According to the news agency Bloomberg, the governor in a interview with its television said: “May be, if our board decides, we will buy part of them, but of course, start trading these bonds very soon.”
In February this year, the central bank fully subscribed to the first tranche of $ 10 billion bond issued by the Dubai Department of Finance at a rate of four per cent per annum. The government of Dubai’s launched its five-year $ 20 billion bonds to help refinance debts of government-affiliated companies and continue its development programme. The second tranche of $ 10 billion bonds are expected to be launched later this year.
Al Suwaidi said that the central bank would use these bonds as a mechanism to control liquidity in the banking system. “The central bank, of course, would trade in the secondary market with the banks and then it’s a process which lets us provide liquidity to the banking system when it’s necessary and take it when it’s necessary through these instruments,” he said.
According to Eckart Woertz, programme manager for economics at Dubai-based Gulf Research Center, the governor’s intention to trade these bonds with local banks as a tool to reach its monetary policy goals is an important measure. “Bonds and money market instruments are important ingredients of open market operations of central banks,” he said.
Central banks world over use these types of liquidity measures to achieve desired liquidity position and control inflation. They regularly buy bonds from banks thus introducing new money into the system or sell bonds to mop up excess liquidity in the system.
Federal government support for Dubai’s second $ 10 billion tranche is seen as a key confidence building measure and is likely to boost investors’ appetite and help the emirate secure more attractive pricing.
However, Woertz said that the attractive pricing might also be a hindrance to fully deploy these bonds a policy tool. He said that the purchase of first tranche at four per cent was lower than the market raters prevailing then. “The first tranche of the $ 10 billion bond programme was priced considerably below the market with an interest rate of only 4 per cent,” he said.
“Thus, at this stage it is unclear whether the second tranche will be also purchased at such a subsidised price and whether the central bank would be ready to sell it afterwards at a market rate thereby realizing a loss,” said Woertz.
The UAE government is also working on launching its first ever sovereign bond to finance infrastructure projects and more importantly to develop a local bond market to reduce the dependency of domestic companies on foreign debt markets. The country’s legislative council recently passed a debt law which limits the federal debt to 45 per cent of its GDP and 15 per cent for each of the seven emirates that form the federation.
