Sovereign debt law by end of year

The Government hopes legislation will control sovereign debt and develop local bond markets.

UAE Government officials expect the passage this year of a public debt law aimed at controlling sovereign debt and developing local bond markets. The legislation will open the way for the establishment of a debt management unit by the Ministry of Finance to more closely regulate government debt and oversee all sovereign securities including bond issuances. No plans exist to sell Federal bonds this year, officials say.

"We are waiting for the law to be issued and as soon as it is we will work on the bylaws to execute and set up the debt management unit," Obaid Humaid al Tayer, the Minister of State for Financial Affairs, said yesterday on the sidelines of an Abu Dhabi conference, International Best Practice in Public Debt Management Strategies. Concerns have emerged about levels of government debt after a rise in Dubai's debt burden as the emirate attempted to reverse a slowdown in its property and financial services sectors after the global financial crisis.

The new law is also part of attempts by ministers to try to develop an active local currency debt market to provide low-cost funding for infrastructure projects with a prudent degree of risk. It is hoped the legislation will help to deepen debt capital markets and provide companies in the private sector with a potential alternative source of funding at a time when access to liquidity from banks remains tight. It could help create a yield curve, which corporate issuers could use as a benchmark to price their own bond sales.

Having been approved by the Federal National Council (FNC), the public debt law is now awaiting agreement from the Cabinet. The legislation passed by the FNC last year limits the extent to which the Federal Government can tap into international and local debt markets to 45 per cent of the UAE's total GDP, or Dh300bn, whichever is smaller. At an emirate level, debt is limited to 15 per cent of an emirate's GDP. The two limits, which together add up to as much as 60 per cent of the country's GDP, will ensure the UAE does not borrow excessively.

The debt management unit is based on recommendations first published by the IMF and World Bank in 2001 for the establishment of government offices to regulate public debt including structuring, costs and limits. Debt management units help to minimise financial costs by encouraging governments to tap into bond markets for finance over a longer period rather than using short-term bank lending, the World Bank says.

"Having a robust bond market allows government to have a quicker response when there's a need to react to economic downturns," said Anderson Silva, a senior debt specialist at the World Bank. The Federal Government has yet to issue a sovereign bond. Separately, Abu Dhabi has created its own debt management office within the Department of Finance to prepare the way for new bonds from the Abu Dhabi Government and its related companies, an adviser to some of the emirate's largest companies said in February. It could be looking to raise more than US$20 billion (Dh73.46bn) this year, the adviser said.

The Dubai Electricity and Water Authority was the first Dubai borrower to test international investors since the Dubai Government-backed Dubai World announced its restructuring plans in November. The Dubai Government said in March it would provide as much as $9.5bn for Dubai World, including $5.7bn from a loan already made by the Abu Dhabi Government, with $3.8bn from its own resources. [e-mail]