The National - UAE Issues First Sovereign Bonds

Vijay Valecha, Special to The National October 10, 2021

The UAE, the Arab world’s second-largest economy, issued multi-tranche sovereign bonds for the first time as a federation as the country looks to raise fresh funding amid low interest rates globally.

The bond package denominated in US dollars includes conventional medium and long-term 10 and 20-year tranches, as well as 40-year dual-listed formosa bonds, the UAE’s Ministry of Finance said in a statement.

Formosa bonds refer to debt issued in Taiwan by foreign borrowers in currencies other than the Taiwanese dollar. The Ministry of Finance, however, did not provide details on the total amount it plans to raise through the issuance.

“Throughout its development, the UAE has adopted a solid and comprehensive approach to economic and social development, which included building a strong credit profile, a solid balance sheet for the Union and a low level of government debt, which enhanced general economic stability,” Sheikh Maktoum bin Mohammed, Deputy Ruler of Dubai and Deputy Prime Minister and Minister of Finance, said.

“In addition to its efforts to enhance the efficiency and skills of human talent, the country has successfully managed to achieve high financial solvency and reserves as a direct result of its efficient management of economic projects.”

The UAE’s sovereign bonds are expected to witness high demand from global and regional investors, the statement said.

The finance ministry hired a group of banks to lead the deal comprising Abu Dhabi Commercial Bank, BofA Securities, Citigroup Global Markets, Emirates NBD Capital, First Abu Dhabi Bank, HSBC, JP Morgan, Mashreq Bank and Standard Chartered.

The latest development comes as Moody's Investors Service assigned a (P) Aa2 foreign currency senior unsecured rating to the UAE government’s global medium-term note programme last month due to the country's very high per capita income, large hydrocarbon reserves and its domestic political stability.

Aa2 is the third-highest long-term credit rating that Moody's assigns to fixed-income securities like government bonds, denoting their very low credit risk.

Moody’s expects “Abu Dhabi's balance sheet to remain among the strongest in the Gulf Cooperation Council (GCC) and the UAE's nominal GDP to recover to pre-pandemic levels over the next two to three years".

The net proceeds from the bond issuance will be used for general budgetary purposes including financing infrastructure projects that would help to attract more foreign direct investment into the country, according to Vijay Valecha, chief investment officer at Dubai-based investment company Century Financial.

The bond issuance will also “uplift the financing for different emirates”, he said.

"The UAE's federal government bond issuance comes at a time when global interest rates are the lowest, and the UAE enjoys substantial credit strength to sell the bonds at attractive pricing," Mr Valecha said.

The Covid-19 related funding requirements coupled with lower oil prices were reflected in higher GCC government issuances last year, which stood at $78.8 billion versus $44.4bn during the first nine months of 2021, Junaid Ansari, senior vice president of investment strategy and research at Kamco, Invest said.

“This year, although the recent rise in oil prices lowers the overall need for bond issuance by the GCC governments, we can expect to see issuances aimed at securing lower rates,” Mr Ansari said.

The UAE’s economy continues to recover from the impact of the coronavirus pandemic and is expected to grow 3.1 per cent in 2021, according to the International Monetary Fund. That is higher than the Central Bank of the UAE's estimate, which projects the country’s economy expanding 2.1 per cent this year and 4.2 per cent in 2022.

Higher oil prices, as well as a rebound in tourism and economic activity generated by the delayed Expo 2020, are helping the country’s economy to recover from the pandemic-driven slowdown.

Brent, the global benchmark, was trading above $80 per barrel on Thursday, while West Texas Intermediate, the key gauge for US oil, was trading above $76 per barrel. Both benchmarks have gained about 60 per cent since the start of the year.