Bond guarantee paves way for debt market, says ADX

The Central Banks decision to guarantee bonds issued by local banks will pave the way for the creation of the long-awaited debt market in the UAE, the Abu Dhabi Securities Exchange (ADX) said yesterday.

Authorities said the law represents a major step forward towards a full-fledged bond market, which will be the second in the region after Saudi Arabia.

The analysts also expected the new law, which was approved by the Federal National Council on Tuesday, to boost liquidity and allow banks to expand their lending operations and upgrade performance.

"When it became apparent that the UAE would be affected by the international credit crunch, the Federal Government acted swiftly and decisively to limit this impact," ADX Chief Executive Tom Healy told Emirates Business.

"This has included injecting liquidity into the banking system and making certain guarantees that have restored confidence in the local economy. The new law, which we understand will guarantee bonds issued by local banks, should not only improve banking liquidity further, but also help the UAE develop a bond market, which is an important factor in the development of the local capital markets," he said.

The approval of the law, which has to be ratified by the President His Highness Sheikh Khalifa bin Zayed Al Nahyan, came on the heels of announced plans by the UAE Government that it will issue sovereign bonds for the first time to fund development projects.

Both plans, which follow bond issues by the governments of Abu Dhabi and Dubai, are the latest in a series of measures taken by the UAE to bolster financial sector and adapt to changes spawned by global crisis.

"The new law to guarantee bonds in the UAE will give a strong push to the countrys banks as it means additional funds for them to invest in projects; this will benefit their performance and the UAE economy in general," said Mohammed Younus, Senior Economist at the National Commercial Bank, the largest bank in Saudi Arabia by assets.

"It is similar to the law that guarantee deposits. This means that UAE investors will get dual protection – for their deposits and bonds. I also believe this new law constitutes a major step towards the creation of a debt market in the UAE."

An economist in the UAE described the new law as a "big step" in consolidating the financial sector and strengthening public confidence in the economy.

"It will also ensure the much needed liquidity for the UAE banks and this will help them restore their normal lending activity in the country and finance domestic projects," said Humam Al Shamma, Financial Advisor at the Abu Dhabi-based Al Fajr Securities.

The UAE has the largest banking sector in the Arab World, with the combined assets of the 24 national banks and 28 foreign units peaking at around Dh1.49 trillion at the end of May.

Their total loans and advances stood at Dh1 trn and deposits at Dh972 billion.

The combined net profits of national banks stood at Dh5.41bn in the first quarter of 2009, slightly higher than their net earnings of Dh5.40bn in the first quarter of 2008, according to their balance sheets.