Interview: Alex Thursby
To what extent will the government’s investment strategy help underpin the sector’s expansion by encouraging big-ticket corporate lending?
ALEX THURSBY: The capital spending programmes of all the emirates and the federal government were laid out going back some years and include substantial amounts of infrastructure and social spending. Many projects are being rolled out in phases through 2030, with a substantial knock-on effect to the private sector accruing over the many years to come.
The government uses its investment arms to carry out its strategy locally and internationally. Commercial companies, such as government-related entities (GREs), regularly borrow from the international bond and loan markets to meet funding needs, with borrowing either on the corporate balance sheet of the GRE or with some sort of recourse. In some cases, such as for independent water and power projects for example, it is on a non-recourse basis. International bank and bond investors are active participants in these deals and take great comfort from direct or indirect state ownership.
Non-commercial government entities usually do not borrow directly on balance sheet, but rather seek to co-invest with other equity providers (if any) with banks providing debt funding. Therefore, as a general rule, the investment of the government is directly proportional to corporate borrowing and issuance from GREs.
What would be the potential impact of fully enforced regulations limiting exposure to GREs?
THURSBY: In recent years, lending to GREs has sometimes been likened to off-balance sheet lending, as those liabilities are not included in government accounts. The IMF, however, has been instrumental in publishing debt to GDP for the UAE that includes such liabilities. If the banking sector’s lending to these entities were to be limited by full implementation of the regulations, it could prevent a number of GREs from obtaining further funding from domestic banks that are already largely exposed. As a result, the entities will likely be more prudent than they would otherwise have been, which could be a good thing. The development of debt capital markets will allow GREs to broaden their sources of funds to investors outside the banking industry.
Given that the majority of development and expansion is led by the government and GREs, it makes sense to allow a five-year grace period for implementation, giving banks time to adjust exposures and promote alternative funding for GREs. Excluding marketable bonds and sukuk(Islamic bonds) from such limits is helpful if they are convertible into equity. Together with the proposed grace period, this will allow more subsidiaries and joint ventures to seek independent ratings to ensure deconsolidation from the proposed limits. Furthermore, capital markets issuance offers diversification away from the banking sector into non-bank financial institutions, both locally and internationally.
Is wealth management one of the most promising areas of growth within the retail proposition?
THURSBY: Wealth management in the UAE has very good prospects, with opportunities on a number of fronts. Firstly, the region’s wealth continues to grow rapidly thanks to strong economic growth in recent years. Secondly, the local market has been underserved by regional wealth managers due to the previous lack of depth in local asset markets and insufficient capability in private banking. Thirdly, a recent pick-up in initial public offerings, together with bond and sukuk issuance, has increased domestic investor awareness that asset management is about more than property with some equities on the side. In tandem with this has been a greater willingness to seek advice on how to establish logical strategies to plan for life’s future needs.
Lastly, very low interest rates and relatively high regional inflation are a challenge for customers who typically keep large cash balances. In this context, the wealth management industry has a great opportunity to offer conventional and sharia-compliant cash solutions that offer both low risks and profitable returns.
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