UAE must tap local currency bond market

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Dr. Allen Baby

The contribution of equity and bond funding in the UAE has been relatively low as the capital markets are still in their evolving stages. Almost 85 per cent of the total infrastructure and other iconic projects have been financed by banks, while the contribution of equity and conventional bond funding or Islamic sukuk stand at 12 per cent and three per cent respectively, according to the IMF Global Financial Stability Report (2016). What’s needed is a further deepening of the bond markets.

Currently, the UAE’s evolving bond market mostly comprises bond and sukuk issuances by some emirates, in most cases Dubai and Abu Dhabi, public sector companies, government-related entities, banks and the private sector. However, bulk of these borrowings is still denominated in US dollars (USD).

The advantages of issuing USD denominated bonds for UAE entities are as follows: No currency risk as the UAE dirham (AED) is pegged against the US dollar; low interest rate regime in the US lowers borrowing cost; issuances in USD also create the much-needed liquidity in bond markets. Also, as a large segment of investors are foreign entities, they prefer issuances which are in USD.

Despite the advantages of borrowing in a foreign currency, there exist seven compelling reasons for the country to develop local currency bond markets (LCBM).

he UAE Central Bank’s ability to control monetary policy is constrained by its peg to the US dollar. Hence, interest rates in the US and in the UAE cannot vary much. If they do, investors will get arbitrage opportunities of borrowing in one country and investing in the other. This raises significant challenges before the UAE Central Bank in conducting its monetary policy independently of the US. For example, when the US Fed raised interest rates last December, the UAE could not afford to have high interest rates amid a slowdown in the economy due to low oil prices. An active local currency bond market will be a tool which will help the Central Bank to conduct monetary policy functions and liquidity management.

If borrowings are made in the foreign currency, it leads to a dollarisation of the liabilities. This implies that the issuing country has no control over the currency in which the liabilities are raised. In the event of any external macro-economic shocks, the volatile capital flows could dry up and the USD reserves could fall drastically. Any future possibility of de-pegging the currency can raise additional challenges for these debts issued in USD as the value of debt in AED terms could zoom up, in case there is a major currency depreciation accompanying it.

Bond issuances in the UAE in USD are highly influenced by global investor sentiment. Foreign investor appetite for UAE bonds can dry up if there is a challenging macro-economic condition in their countries or if there are other better investment opportunities. This can become a major challenge for companies based in the UAE in difficult times.

The major source of finance for companies in the UAE are from the 50-plus banks operating in the country. This also results in the concentration of bank assets in certain sectors such as real estate due to its importance in the economy. In most advanced economies, bank finance is not the most important source of debt for companies. Companies approach debt markets, equity markets, etc., for long-term fund raising.

The presence of a local currency bond market can offer a significant boost to the insurance and pension fund industry in the UAE. These industries, which are a key component of any developed economy, desperately need long-term investment options due to the nature of their business. Currently, for example, the life insurance market is underdeveloped in the UAE because of the absence of long-term investment options for insurance companies.

Effective implementation of Basel III norms also hinges on the presence of a local currency bond market. Basel III norms specify high levels of liquid assets to help banks withstand risks arising out of sudden liquidity shortages. Currently, as government bond issuances are less significant in the UAE, banks are forced to invest in bonds of corporates or foreign bonds. The liquidity and quality of these investments can undergo major challenges such as during the economic downturn in 2009.

The absence of an active AED-based bond market results in the absence of a yield curve for different maturities. This poses a major challenge before banks as how to price long-term loan offerings. It has to be noted that the USD yield curve cannot be considered as a proxy for the AED yield curve due to major differences in economic factors of the US and the UAE.

Emirates Institute for Banking and Financial Studies Offers Banking Sector Free Access to Library Resources

Initiative aligns with UAE’s Year of Reading directive and promotes reading and education as a tool to deepen knowledge and skills in the banking and finance sector

With recent updates to its library function, the Emirates Institute for Banking and Financial Studies (EIBFS), a regional leader in banking and finance education and training, now offers members of the banking sector free access to the institute’s vast library services and resources. With a 5-user free membership service, banks can benefit from the institute’s broad collection of both print and online periodicals, magazines, books and databases.

Aligned with His Highness Sheikh Khalifa Bin Zayed Al Nahyan’s, President of the UAE and Ruler of Abu Dhabi, 2016 Year of Reading directive, EIBFS has recently upgraded its library services, technologies and functions to promote reading and education as a tool for broadening intellect, knowledge, tolerance and cross sector communication.

The institute’s newly implemented external library program enables banking institutions and their internal research departments to access EIBFS resources and research expertise, including library records, databases and industry reports among other services. EIBFS and collaborating banks will exchange knowledge, expertise and best practices to establish an extensive research library that will serve as the banking and financial sector’s main source of information.

Commenting on the institute’s library initiatives, Jamal Al Jassmi, General Manager of EIBFS, said: “An advanced and smart library function is key to disseminating knowledge and industry expertise to students, educators, researchers and professionals across the UAE. Committed to the Year of Reading initiative, EIBFS will continue to compile and offer wide access to top notch banking and finance resources, including print and digital books, online databases and journals, industry reports, and research studies. In doing so, we hope to further develop human capital in the region and equip banking and financial professionals with the intellect and skills needed to keep pace with the latest trends and market demands.”

EIBFS has consolidated its library services through a revamped Library Portal and a mobile application interface compatible with laptops, tablets, smartphones and desktops. Through this integrated portal and corresponding mobile application, bankers, professionals and students alike can seamlessly access a wide range of library services, databases, tutorials, online periodicals and e-Resources as well as directly communicate with librarians.

Keen to establish the first Smart Library in the banking and financial sector, EIBFS will install various smart technologies, including advanced self-checkout counters and the Library Radio Frequency Identification (RFID) Management System, a tracking system that ensures secure and more efficient tracking of library materials. Further to this objective, the institute will upgrade its discovery tool system. With the Summons Service, a discovery tool that augments the research experience, EIBFS will offer access to the largest unified index in the industry with wide coverage of highly relevant and unbiased results.

The EIBFS Library collection includes approximately 24,000 printed and 127,000 online books, covering a wide range of topics and subjects including: Accounting, Banking, Finance, Economics, Management, Computer, and References. Moreover, the EIBFS Library has a subscription to core English and Arabic publication titles along with key database systems, including Ebrary, Islamic Finance News, Infotrac, ProQuest Banking Information Service and Thomson Reuters Zawya. In addition to these services, EIBFS Library users have access to a variety of printed and electronic periodicals and magazines related to banking and finance.