The Federal Government is moving ahead with plans to issue bonds for the first time by 2010. A Finance Ministry official was quoted by Reuters today as saying that the ministry had been given a mandate by the Office of the Prime Minister to study the issuance of bonds, and had hired the World Bank to conduct a study on how to do so. The Governments of Abu Dhabi and Dubai have both sold bonds internationally, largely to establish a benchmark against which companies can borrow. While most governments sell bonds to help finance budget deficits, governments with surpluses, such as Australia and Singapore, sell bonds purely to promote their national bond markets.
Thanks to oil income from Abu Dhabi, the Federal Government also runs a budget surplus. Yesterday, the Cabinet approved a 21 per cent increase in next year's budget to Dh42.2 billion (US$11.48bn), including a 23 per cent increase in education spending and 37 per cent more allocated to services. Bankers and economists say that will still leave it with a sizeable surplus, even amid falling oil prices. And Abu Dhabi has announced it would boost its contribution to the federal budget by Dh2.8bn next year.
The move, which was widely anticipated, was welcomed by bankers and economists. Selling bonds will require the UAE to obtain a credit rating, which will require opening its books to ratings agencies and giving investors a better sense of its overall fiscal health. "You need a federal one as well," said Mahmood al Aradi, the senior general manager of National Bank of Abu Dhabi's financial markets division. Faced with growing uncertainty amid the global financial crisis, the Central Bank recently said it was guaranteeing all bank deposits in the country. "When you have a federal guarantee on banks, you need to know what a federal guarantee means," he said.
With western financial institutions in turmoil, economists have said that promoting local debt markets will be crucial to ensuring the Gulf continues to grow amid the global downturn. Issuing government bonds could be an important step in that direction. warnold@thenational.ae