Arqaam Capital, the specialist emerging markets investment bank, said in a strategy note that the expected UAE Federal bond issue would ease deposit pressure on the domestic banking sector.

The bond issue will also result in limited crowding out of private sector credit growth at least in the initial phase, said a statement from Arqaam Capital.

Arqaam also expects proceeds of the issuance to help cover 75-95 per cent of the country’s expected deficit for 2016, even with an oil price of $35 per barrel, it said.

The UAE federal government is working on ratifying a new federal law that would allow it to issue bonds. The law, under review for the past six years, is expected to be passed over the next six to nine months, with the Central Bank of UAE responsible for issuing the bonds. Following the ratification, the government expects to issue Dh80-100 billion ($21-27 billion) in bonds, it added.

Jaap Meijer, managing director at Arqaam Capital, said: “A bond issuance by the UAE Federal government should reduce pressure on the deposit system. In 2015, the UAE funded its deficit shortfall through the drawdown of government deposits, sale of foreign assets and a credit line from its sovereign wealth fund.”

“For 2016 and 2017, this mix should change, with less pressure on domestic deposits held at the commercial banks. Separately, we also expect the UAE Central Bank to possibly issue bonds to inject liquidity into the banking system should liquidity worsen further,” he added.

The planned issuance represents 3.3-4.0 per cent of UAE commercial banking assets and 26-33 per cent of total aggregate cash held by banks.

Arqaam said in the note that it expects banks to reduce their positions in Certificates of Deposits issued by the UAE Central Bank and to rotate into these Federal bonds. It also sees UAE sovereign wealth funds as natural buyers, it added. – TradeArabia News Service