UAE ‘to issue first 10-year dirham bond this year’

WAM

• Emirates NBD predicts issuance after successful bond launch last year
• Treasury bonds were vastly oversubscribed
• New tenor indicates maturing of UAE financial system

The UAE government is expected to issue its first ever 10-year dirham-denominated bond in 2023, a banking executive has said.

Since the Gulf state announced the launch of conventional AED government treasury bonds in May last year, the Ministry of Finance has issued a total of AED9 billion-worth in two, three and five-year tenors.

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“The UAE last year tapped the dirham bond market for the first time – so we now actually have a dirham sovereign debt curve [for] five years,” said Satyajit Singh, CFA head of fixed income strategy at Emirates NBD, the emirate’s biggest lender.

“This year we will have a 10 year [federal] issuance.”

In December, the sixth auction of the UAE’s dirham-denominated treasury bonds was oversubscribed by 4.5 times and achieved bids worth AED6.72 billion ($1.83 billion).

The first, second, third, fourth and fifth auctions were also vastly oversubscribed.

Building a UAE dirham denominated yield curve will help drive more bank and corporate issuances, Singh said. 

“What is more important is that now the banks and corporates from this region are actually being encouraged to issue in dirham,” he added. 

“That’s an interesting currency play and an interesting opportunity for investors to come in and play against the fixed deposits.”

In January this year, Emirates NBD announced the pricing of its inaugural AED1 billion dirham-denominated bond, the first such issue by a UAE bank.

The three-year bond saw strong demand with the order book peaking at over 1.65 billion, allowing Emirates NBD to tighten the price to a spread of 83 basis points over UAE government treasuries. 

The bank said regional investors contributed 72 percent of the order book, with the others being international.

Strengthening the local debt capital market and developing the investment environment to provide safe alternatives also indicates further maturing of the UAE’s financial system, Maurice Gravier, chief investment officer at Emirates NBD Group, said.

“If you are a sovereign country with a currency it’s good to have a yield curve and a proper sovereign debt market,” Gravier said. “This country is developing. It’s a logical step.”

For domestic issuers, the dirham’s peg to the US dollar helps in asset liability management, hedging and helps reduce currency mismatches, Fitch Ratings said in a comment last year.

Gulf states adopted a de facto peg of their currencies to the US dollar decades ago.

Kuwait is the only Gulf country whose currency is no longer pegged to the dollar after inflation spiked in 2007 and it adopted a dinar exchange rate that is based on a basket of currencies.

Asked if the launch of the dirham-denominated bonds signal a long-term plan for devaluation, Gravier said it was unlikely. 

“It doesn’t indicate plans for depegging but it means that, for example, in 30 years down the road, if it’s an issue to be pegged, then you have the ability to unpeg if you have to,” he said. “I’m not saying we will have to, but it’s always good to have options.”

According to the Ministry of Finance, the development of the UAE yield curve plays an important role in providing a reference index for various operations of the federal government, including long term mortgage interest rates and capital projects.

The ministry said local currency bond issuance will help diversify funding sources and minimise dependency on the foreign capital markets.

It will also expand the investor base which helps reduce exposure to rollover and foreign exchange fluctuation risks.

This provides an opportunity to invest in local government securities in dirhams, while offering alternative resources for the private sector, as well as banks and financial institutions in the UAE.

Gravier added that he expects to see more global investors considering dirham bonds.

“People understand and have a different view of this country now – they don’t see it as a small, isolated country anymore,” he said. “They see it as a global hub, which it is.”

The executives were speaking at the launch of the 2023 Emirates NBD Global Investment Outlook, the bank’s annual report, which said quality bonds issued by investment grade corporates and governments are best favoured for a challenging 2023.