UAE federal bonds issue to bolster country’s banks, says Arqaam Capital

The UAE’s forthcoming fed­eral bond issue is good news for the country’s banks, which have endured falling deposits as government-related entities withdraw cash, said the investment bank Arqaam Capital yesterday in a research note.

Younis Al Khouri, undersecretary at the Ministry of Finance, recently said the federal government is expected to issue between Dh80 billion and ­Dh100bn in bonds next year.

However, the government must pass a new law, which is expected in the next six to nine months.

Federal bond issuance should allow the UAE to fund almost all of its 2016 fiscal deficit, reducing the need for the government to draw down on bank deposits, or sell assets.

Deposits from government-related entities at UAE banks fell 16.6 per cent in the 2015, with banks liquidating Dh31.6bn of a total of Dh190.9bn in deposits held in December 2014, according to Central Bank data.

“Bond issuance … should reduce pressure on the deposit system,” said Jaap Meijer, head of research at Arqaam Capital.

“In 2015, the UAE funded its deficit shortfall through the drawdown of government deposits, sale of foreign assets and a credit line from its sovereign wealth fund,” he said.

But “for 2016 and 2017, this mix should change, with less pressure on domestic deposits held at the commercial banks”.

The Abu Dhabi government, which is the largest contributor to the federal budget, has a long-standing arrangement with the Abu Dhabi Investment Authority that allows it to withdraw cash from the sovereign wealth fund to fund its deficit.

State-backed entities including Adnoc and Mubadala have sold off assets in a bid to improve their cash flows, while a number of major infrastructure projects including the regional Etihad Rail project have been postponed or cancelled.

The collapse in oil prices from above $110 per barrel in June 2014 to $33 per barrel yesterday has torn holes in government budgets across the hydrocarbon-exporting Arabian Gulf. The UAE is expected to run a fiscal deficit of 11.6 per cent of GDP this year, according to Fitch ratings agency.

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