Market Analysis: In Time, New Bankruptcy Law Will Benefit UAE Capital Markets
Consider these facts: the size of the UAE capital markets is about US$327 billion.
This consists of $129bn spread across 191 issues in the public bond market, $103bn across 472 loan tranches in the syndicated loan market and about $95bn across 97 stocks listed on Dubai and Abu Dhabi stock exchanges. Bilateral loans and the market capitalisation of Nasdaq Dubai are excluded from this.
And then consider this: in the World Bank’s 2017 Doing Business report, the UAE’s overall rank at 26 was eight positions higher than its 2016 rankings. However, when it came to winding down a business, the UAE ranked very low, at 104, with almost 3.2 years needed to wind down a business compared with the OECD average of 1.7 years, at a cost of 20 per cent of the estate, against the OECD average of 9.1 per cent, and a recovery rate of 29 per cent, compared with the OECD average of 73 per cent.
Capital markets in any country are affected by the level of investor protection provided by the insolvency law framework and efficiency of the legal system. To achieve diversification of the economy away from oil, reforms to improve the legislative environment governing and protecting businesses in the UAE are as important as fiscal reforms.
The new UAE Bankruptcy Law was ratified as Federal Law 9 of 2016 on October 24 last year and came into force on December 29. The objective of the law is to modernise and streamline the bankruptcy procedures here in line with international best practices.
For the country’s markets, the benefits of the law will take time to emerge.
In the short term, the law has had little effect on the markets, as we can see by reviewing the performance of various asset classes within UAE capital markets for the quarter before and after its implementation.
The effects can be summarised as follows:
- The DFM and ADX indexes recorded positive price and volume movements in December last year and in January. However, those appear to be more a reflection of the “Trump trade” in global equity markets as well as stability in oil prices. Much in sync with the current volatility in oil prices, the DFM index has now fallen by about 10 per cent since the beginning of this year and volumes have reduced from more than Dh1bn to less than Dh100 million per day now.
Given the dirham’s peg to the dollar, UAE interbank rates move in conjunction with the dollar rates. The three-month Emirates Interbank Offered Rate (3mEibor) has gone up from 0.68 per cent at the end of 2014 to about 1.45 per cent now, mainly in response to the rate hikes in the US. However, the 3mEibor-3mLibor spread has reduced from 48bps in December to about 31bps now. The reduction in Eibor/London Interbank Offered Rate (Libor) spread can be interpreted to reflect the positive effect of the new bankruptcy law. However, it is difficult to quantify it accurately. Reduction in the Eibor/Libor spread could largely be attributed to improving liquidity in the local banking system because of higher oil revenue deposits and lower loan growth.
- UAE credit spread premium, defined by the difference between the option-adjusted spread on liquid UAE bonds (BUAEUL index) and the option-adjusted spread on US IG bonds (Busc index), has narrowed from more than 50bps in early 2016 to less than 10bps now. While there may be some positive effect of the new bankruptcy law, again, it is difficult to quantify. The spread tightening can easily be ascribed to improved oil fundamentals as well as a stronger technical backdrop ensuing from higher bids from the banking books as they enjoy more discretionary cash from improved liquidity in the banking system.
- The syndicated loan market has slowed in the recent past mainly as a result of declining cheap liquidity from international banks. There is minimal evidence of the new bankruptcy law on the syndicated loan market, possibly because majority of the borrowers in this space are sovereign or GREs.
There are several reasons why the new law has had so small an effect on the markets, so far. These include: a) UAE capital markets are dominated by sovereign and sovereign-owned entities, which are generally perceived to operate above the corporate laws; b) most entities in debt and equity markets have strong balance sheets and have high credit ratings. They are seen as too far from any bankruptcy event, and; c) Insolvency regime provides the biggest benefit to companies in the SME segment and this segment has low representation in the UAE capital markets. The benefits of soft infrastructure reforms also take time to materialise, particularly in the less deep capital markets, as in the UAE.
Anita Yadav is Vice-Chairwoman of The Gulf Bond and Sukuk Association (GBSA). She is also Senior Director and Head of Fixed Income Research at Emirates NBD.