Oil-rich Abu Dhabi has quietly issued a new public debt policy to its state-linked companies as it tries to rein in boom-time borrowing and get an idea of what debt it is responsible for.
The most important articles of the policy are here, from documents seen and translated into English by beyondbrics.
Bond holders will be looking keenly at Article 8, where the government tries to articulate the debt that it is not responsible for:
- The government shall be directly responsible for the public debts
- The government shall not be responsible for debts or liabilities of the government companies and affiliates of the same, companies in which the same have interest or any other entity held or controlled by the government, excluding any amount liable from the government in accordance with any Law, guarantee or compensation provided by the chairman of the department by virtue of the present resolution, or any amount to be paid by the government to a creditor of any public authority or government company and affiliates of the same by way of implementing a judgment or claim against the government.
The new rules were agreed by the emirate’s executive council, a powerful advisory body overseen by Sheikh Hazza bin Zayed Al Nahyan and chaired ultimately by the Crown Prince Sheikh Mohammed bin Zayed.
The policy document, dated August 7, also officially establishes the public debt office in the department of finance. It has already been running since 2009, but the new policy may give it teeth for the first time. Its responsibilities are numerous, including: “ensuring the continuous financing of the financial needs of the government entities in the proper time.”
And also: “Promoting the position of the emirate as a reliable, credible and sovereign borrower.”
The document also refers to the creation of the public debt committee, which will oversee the work of the public debt office. The chairman of the department of finance will issue a resolution to approve a list of government entities and government companies and affiliates that fall within the limits of regulating public debt.
The limits on new government borrowing are also interesting. The policy states that: The total amount of the new public debt, to be issued at any Gregorian year, shall not exceed 5% of the expected Gross Domestic Production (Nominal GDP) of the emirate. There is a clause that the department of finance can adjust that.
The strong hand of the government comes into play in article 10:
- The Borrowing shall be confined only to the department on behalf of the government, upon approval of the Executive Council.
- The Department [of finance] shall be the sole source of the government guarantees on behalf of the government, upon approval of the Executive Council. The government guarantee beneficiaries shall advise the department of paying the guarantees regularly.
Those that issue with a guarantee must:
- maintain financial ratios and indicators consistent with financial ratios and indicators determined by the Department and in accordance with ratios and indicators of the sector, in which such companies are operating, which may be adjusted from time to time by the Department upon its sole discretion, as well as indicators declared by Credit Rating Agencies.
There is however, some flexibility, it later states.
While Abu Dhabi has the oil funds of the UAE, its drive to introduce accountability to its finances echoes steps taken by Dubai in the wake of its 2009 debt crisis. Big bets were made on Dubai’s debt based on assumptions of government support. In 2010 Abu Dhabi was forced to express support for several of its state-backed companies as they faced credit rating downgrades.
Whether Abu Dhabi’s biggest state-linked borrowers follow the new debt policy will bear on its ability to break with the bad habits of the past. If they do apply for government guarantees and bondholders start to differentiate, then we could see a transformation of the way creditors perceive different Abu Dhabi entities.
If its big names continue to issue debt without explicit guarantees, however, the new rules will have little impact and their ability to control spending will be limited.
[This post has been updated to add details of the new policy to what was in the original post.]