Debt law will also support the establishment of a secondary market for government securities
On Saturday, The President of the UAE, His Highness Shaikh Khalifa Bin Zayed Al Nahyan, issued Federal Decretal Law No. (9) of 2018 on public debt, which will enable the federal government to issue sovereign bonds.
The law is aimed at helping the banking sector meet international liquidity rules as soon as they are issued.
According to a statement from the Emirates News Agency – WAM – the law will enable banks to purchase government bonds in dirhams or foreign currencies, helping them to comply with Basel III requirements.
The issuance of sovereign bonds will help the UAE Central Bank manage liquidity in the banking system, and the issuance of government debt securities will help benchmark the UAE dirham yield curve, deepening the local financial market for the financing of companies operating locally.
The debt law will also support the establishment of a secondary market for government securities, through which public debt instruments can be traded in UAE financial markets to meet the liquidity needs of the banking sector.
According to the Head of Fixed Income at Arqaam Capital, the introduction of such a law is a milestone step in establishing a vibrant local debt market. The issuance of debt from the federation as opposed to each individual Emirate will establish a true government yield curve in the domestic market.
He goes on to conclude that the timing of this new law is good as liquidity in the banking system is currently quite strong and this provides another avenue.
Shaikh Hamdan Bin Rashid Al Maktoum, Deputy Ruler of Dubai and UAE Minister of Finance, stressed the importance of the Public Debt Law’s role in developing and regulating the state’s debt market to contribute to the promotion of the state’s financial stability.
Shaikh Hamdan stated that: “this law will have substantial returns for the state, as it will anchor the development of sovereign debt management according to best international practices, and will have a significant positive impact in upgrading the state’s macroeconomic management and better coordination between fiscal and monetary authorities, reducing the cost of borrowing and boosting the state’s credit rating.
“The law will contribute to enhancing the state’s competitive ranking, boost investors’ confidence in the national economy and raise transparency regarding management of public finances to allow for greater opportunities for the national economy and better integration into the global economy,” he added.
The law sets the general rules for the issuance and management of public debt and under the provisions of this law, a ‘Public Debt Management Office’ shall be established at the Ministry of Finance.
“The Federal debt law is an important step in the development of the financial and debt capital market by allowing the Federal government to raise debt and benefit from the UAE’s strong fundamental position. Overall the UAE has a low debt level and the law will enable addition borrowing to support Federal spending. It is positive to have the law in place, despite the higher oil price. We see the UAE’s consolidated fiscal position returning to a surplus in 2018. System-wide banking sector liquidity also remains ample currently with the rise in government deposits, likely supported by the higher oil revenue. The issuance of federal debt will also increase the highly-rated assets the banks can invest in,” the Chief economist at Abu Dhabi Commercial Bank said.
The office will be responsible for proposing public debt management strategies and policies in coordination with the Central Bank of the UAE, implementing the strategies and policies approved by the Cabinet, and providing recommendations on issuance of public debt instruments. The Public Debt Management Office will also monitor financial risks as well as other risks associated with issuing and trading any public debt instruments and propose solutions to manage and control these risks.
The Public Debt Management Office will advise the Minister of Finance on investments involving any public debt surplus, identifying risk levels on borrowing or issuing any guarantees for government projects as well as playing an important role in the development of policies and procedures created to manage and reduce risks in the public debt portfolio. The office will also work closely with the Central Bank of the UAE with regards to managing the issue and sale operations of government bonds, treasury bills, and any other public debt instruments.
The Public Debt Management Office will set short and long-term objectives for the nation’s public debt management, as well as issue reports on the management and implementation of public debt. It will also coordinate with local governments in each emirate to support and develop a highly efficient primary and secondary financial market by issuing public debt instruments in the state, in which each local government shall establish a public debt office if local public debt instruments are issued.
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