Subsidy reform helps Abu Dhabi bonds

The yield on bonds of Abu Dhabi has decreased four basis points since 22 July, the day the UAE announced the move to remove fuel subsidies, Bloomberg reported.

While the average yield on developing-country debt has increased 13 basis points since the 22 July announcement of fuel-price deregulation, the yield on bonds of Abu Dhabi has declined four basis points. The yield on bonds of the neighboring emirate of Dubai maturing in 2018 fell 1 basis point over the period.

With about 6 per cent of the world’s proven oil reserves, the UAE became the first country in the Persian Gulf region to scrap fuel subsidies as it seeks to shore up government coffers amid a plunge in crude prices in the past year. Budgets of the six-nation Gulf Cooperation Council depend on income from oil sales to prop up spending aimed at maintaining social stability after revolts toppled governments in Tunisia, Egypt and Libya.

“Reducing gasoline subsidies enhances the credit profile of the UAE,” says John Sfakianakis, Riyadh-based Middle East director at asset manager Ashmore Group. “It’s good news for both Abu Dhabi and Dubai, and other GCC countries should follow suit.”

The UAE fuel deregulation will lead to $3.75 billion of reduced expenditures and higher revenue for the government over the next two years, according to Moody’s Investors Service. The company already rated Abu Dhabi debt as Aa2 stable, the third highest investment grade.

“Even if they hadn’t ended subsidies, there was no question on their ability to comfortably meet all liabilities,” Akber Khan, director of asset management at Al Rayan Investment, said Wednesday by phone from Doha, Qatar.

Demand for UAE debt is also benefiting as investors seek an alternative to tumbling stocks in China and weakening economies in Russia and Brazil, said Anita Yadav, head of fixed- income research at Emirates NBD, Dubai’s biggest bank.

Oman and Bahrain are more likely than other Gulf countries to follow the UAE in removing fuel subsidies because “they are in a weaker financial position,” according to Mathias Angonin, an analyst at Moody’s in Dubai. Kuwait’s Ministry of Finance has formed a committee to study subsidies, it said Sunday on its Twitter page. Iran raised fuel prices by 40 per cent in May and scrapped an eight-year-old rationing program for private motorists.

Bond issuance in the GCC, which comprises Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the UAE, totaled $24.6 billion this year, with the UAE selling nothing. “The supply is low and demand is very high” for Abu Dhabi’s only bond, Emirates NBD’s Yadav said.