Setting benchmarks: The authorities hope to establish a vibrant financial market

The strong fiscal position of the UAE has meant that it has never been compelled to turn to the debt markets to balance its budgets, and comments in recent years by the federal government suggest that this is not likely to change in the short term. While the government has moved to formulate legislation that would allow for public debt issuances at the federal level, it seems unlikely that an actual issuance would occur any time soon. When discussions regarding the proposed law took place in the summer of 2012, Obaid Humaid Al Tayer, minister of state for financial affairs, told local media, “We are not under any pressure to issue any bonds. We are in no need to finance anything. We will be able to bridge the [budget] gap with our own resources.”

Other Uses

However, establishing a sovereign debt programme has advantages beyond the financing of government spending plans, chief amongst which is the creation of a yield curve – the relationship between the yield, or interest rate, and the length of the bond – that can be used for pricing private sector debt issuances. Without sovereign debt as a benchmark, it can be difficult for the market to determine interest rates for other bonds, and in this respect the Abu Dhabi authorities have been more active than the national government.

The creation of a yield curve was part of the rationale behind the sovereign debt issued by the Abu Dhabi government in recent years. This process began in 2007, when the emirate launched its first sovereign bond in the form of a five-year, $1bn note which matured in August 2012. In April 2009, the local government went to the markets again, this time issuing both five-year and 10-year bonds, each with a face value of $1.5bn, but since that time it has eschewed any further debt offerings. The hiatus has led to increasing speculation as to when the next issuance might be made, and a statement to the press by Saeed Al Mazrouei, head of debt management at the Abu Dhabi’s Department of Finance (DoF), in late 2012 suggested that 2013 would see the local government go to the markets with a dollar offering. However, despite planning a non-deal roadshow to take in major Asian cities such as Singapore, Beijing and Hong Kong, the year came and went without any further sovereign issuances.

Debt Strategy

While the creation of sovereign debt instruments by Abu Dhabi has been limited, quasi-public offerings have been relatively frequent, thanks to the activities of government-related entities (GREs). A number of 100% state-owned enterprises – including the Tourism Development and Investment Company (TDIC), Mubadala Development Company and International Petroleum Investment Company (IPIC) – have floated debt in recent years, and are likely to continue doing so.

Recently, Abu Dhabi has taken steps to coordinate the debt issuances of its GREs, in an initiative that has taken on increased importance in the wake of the quasi-sovereign debt “standstill” which occurred in Dubai in 2009. Abu Dhabi’s efforts in this regard have been conducted through the emirate’s Debt Management Office (DMO), established in 2009 as a unit of the DoF and tasked with monitoring the debt issued by major issuers and providing a forum through which issuances can be coordinated.

Primary Responsibilities

The DMO has two primary responsibilities. The first is to manage risk, and twice a year officials from the office meet with each GRE to review its debt liabilities, evaluating currency, interest rate and maturity risks. The second is coordination, in terms of timing and content, where the government’s principal interest lies in avoiding a scenario in which all of the GREs are tapping capital markets at the same time. The DMO also endeavours to ensure that, at least in terms of broad macroeconomic indicators, the GREs are providing investors with the same data to avoid confusion.

In 2012, the Abu Dhabi government released an official document that further clarified the emirate’s debt policy with regard to its GREs. The document places ultimate authority for the emirate’s debt with the Abu Dhabi Executive Council, and states that only debt formally approved by the council will be underwritten by the government. The new policy also established a collective debt limit of 5% of projected nominal GDP for Abu Dhabi’s GREs, a decision clearly aimed at reducing risk.

Crucially, as far as investors in the emirate’s GREs were concerned, the new policy did not substantially alter the level of government support enjoyed by the major state-operated companies, and prices of outstanding bonds for IPIC, TAQA and TDIC remained largely unaffected. Nevertheless, the requirement that GREs wishing to tap into debt markets must meet a range of financial standards and report their performance against them to the DoF on a half-yearly basis reflects Abu Dhabi’s longer-term desire to see its state-owned companies operating as financially independent companies.

Local Listings

To date, Abu Dhabi’s sovereign debt offerings have been listed on the London Stock Exchange (LSE), an obvious choice given the depth of the London market, its respected regulatory framework, and the shared history of the UAE and the UK. Other Gulf governments and GREs have adopted a similar policy of tapping well-established markets for capital, but recent developments suggest that the Abu Dhabi is looking to make more use of local trading platforms in the future.

In December 2013, the regulator of the UAE’s capital markets, the Securities and Commodities Authority (SCA), approved the secondary listing on the Abu Dhabi Securities Exchange (ADX) of the sovereign bonds that had hitherto been placed on the LSE – a move which the chairman of the DoF described to the local press at the time as a bid to “create a more attractive investment environment in the emirate”. For the local bourse, the secondary listing of sovereign debt represents a step towards achieving its long-term ambition to establish itself as a platform for bond trading. To this end Abu Dhabi has already formulated a series of draft regulations aimed at encouraging local debt issuance and listings, which at the start of 2014 had been put out for consultation with market participants.

A new regulatory framework, combined with the listing of government debt, has the potential to alter a long-established trend of over-the-counter bond sales in the UAE market, whereby investors deal directly with brokers of banks’ trading floors to sell or buy bonds. However, while the listing of sovereign debt on the local bourse is clearly a welcome development for the ADX, it also has wider implications for the economy of Abu Dhabi.

Stimulating Financial Activity

 The dual listing of government debt on the ADX as well as foreign markets promises to significantly enhance Abu Dhabi’s position as an international financial centre, primarily by providing investors with a deeper capital market. The move, seen in this context, is consistent with the 2013 decree issued by the UAE’s president, Sheikh Khalifa bin Zayed Al Nahyan, who is also ruler of the emirate of Abu Dhabi, which established a new free zone for international financial services – Abu Dhabi Global Market.

Currently being developed on Abu Dhabi’s Al Maryah Island, the new zone is already home to a new 114-ha mixed-use financial, retail, residential leisure and commercial development. When the law establishing the Abu Dhabi Global Market is fully implemented, the zone have its own regulatory structure and legal system. A number of other Gulf governments, sharing Abu Dhabi’s goal of economic diversification, have sought to establish their capitals as financial hubs, and the decision by Abu Dhabi to list sovereign debt locally has therefore been interpreted by some as a bid to increase the emirate’s competitiveness in what is fast becoming a regional race to attract capital.

Looking Ahead

The greater oversight applied to the debt strategies of the emirate’s GREs by the DMO and the Abu Dhabi Executive Council has lessened financial risk associated with debt issuance and brought a greater degree of clarity to the process. The government, meanwhile, is in the enviable position of choosing when it goes to the debt markets – a decision that will answer the need to establish a yield curve more than address any government spending requirements. Given its usefulness as a benchmark for corporate debt, and Abu Dhabi’s ambition to establish itself as a regional financial hub, a sovereign issue, when it is offered, will be a welcome development in terms of the emirate’s long-term debt market. Furthermore, the establishment of the Abu Dhabi Global Market, and its independent regulatory and legal systems, is expected to boost financial sector activity as has been seen elsewhere in the region. Abu Dhabi’s sustained and diverse efforts to stimulate the sector in a measured way bode well for the strategy’s ultimate success.

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The Report: Abu Dhabi 2014

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