UAE Central Bank organizes ‘Basis for Developing the Debt Market’ seminar

Abu Dhabi: Central Bank of the UAE announced that it has organized a seminar regarding Basis for Developing the Debt Market in the UAE, on Thursday 8 November 2012.

Sultan Bin Nasser Al Suwaidi – Governor of the Central Bank inaugurated the seminar by a speech on the importance of having an active bond market to encounter financial crises and alleviate the pressures on banks’ liquidity through the creation of a high degree of liquidity in the economy which would assist in addressing the negative impact in a crisis situation.

The Governor mentioned that the application of Basel 2 and Basel 3 will require a high liquidity ratio at banks, which will inevitably lead to banks avoiding large corporate loans in the coming years, and banks will switch to bonds with high and medium quality, but in the absence of an active local bond and sukuk market, banks will be forced to buy bonds in the international markets, and this situation, if developed, will put us in a high risk at crises.

Elias Kazarian from the Monetary and Capital Markets Department of the International Monetary Fund (IMF) gave a presentation on the Sound and Efficient Infrastructure for Debt Market Development. These prerequisites are sound fiscal and monetary policies, effective legal and regulatory structure, sound and effective clearing, settlement and custody arrangements, smooth and secure link to the payment system and close cooperation between Ministry of Finance, Central Bank and Emirates Securities and Commodities Authority.

The seminar addressed six subject, which are: the importance of Government issuance of Treasury Bills, Bonds and Sukuk, to create a yield curve for the Dirham, encouragement of main corporations in the UAE including GREs to finance projects through issuance of Bonds ‘&’ Sukuk instead of borrowing from banks, encouragement of the establishment of long term investment funds, like venture capital funds and other specialized funds, enhancement of Governance in the operation of issuance of Bonds ‘&’ Sukuk and enhancement of Governance within debt market institutions, discussion on the best alternative for the classification of Bonds ‘&’ Sukuk based on eligibility for discounting these instruments at the Central Bank with emphasis on transparency in the financial reports of corporations issuing these instruments is an important part of this process and, and necessity to establish an independent company for netting, settlement and safe custody, and to connect this company to central bank payment systems .

The seminar discussed some recommendations for the development of the bond market in the UAE and enhancing financial stability. The important recommendations were that there is need to expedite the issuance of public debt law that will pave way for the issuances of government bonds and building yield curve to be used as a reference for nominal risk-free interest rates, and that there should be an alternative for bank financing, and that the existence of long-term investment funds necessary for completing the infrastructure for the market, as well as the formation of a joint committee between the Central Bank and the Securities and Commodities Authority for approving the issuance, and thereafter, rate bonds and determining the size of the issuance, to promote financial stability in the UAE and reduce dependence on rating companies, as recommended by the Financial Stability Board in Paris.

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