x Abu Dhabi, UAESunday 21 January 2018

Ministry launches public debt unit

The unit is part of plans to stimulate the economy, with strategies to be submitted to the Government on federal borrowing and risk management.

Sound finances: the Central Bank will manage the front and back offices of the new debt unit.
Sound finances: the Central Bank will manage the front and back offices of the new debt unit.

A new unit to manage the UAE's public debt is being set up by the Ministry of Finance. It is the latest attempt by ministers to stimulate the economy and try to develop local bond markets as the UAE strives to follow other global economies out of the credit crisis.

The Public Debt Management Unit will be responsible for developing public debt and risk management strategies to submit to the Government for approval, the Ministry of Finance said yesterday. It said the unit was a step towards the implementation of a public debt law, which puts a cap on the level of federal debt. The move comes at a time when market attention is focused on the Dubai Government-controlled developer Nakheel, which has a US$3.5 billion (Dh12.8bn) Islamic bond due to mature in December. Dubai's total debt may stand at $84.7bn, EFG-Hermes estimated last month.

The UAE's total debt obligations stand at $142bn, of which $24bn is due for repayment this year, according to estimates in February by Bank of America Merrill Lynch. Nadia Sultan, of the ministry's Department of Financial Operations, said the formation of the unit was an indication of the UAE's commitment to developing a healthy debt market to provide low-cost funding with a prudent degree of risk.

"Through sound sovereign debt management, the UAE will be able to develop and maintain an efficient market for government securities and a sustainable capital market, which will continue to enhance the country's creditworthiness," she said. The Federal National Council passed legislation in June regulating the issuance of government debt, which limits the amount the Federal Government can tap international and local debt markets to 45 per cent of the UAE's total GDP, or Dh300bn, whichever is smaller.

Individual emirates will be able to borrow only as much as 15 per cent of their own 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. Monica Malik, a Dubai-based economist at EFG-Hermes, said: "Our main concern remains the regulation of debt issued by government-related entities, and this is an area that appears to have been overlooked by the new ruling."

The debt management unit will be part of the ministry's Public Debt Management Office, which also includes a front office function responsible for issuing government securities and executing transactions, and a back office function in charge of clearing, settling and recording transactions. The front and back offices will be managed by the Central Bank. In an effort to improve transparency, the Public Debt Management Office will prepare borrowing plans, issuance calendars of government securities and annual reports on its activities to ensure investors can keep track of the size and dates of maturity of debt. Under the legislation passed by the Federal National Council in June, new government bonds will be designed to create a benchmark debt pricing system, against which other local borrowers such as large companies will then be able to issue their own bonds, giving them access to new sources of capital.