x Abu Dhabi, UAEWednesday 26 July 2017

Guarantee on bond sales to stimulate lending

A planned federal law that will guarantee the bond sales of local banks will trigger a new wave of lending and allow financial institutions to tap cheaper funds.

A planned federal law that will guarantee the bond sales of local banks will trigger a new wave of lending and allow financial institutions to tap cheaper funds, senior bankers say. The Federal Government is close to introducing legislation that will guarantee bond sales, aimed at shoring up investor confidence in new issuances as regional capital markets struggle to recover from the global recession.

"In my view, formalising a government guarantee on deposits and bank borrowings will certainly act as a catalyst for foreign investors to lend to UAE borrowers," said Mohammad Wajid, the global head of the financial institutions division at Emirates NBD. "The true recovery will start only once banks themselves feel comfortable to lend actively again." The plan to guarantee bonds follows an earlier pledge to back bank deposits and interbank loans. After five years of an oil-fuelled economic boom, the UAE enjoys a favourable credit rating among international investors, which could now be extended to its banking sector.

Sultan al Suwaidi, the Central Bank Governor, said he expected the planned law to be discussed this week. A government guarantee will "give banks an extra arm to extend credit. It's coming very soon," he told Bloomberg in Basel, Switzerland. "It would enable the expansion of credit." If passed this week, the new law could come into effect late next month. Mr Wajid said the law, which would see the government guarantee syndicated loans as well as bonds, had been in preparation for some time. But foreign investors wanted to see it published in an official gazette or be made into a formal law, he said.

A government guarantee would make foreign investors more confident to lend to UAE banks, in turn making it cheaper for them to issue bonds. Without it, investors still demand hefty premiums for emerging market debt, making it expensive for banks to raise fresh money. Credit markets in Europe and the US have been opening up fast in recent months, but the region still suffers from a lack of fresh funds.

"The true recovery will start once credit starts flowing into the real economy and banks start lending again," said Mr Wajid. "Recent successful sovereign and corporate issues have demonstrated that we are heading in the right direction; although a lot still needs to be done." The recent revival in local debt markets has been led by government-backed institutions, including the Tourism Development and Investment Company, Aldar and Mubadala Development.

Local banks, which in the past have relied heavily on bond sales, have effectively withdrawn from the market since last summer. uharnischfeger@thenational.ae