have protection from the strong regulatory bodies, and so ultimately helping investors with wealth planning and pension planning.
Broadly, with the UAE's robust macro fundamentals and strong policy response to accelerate an economic rebound this year, the move to establish a local currency bond market offers promising opportunities for diversification both for borrowers and investors.
© Opinion 2021Any opinions expressed in this article are the author’s own
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